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Trade war is part of a perfect storm hitting Europe biggest economy

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Industrial output dropped more than 5% compared to the previous year, a performance that suggests Europe’s largest economy may have contracted in the second quarter.

“We would characterize today’s industrial production report as devastating, with no silver lining,” wrote economists at Dutch bank ING. “We should prepare for contraction in the German economy.”

Germany relies heavily on exporters that sell a disproportionate amount of goods to China and the United States, which are locked in a bitter trade war. Lackluster global auto sales have also hit the country’s carmakers. Fears of a chaotic Brexit are hurting too.

The risks of Trump's trade war gambit with China

“Weaker global trade, a struggling global auto industry, Brexit and China’s economic problems get pretty close to a perfect storm for Germany,” said Kit Juckes, a strategist at Societe Generale.

Germany is not the only victim of the storm.

Last month, the International Monetary Fund cut its global growth forecast for this year and next, citing the impact of trade conflicts. If the US-China dispute were to escalate, it warned that global growth in 2020 would be reduced by half a percentage point.

Central banks around the world are now racing to get ahead of the storm clouds.

The US Federal Reserve cut rates last week for the first time in 11 years, and the European Central Bank has hinted that it will unleash more stimulus. On Wednesday, the Reserve Bank of India announced its fourth straight rate cut. That coincided with a surprise interest rate reduction by Thailand’s central bank, and a bigger than expected cut from the Reserve Bank of New Zealand.

What happens next

Recent events have unnerved investors, and could trigger further action by central bankers.

President Donald Trump escalated the trade war last week by announcing that the United States would tax just about every Chinese export starting in September.

The United States then labeled China a “currency manipulator” after Beijing allowed the yuan to weaken. That prompted fears of a currency war that would hit trigger inflation and send asset prices plummeting.

Analysts at Capital Economics said the US-China trade war is likely to escalate further because Chinese President Xi Jinping won’t give into US demands and change its industrial policies.

“As such we expect the tariffs to go ahead and furthermore that they will be raised, to 25% on all Chinese goods imports to the US, before long,” the analysts wrote in a research note.

Goldman Sachs thinks the trade war will drag on until after the 2020 electiontrade war

In Germany, where growth in the first quarter was 0.4%, the situation is likely to get worse before it gets better. According to Capital Economics, business surveys point to further deterioration in German manufacturing in July.

Germany’s Ifo Institute has also found evidence of trauma. Its latest business survey shows production expectations are at the lowest level since late 2012, when Europe was still grappling with its debt crisis.

“More and more companies are announcing that they intend to cut back their production in the coming quarter,” Ifo said Wednesday, adding that “an end to the recession in German industry is not in sight.”

Commerzbank (CRZBF), the country’s second biggest bank, said Wednesday that it had doubled the amount of money set aside in the second quarter to account for loans that won’t be repaid.

It also warned that its profit target for 2019 would be harder to hit because of a “noticeable worsening of the macroeconomic situation” and the “increasingly uncertain geopolitical situation.”

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Economic cost of a warmer planet

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Earlier this year California-based utility Pacific Gas and Electric (PG&E) became one of the clearest cases of how climate change can wipe out a company that has not done enough to prepare for a warming planet.

After costs related to wildfires ballooned, PG&E filed for bankruptcy protection. The company faced approximately $30bn in liabilities as a result of its role in the 2017 and 2018 fires.

State investigators linked 100 deaths to the fires. Federal judge William Alsup blamed the cause of some of the fires on the utility’s negligence and said the utility had paid $4.5bn to shareholders in dividends over the past five years while failing to take adequate safety precautions.

And now Germany‘s car industry is facing the threat of losing its position as a leading centre for production. A series of missteps – from diesel-cheating scandals to a lack of preparedness for the end of the combustion engine – has left the road open to Uber, Tesla and Chinese electric brands. An industry that employs more than 800,000 people is facing a make-or-break moment.

So, are businesses doing enough to prepare for climate change or do executives have their heads in the sand?

According to a Global Commission on Adaptation report, businesses need to plan more for a warming planet. Companies that do not adapt may not survive.

The report claims investing $1.8 trillion to climate-proof business and the broader economy by 2030 could generate up to $7.1 trillion in net benefits. Half of the world’s biggest companies believe climate adaptation could result in $236bn in increased revenue.

One of the authors of the report is Feike Sijbesma, chief executive of Dutch life sciences company Royal DSM. Economics editor Abid Ali talks to him about climate change adaptation and why it is important for businesses around the world.

Sijbesma points out that no country in the world can escape from climate change.

“Addressing climate change mitigation and addressing climate change adaptation is in the interest of all countries and in the interest of all companies,” Sijbesma says.

“Of course, as companies we are not philanthropic organisations, we need to make money, but there are more interests than only making money and there are more interests than only the short term.”

