Ever since the ECB commenced buying tens of billions of sovereign and corporate bonds, it is undeniable that Europe’s economic picture brightened substantially, eliminating occasional flash crises such as Greece and Italy which had a contagious event on the rest of the Eurozone, and why not: after all there was a definitive backstop to all the risk – nothing bad was allowed to happen, or as Draghi said, any adverse outcomes would be fixed “whatever it takes.”

But in recent months Europe’s economic picture has turned decidedly dour, if not so much in the primary data where things are still stable, then certainly in manufacturing surveys, and especially for Europe’s economic dynamo, the export economy. As the chart below shows, PMI trends for new export orders have fallen notably in 2018 – and not just for Europe, but also for Japan and the US. This, according to BofA’s Barnaby Martin, “may point to less vibrant export activity across the world. For Europe, whether this is really the case, or just a reflection of €-strength earlier in the year, remains to be seen. But for now we think the economic data has not been convincing enough to ignite enough of a rally in European risk assets”

Which brings us to the next logical thought: could Europe be approaching a recession, especially if trade wars with the US cripple Europe’s exports which forms that backbone of the German economy, without which Europe is lost. Anecdotally, the following colorful snippet from Martin explains why a US-Europe trade war would really be Europe at war against itself.

If US-EU trade tensions escalate, we would view it as akin to pitting Europe vs. Europe. The US trade deficit with the EU-28 is far from homogenous. Germany exports cars to the US…but France doesn’t, and while Italy is a net exporter to the US, the Netherlands is a net importer. Therefore, growing trade tensions are likely to further fragment the Eurozone, just at a time when ECB QE is drawing to a close.

To be sure, Europe’s current growth trajectory remains far from a recession. According to BofA’s economist team, which recently took down their 2018 Eurozone growth outlook from 2.4% to 2.1%, partly marking-to-market given the weak Q1 momentum, they acknowledge the downside risks posed by Italy and trade tensions. At the same time, however, they calculate that “a trade war coupled with a confidence shock could push the US economy to the brink of recession.”

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