Latest / The European Economy Podcast with Fexingo: ECB, Eurozone, and Continental Markets / Eurozone Firms Stockpile as Trade War Fears Grow
Transcript
- Lucas: You know that moment when you see companies doing something that screams 'we don't trust the next six months'? That's happening right now in the Eurozone, and it's all about inventory. Luna: You mean firms are stockpiling ahead of the tariffs? I saw that headline about Trump's new global tariff — the forced labor justification angle. Lucas: Exactly. But it's not just the tariff itself. Look at the data: import prices from China hit their highest since 2008 last week. The dollar index is at 120.5, which means Eurozone companies pay more for anything priced in dollars — oil, chemicals, many Chinese components. That's a big chunk of their input costs. Luna: So they're buying now before prices go up further. But that ties up cash. Is it really that widespread? Lucas: The numbers say yes. Purchasing managers' indices across the Eurozone — Germany, France, Italy — all show inventory accumulation at the fastest pace since mid-2018. That was the last tariff round. A major German automotive supplier I've been tracking — let's call them a tier-one parts maker — has boosted its raw material buffer from 30 days to 55 days since April. Luna: Fifty-five days? That's a huge cost. Warehousing, insurance, the opportunity cost of that cash. Lucas: It is. But they calculate that the risk of a sudden price spike or supply disruption is worse. They import specialty chemicals and microchips from China and Eastern Europe. The chemicals alone rose 12 percent year-over-year in June, partly due to the dollar strength. Luna: And the euro hasn't budged. It's still around 1.14 to the dollar. So the cost of those imports isn't getting any relief from a weaker dollar. Lucas: Right. And then there's the tariff news. Even if the forced labor justification is contested, the mere threat of tariffs on European goods makes companies want to secure inputs now rather than risk paying duties later. It's a classic pre-buy. Luna: Is this happening across all sectors, or is it concentrated in automotive and chemicals? Lucas: Mostly in industries with complex supply chains. Automotive, chemicals, machinery, and also some electronics. Consumer goods firms are more cautious — they're worried about demand softening. But industrial companies are loading up. The French chemical giant Solvay — I should say, a large French chemical firm — recently said it's increasing its inventory of certain raw materials by 20 percent. Luna: Twenty percent. So this is material. But what does it mean for the broader economy? I mean, inventory investment adds to GDP in the short run. Lucas: It does. Real GDP growth in the Eurozone was 2.1 percent annualized in the first quarter, and inventory buildup contributed about half a percentage point. But the worry is that when the tariffs either hit or don't, firms might destock quickly, causing a sudden drop in orders. That's what happened in late 2018. Luna: So we get a sugar high now, then a hangover. Lucas: Exactly. And there's another angle: the ECB is watching this. If inventory buildup is partly driving near-term demand, it could mask underlying weakness. The services sector is still sticky on inflation, as we saw in June. If companies pass on higher input costs because they need to cover their stockpiling costs, that keeps price pressures alive. Luna: So the ECB might have to stay tight longer, even if the real economy is fragile. That's a tricky spot. Lucas: Because if you raise rates to fight inflation that's partly from stockpiling, you risk tipping manufacturing into recession. But if you cut too soon, the import price surge feeds through to consumer prices. Luna: It feels like every twist in this trade policy just creates more uncertainty. And uncertainty is the one thing companies hate most. Lucas: Absolutely. And that's what drives the inventory buffer. It's a hedge against the unknown. Luna: Speaking of hedges and unknowns — you know, a handful of listeners actually help us keep this show going, and that's what funds making this many episodes without ads. It's on buy me a coffee dot com slash fexingo, if that kind of thing has made a difference in how you understand the economy. Lucas: Yeah, and it honestly makes a real difference. Those contributions mean we don't have to chase sponsors or compromise on the angles we dig into. It keeps it exactly the kind of conversation we want to have. Luna: Exactly. So, coming back to the inventory picture — do you think this buffer strategy is sustainable if the tariffs don't actually materialize? Lucas: Not really. If the tariff threat fades, companies will start drawing down those inventories. That could lead to a sharp slowdown in factory orders by early next year. It's a short-term fix, not a structural change. The real question is whether European firms will shift supply chains permanently — nearshoring to Eastern Europe or reshoring — or just wait out the storm. Luna: And that depends on how long the policy uncertainty lasts. The longer it drags, the more likely companies make permanent moves. Lucas: Right. And that has huge implications for trade patterns, investment, and eventually productivity. For now, we're in the buffer zone. Luna: Let's hope the fog clears soon. Lucas: From our lips to the policymakers' ears.