Source: Al Jazeera News

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Peru economic growth jumps due to healthy domestic demand

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SANTIAGO — Peru’s economy grew 3.28% in July from the same month a year earlier, the second highest rate this year, due principally to healthy domestic demand and a slight rally in the mining sector, the government said on Sunday.

The rate was in line with analysts’ estimates in a Reuters poll. The Peruvian economy grew 2.74% in the last 12 months to July, the state statistics agency Inei said.

Peru is the world’s No. 2 producer of copper, zinc and silver. (Reporting by Marco Aquino, Writing by Aislinn Laing Editing by Paul Simao)

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Slower U.S. job growth expected

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By Lucia Mutikani

WASHINGTON (Reuters) – U.S. job growth likely slowed further in August, but the pace of gains probably remains sufficient to keep the economy expanding moderately amid rising threats from trade tensions and weakness overseas that have left financial markets fearing a recession.

The Labor Department’s closely watched monthly employment report on Friday will come in the wake of a survey on Tuesday that showed manufacturing contracting for the first time in three years in August. The economy’s waning fortunes, underscored by an inversion of the U.S. Treasury yield curve, have been largely blamed on the White House’s year-long trade war with China.

Washington and Beijing slapped fresh tariffs on each other on Sunday. While the two economic giants on Thursday agreed to hold high-level talks in early October in Washington, the uncertainty, which has eroded business confidence, lingers.

The economy is also facing headwinds from Britain’s potentially disorderly exit from the European Union, and softening growth in China and the rest of the world.

The Federal Reserve is expected to cut interest rates again this month to keep the longest economic expansion in history, now in its 11th year, on track. The U.S. central bank lowered borrowing costs in July for the first time since 2008.

“The general message from the labor market is that businesses are cutting back on hiring, but they are not laying off workers and that is important,” said Ryan Sweet, a senior economist at Moody’s Analytics in West Chester, Pennsylvania. “Consumers are what’s keeping the economy moving at this point.”

Nonfarm payrolls probably increased by 158,000 jobs last month after advancing 164,000 in July, according to a Reuters survey of economists. The anticipated job gains would be below the monthly average of 165,000 over the last seven months, but still above the roughly 100,000 per month needed to keep up with growth in the working age population.

The unemployment rate is forecast unchanged at 3.7% for a third straight month.

August job growth could, however, fall short of expectations because of a seasonal quirk related to students leaving their summer jobs and returning to school. Over the past several years, the initial August job count has tended to exhibit a weak bias, with revisions subsequently showing strength.

Other factors favoring slower job growth include declines in both the Institute for Supply Management’s manufacturing and services industries employment measures in August. In addition, global outplacement firm Challenger, Gray & Christmas reported a 37.7% jump in planned job cuts by U.S-based employers in August.

BULLISH CONSUMERS

But first-time applications for unemployment benefits, a more timely indicator of labor market health, have been hovering near historically low levels. Consumers were very bullish about the labor market in August and the government likely started recruiting for the 2020 Census last month.

Though the trade impasse does not appear to be spilling over to the labor market, job growth has been slowing since mid-2018.

The government last month estimated that the economy created 501,000 fewer jobs in the 12 months through March 2019 than previously reported, the biggest downward revision in the level of employment in a decade. That suggests job growth over that period averaged around 170,000 per month instead of 210,000. The revised payrolls data will be published next February.

The government has also trimmed economic growth for the second quarter. The employment report is expected to show average hourly earnings gaining 0.3% last month, matching July’s rise. But the annual increase in wages is seen dipping to 3.1% from 3.2% in July as last year’s surge falls out of the calculation.

“Recent downward revisions to estimates of economic growth, corporate profits, and employment growth all suggest that the economy is displaying classic late-cycle symptoms,” said Michael Feroli, an economist at JPMorgan in New York. “Moreover, these symptoms are unlikely to go away entirely even if a truce is reached in the current trade tensions.”

The length of the workweek will also be watched for clues on how soon companies might start laying off workers. The average workweek fell to its lowest level in nearly two years in July as manufacturers and other industries cut hours for workers. It is forecast rising to 34.4 hours in August from 34.3 hours in July.

“While one month does not make a trend, hours worked is a leading indicator worth noting,” said Beth Ann Bovino, U.S. chief economist at S&P Global Ratings in New York. “A prolonged drop in hours worked signals that businesses may reduce hiring, with layoffs and cutbacks in private spending to likely follow.”

Manufacturing employment is expected to have risen by 8,000 jobs last month after increasing 16,000 in July. But factory payrolls could surprise on the downside after the ISM reported on Tuesday that its gauge of factory employment dropped in August to its lowest level since March 2016.

Manufacturing has ironically borne the brunt of the Trump administration’s trade war, which the White House has argued is intended to boost the sector. Factories cut overtime for workers in July.

Government employment could get a lift from hiring for the 2020 decennial census, which could create roughly 40,000 temporary jobs.

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