Despite all fears that the trade war between the United States and China is destroying their economies, Europe is increasingly emerging as the biggest threat to global growth.

Industrial production in the 19 countries of the euro zone has been declining as quickly as possible since the financial crisis, and demand is clearly deteriorating as the region is caught between international and national hazards. The expansion is therefore likely to exceed 1% this year, which represents a sharp slowdown from 2018, and even the powerful German continental power in difficulty.

Investors are listening. The Bloomberg Euro Index is close to its lowest level since the middle of 2017 and European stocks have never been cheaper compared to bonds in terms of yield gap.

"What I'm worried about right now is in Europe," said Salman Ahmed, chief investment strategist at Lombard Odier. "It is clear that China is slowing down, but there are also a lot of stimulus measures in the pipeline. However, in Europe, the situation is deteriorating quite rapidly. "

The magnitude and the surprising suddenness of the weakness testify to the fact that the slowdown hits the heart of the region. While Greece was at the base of the gloom of the past, Germany's prospects are collapsing after a period of prolonged slowdown in the manufacturing sector. Household spending also stopped in France, in the grip of yellow vest events.

Together, these two countries account for about half of the euro area economy.

"If France stops consuming and Germany stops producing, you have a major problem in the eurozone," said Ludovic Subran, deputy chief economist at Allianz.

The problems do not stop there. Italian bond yields have started to rise again, due to doubts about budget management, the health of banks is questionable and Brexit remains in abeyance. The May European elections could bring gains for parties opposed to the EU, which is already worrying some companies.

Wednesday's figures show that industrial production fell by 0.9% in December compared to November, twice as much as expected. The annual decline is the most pronounced since 2009. On Tuesday, GDP data from Germany, the Netherlands and the euro area for the fourth quarter will be released.

David Folkerts-Landau, chief economist at Deutsche Bank, said this month that "the risks of deterioration have risen sharply in Europe".

Growth in China is weak, with automakers like Fiat citing weaker demand in the world's second-largest economy. This is reflected in other companies. Umicore, a Brussels-based company, announced last week that its profits would be held back by the global slowdown in the auto industry.

Even companies reporting resilience in China are suspicious. Jean-Paul Agon, CEO of L & # 39; Oreal, said this month that the economic situation would remain "volatile and unpredictable", although the French cosmetics giant has also published sales exceeding expectations, helped by the "dynamism of Chinese consumers".

If the situation worsens, it remains to be seen how the authorities could react and the European Central Bank has little more to do.

Dramatic action may still not be necessary. German inflation could be limited by an unprecedented unemployment rate and modest fiscal stimulus. And Bloomberg Economics' research suggests that the fallout from Germany to other eurozone countries is usually controllable. This is partly because its structure is different and its shocks are specific to each country.

Goldman Sachs has lowered its short-term expectations for the eurozone, but expects an improvement later this year due to lower oil prices and fiscal policy.

"The national economy is very resilient," said Aline Schuiling, an economist at ABN Amro. "You could very well have a negative first quarter and a weak second, but after that, it should resume. I do not expect a deep or prolonged recession. "

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