Europe is bracing for another "China shock," with a flood of cheap exports threatening to hollow out the continent's most important industries.

Why it matters: Global imbalances — the growing gap between countries that produce more than they consume and those that consume more than they produce — are high on the G7 agenda this week.

• For years, the loudest warning that China's export-led growth model was distorting global trade came from the U.S.
• Now, European policymakers fear that those same imbalances are spilling into their own markets.
• The concern is driving a shift toward tariffs, local-content requirements and other tools more commonly associated with President Trump's trade policy.

Driving the news: France, which holds this year's G7 presidency, made "global economic and financial imbalances" a centerpiece of the summit's economic agenda.

• China isn't mentioned by name in the G7 priorities document, which instead refers to "non-market policies and practices" that distort trade and investment flows — language widely interpreted as a reference to concerns about Chinese overcapacity.

"This is a way for the French to put on the table the issue that, in some sense, is the same issue that the Americans are concerned about," Phil Luck, director of the economics program at the Center for Strategic and International Studies, told reporters last week.

• "Imbalances relating to U.S. overconsumption, Chinese overproduction and potentially European lack of investment as sort of a third piece of the puzzle," Luck said.

The big picture: China's rise as a manufacturing powerhouse in the 1990s and 2000s hit industries like textiles, toys and furniture the hardest, wiping out millions of manufacturing jobs across advanced economies and reshaping global trade.

• Chinese exports are now surging into sectors that Europe long viewed as competitive strengths, fueling fears that Beijing's excess production is spilling into autos, chemicals, machinery and other industries at the heart of Europe's economy.

Zoom in: China's trade surplus hit a record $1.2 trillion last year, an astonishing feat that suggests U.S. tariffs have redirected Chinese exports to markets like Europe — not reduced them.

• "If you look at the year 2025, this will be remembered as the year for the first time ever all member states had a trade deficit with China. ... This is a force [that is] not sustainable," European Commission president Ursula von der Leyen told reporters yesterday.

What to watch: Fears of a second China shock and dependence on the world's second-largest economy are reshaping European policy.

• The EU is considering harsher tariffs and other import restrictions on Chinese goods. Policymakers in Brussels have also begun crafting an "overcapacity" instrument aimed at sectors flooded by subsidized imports.
• Officials this year have ramped up the debate over rules designed to favor European-made products in sectors like batteries, wind equipment and clean technology.

The bottom line: Europe is increasingly arriving at the same diagnosis as Washington — that Chinese overproduction poses a threat to domestic industry.

The spike in interest rates this spring looks to have frightened homebuilders in a big way.

By the numbers: The number of housing units started in May fell 15.4% to an annualized 1.18 million, the Census Bureau said, the lowest reading since the early days of the pandemic and far below forecasters' expectations.

• The steepest drop was in multifamily housing construction. Single-family housing starts fell a more modest 1.9%.
• The number of permits issued for new housing units also fell, by 0.7%, to an annualized 1.41 million.

State of play: The average rate on a 30-year fixed-rate mortgage fell under 6% in late February before the Iran war caused a bond market plunge and a corresponding rise in longer-term rates.

• On May 19, the average rate hit a recent high of 6.75%, according to Mortgage News Daily.
• Homebuilders face the prospect that buyers will be scarce amid both higher mortgage rates and higher construction loan rates used to fund building activity.
• A survey of homebuilder confidence showed a decline to 35 from 37 in June, per the National Association of Homebuilders. That's well below the dividing line between a good or poor environment, which is 50.

What they're saying: "The monthly numbers are volatile, but that said, we normally don't see this drastic of a decline in housing starts," Jeffrey Roach, chief economist at LPL Financial, wrote in a note.

• Low levels of single-family home completions "affirm the thesis that policy needs to address the supply side of the housing equation to successfully deal with the affordability crisis in the U.S.," he added.