Italy's Interior Minister and Deputy Prime Minister Matteo Salvini recently stepped up his rivalry with Europe’s leadership, blaming France’s history of colonialism in Africa and intervention in Libya for Europe’s migrant crisis. Photo: Reuters

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Italy’s Interior Minister and Deputy Prime Minister Matteo Salvini recently stepped up his rivalry with Europe’s leadership, blaming France’s history of colonialism in Africa and intervention in Libya for Europe’s migrant crisis. Photo: ReutersIt is always a wise idea to keep your friends close and your enemies closer. China and the US may be at each other’s throats, inflicting serious self-harm on their economies as the trade war drags on, but both countries have a mutual dependence – if one goes down, the other suffers, too. There is a strong imperative to bury the hatchet and resolve their differences – quickly and for everyone’s sake. The well-being of the rest of the world depends on it.The last thing the global economy needs is any more “mutually assured destruction”, especially with the effects of the 2008 crash lingering on. The global economy remains stuck in a deflationary aftershock, with the fallout still felt far and wide, not least in China’s other big trade partner, Europe, where the risks of slipping back into recession still loom large. As a major exporting bloc, Europe is a good bellwether for how global trade is bearing up under the strain – and the outlook is far from rosy.What is alarming from Europe’s perspective is that, after years of monetary super-stimulus and policy pump-priming, the economic outlook has taken a turn for the worse, with Germany, its biggest economy, suddenly back on the brink of recession. What makes it worse is that Europe’s policy cupboard looks worryingly bare with the European Central Bank about to slam the door shut on free and easy money. Zero interest rates and copious amounts of cheap cash brought to deal with Europe’s economic crisis are marking time as the ECB monetary clock ticks to tougher times ahead.

The easy days are over and Europe is beginning to feel chill winds of less monetary largesse, coupled with a sharp downturn in the global trade outlook. Germany is definitely feeling the pinch and what emerges there will be felt in the rest of Europe further down the line. In the past few months, German business confidence has fallen away very sharply, reinforcing the ECB’s view that European economic risks are tilted to the downside. Domestic and international fear factors abound.On the international side, German companies are worried about the US-China trade war, negative fallout from the US government shutdown and the impact of a no-deal, hard Brexit by the UK. This is all rebounding on Germany’s domestic economy, hitting industrial orders, factory output and new investment intentions. The “dieselgate” scandal affecting Germany’s car industry has been another nail in the coffin for business confidence, inflicting further damage to future growth prospects.

German growth slumped to 1.5 per cent in 2018, its worst annual rate in five years, with the economy once again flirting with recession. Third-quarter gross domestic product was negative to the tune of a 0.2 per cent drop in output and it will be another month before official data confirms whether Germany managed to avoid a “technical recession” in the final three months of 2018. Whatever the outcome, the underlying trend is worrying, with the gravitational drift shifting towards harder times ahead.SUBSCRIBE TO SCMP TODAY: INTL EDITIONGet updates direct to your inboxSUBMITBy registering for these newsletters you agree to our T&C and Privacy PolicyWhy the global growth scare is set to get scarier

Germany is a microcosm for what fate befalls the rest of Europe. If Germany stumbles into a demand sinkhole then the European economy will follow close behind. The latest economic confidence numbers from the euro zone are far from encouraging. The problems are piling up, not least the worry that the ECB will be less supportive to future growth, while the European Union keeps plugging away with fiscal consolidation and austerity. The policy outlook will strangle any hope of recovery without a major sea-change in strategy.

Source: New View EconomicsShare:European politics could throw a further spanner into the works. After Italy’s recent run-in with the European Union over fiscal sovereignty, far-right Italian Deputy Prime Minister Matteo Salvini warned that Italy could lead a populist “European spring”, a reminder that anti-Brussels and eurosceptic sentiments are far from dead and buried. Politicians may boast about a “united” front over Britain’s Brexit position but, behind the unity, there are definite signs of cracks re-emerging in European politics.

The last thing the world needs is a resurgence of economic and political disorder in Europe. It always ends badly for the euro, risk assets and global stability. China’s economy could end up badly burnt by any new global contagion.

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