Macroscope | Why China must be prepared for Brexit and the possibility of another European crisis

Germany’s economy is flashing warning signs and with a no-deal Brexit imminent, contagion might spread across Europe and the world. The Chinese economy, already under stress from the US trade war, is vulnerable

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The skyline of the financial district in Frankfurt, Germany. Photo: Reuters

Published: 4:00pm, 2 Sep 2019Updated: 10:32pm, 2 Sep 2019

If the euro is a handy bellwether for global risk perceptions, then recent price action suggests financial markets are in for a storm. And if Germany’s economy is a weather vane for global growth, the world seems to be heading for more trouble.

Germany’s trade surplus is shrinking fast, its foreign orders are slumping and its business confidence is imploding – all signs of a possible recession. Worse, German business has yet to reckon with a greater nemesis – namely, a Brexit shock, for Britain looks increasingly likely to crash out of the European Union without a deal.

A major European crisis is brewing and the Chinese economy, already battered by the trade war with the United States, will not be spared. World trade will suffer badly as global economic confidence experiences another punishing body blow.

Europe might have slipped off investors’ radar screens in recent years but its internal tensions have never gone away. The EU might appear united in its battle with Britain over Brexit, but the blight of European populism and dissent from Brussels will quickly resurface if recession returns to the euro zone, unemployment starts rising again and question marks hang over the euro’s future.

The euro has been through the wringer many times before and seems to be in danger again. With Brexit and the threat of recession, the euro might reach parity with the US dollar. Currency markets don’t seem to have fully woken up to this risk yet.

If Brexit poses a threat to European unity, investors hardly need to look too far to see other cracks in the system. With the formation of another new Italian government last week, its domestic politics remains in tumult and could come back to haunt markets with a vengeance, especially if Italian credit default risks resurface again.

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.css-1m2rp1p{color:#34b8b5;}Macroscope | Why China must be prepared for Brexit and the possibility of another European crisis

Macroscope | Why China must be prepared for Brexit and the possibility of another European crisis