The economic situation of Europe shows that the UK is not alone in undergoing an economic slump. Europe’s major economies, led by Germany, its powerhouse, are also in the midst of a slump. Figures out this month showed the bloc’s biggest economy’s industrial sector, which it relies on to generate a big part of its output, shrunk 3.4 per cent in March, plummeting far more than expected by analysts and a reversal from a more than 2 per cent increase in February.
That batch of data led economists to roundly agree Germany is on the brink of a recession, which Britain has also been toying with for several months. In fact, production across the 20 members that make up the eurozone, is trending in line with Britain. Gross domestic product (GDP) grew just 0.1 per cent in the first three months of this year in the eurozone, the same as the UK’s first quarter figure.
Germany’s economy stagnated after shrinking 0.5 per cent in the final months of 2022, meaning they would slip into a recession if Eurostat – the stats agency that produces the continent’s main economic data – revives its estimate lower.
France grew 0.2 per cent; Italy 0.5 per cent: Spain 0.5 per cent and Ireland contracted 2.7 per cent. The dynamic that has cut UK’s growth over the last year, shares similarities with that which is sweeping through Europe.
Energy prices jolted higher after Russia sucked gas out of international markets in response to sanctions placed on it. That made large swathes of business activity in Europe unviable, crimping output. European consumers have also been squeezed by a historic inflation surge — peaking at over 10 per cent in October — sparking a spending slowdown.
The European Central Bank, much like the Bank of England (BoE), has responded to that price surge with aggressive interest rate rises, sending them to 3.25 per cent and is expected to keep hurting businesses and families in the coming months.
Eurozone banks have also put more controls on lending sharply in response to US banking failures, adding to the squeeze on companies. BoE governor Andrew Bailey and co this month upgraded GDP by the greatest amount (about 2 per cent) since the central bank was made independent in 1997.
Similarly, the European Commission, two weeks ago, raised its expectations for GDP growth across the bloc up to 1.1 per cent and 1.6 per cent this year and next. Stronger than expected demand and persistent price pressures concentrated in the food production sector mean inflation this year will be higher than the Commission previously predicted at 5.8 per cent.
What ties assessments of the UK and European economies — which, under the same pressures, have moved more in tandem than one might have thought — is that they have been overly pessimistic.
Experts were not entirely correct with their recession warnings, justifiably so because of the huge energy price shock that at the time looked set to sweep through households and businesses’ finances. Energy prices have come down considerably over the last few months, prompting the recent round of forecast reversals.
Comparing two passages from the Commission and BoE’s new projections, each of which explain why they lifted their GDP outlook.
Commission: “Lower energy prices, abating supply constraints, improved business confidence and a strong labour market underpinned this positive outcome.” BoE: “This reflects stronger global growth, lower energy prices, the fiscal support in the Spring Budget, and the possibility of lower precautionary saving by households than previously assumed in turn related to a lower risk of job loss.”
The two passages reflect a similarity while both the UK and Europe may well be on the path to avoiding a recession. It was interesting that chancellor Jeremy Hunt said last week that he wouldn’t mind Britain slipping into recession if it helped bring down inflation. He pledged full support for the BoE if it decided to raise interest rates again to rein in prices. (The writer is our foreign correspondent based in the UK)
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