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During periods of “low visibility,” confusion reigns: for every indication of one trend, there seems to be a countertrend. The key is to glean from the collective wisdom of reliable leading indicators a clear signal that the economy is headed for a turn.

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Aug 16 2018

Cyclical Risks Amid Global Trade War

The full version of this report was released to ECRI clients on Aug. 8, 2018 -

Trade tensions remain heightened between the U.S. and Eurozone, even though a full-blown trade war has been averted – for now. Consequently, it is important to understand how exposed the Eurozone is to U.S. trade disruptions, as well as the near-term outlook for Eurozone real export growth.

As it is a relatively open economy, the Eurozone’s exports to non-Eurozone countries have become an ever-more-important driver of its economic growth and now account for over 25% of GDP, with the U.S. being its largest trading partner. Meanwhile, the U.S. accounts for a smaller share of Eurozone imports, giving the U.S. more leverage in a trade war with the Eurozone.

Almost regardless of how any trade war develops, the near-term direction of export growth for a country is determined by the cyclical drivers of exports constituting ECRI’s leading export indexes. These indexes provide a clear picture of what lies ahead and are particularly important to monitor during such a tumultuous time for trade, as cyclical forces determine how vulnerable a country is to structural changes, like higher tariffs.



In the Eurozone, Q1 real export growth dipped to a five-quarter low (Chart), as anticipated by a downturn in the year-over-year growth rate of the Eurozone Leading Exports Index (EZLExI, not shown).
 
Whether or not export growth will continue to decline is likely to have a significant impact on the Eurozone’s overall economic growth outlook and relative negotiating leverage, and that has already been foretold by the latest update to our EZLExI.

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