Thursday 17 January 2019

Dan O'Brien: Europe still thriving, despite air of uncertainty

But last week also brought some reassurance about the current state of the British economy. The June PMIs point to further resilience, indicating solid and strengthening growth in the second quarter. Stock photo: PA Wire/PA Images
But last week also brought some reassurance about the current state of the British economy. The June PMIs point to further resilience, indicating solid and strengthening growth in the second quarter. Stock photo: PA Wire/PA Images
Dan O'Brien

Dan O'Brien

Mid-year it is a good moment to take stock. With the Irish economy in rude health, what of the wider European economy upon which Ireland is so dependent?

Last week's EU-wide jobless figures show that the continent is just a few months away from recording its lowest unemployment rate this century. The share of the bloc's labour force out of work fell to 7pc in May.

While the range of unemployment rates across the bloc remains large, the most important point is that jobless rates have fallen in every single one of the 28 member states over the past year.

That reflects continued economic growth across the continent which is now at or near the strongest rates recorded since the Great Recession began almost a decade ago. It continues despite some signs of softness in the economic data in the first months of the year.

Increasingly, however, that looks to have been a short-lived soft patch. Last week's publication of a closely-watched leading indicator - the composite Purchasing Managers' Index (PMI) - showed strong growth across Europe in June. Moreover, the expectation of those same businessfolk, who are at the economy's coalface, is that the rest of the year will see continued expansion.

Last week also saw the publication of the first estimate for inflation across the eurozone in June. It showed that consumer prices were rising at 2pc annually. This uptick in inflation was caused almost exclusively by a jump in energy prices.

Underlying inflation remains unusually low, but well away from deflation territory (the big economic risk from low inflation is that it slips into a downward deflationary spiral, something which policy measures can be ineffective in halting).

Despite inflation likely to stay below the European Central Bank's target for the foreseeable future, the monetary authority in Frankfurt was reported last week to have given further indication that interest rates will go up in the final months of next year. That will depend, of course, on how the economy evolves and, in particular, whether the big risks - a transatlantic trade war and an Italy-triggered reigniting of the euro crisis - materialise (it should be noted that while Brexit is a huge risk to Ireland and the UK, even a no-deal exit would not have a significant impact on the wider continental economy).

Recent trends in growth among three of the big four economies - Britain, France, Germany and Italy - have been in largely keeping with trends in evidence since the recovery from the Great Recession, if not longer. Britain is the exception, to which we will return presently.

Germany continues to lead the pack, with solid growth rates above most of the others. All components of GDP have been contributing to overall growth.

Consumer spending, which accounts for the biggest share of GDP in all advanced economies, has weakened a little over the past year, but with higher wage growth coming down the tracks that is expected to be reversed over the remainder of the year. Business investment and government spending have also been doing their bit. Export growth has been the strongest growing component of German GDP, with volumes of goods and services sold abroad up by almost 10pc in the year to the first quarter of the year.

France continues to be the steady Eddie among the big economies.

It has trailed Germany since recovery began a half decade ago, but only by a little, and its export growth over the past year has actually been stronger than its larger neighbour's.

Both consumer and investment spending have also performed well, even if they lagged Germany growth rates by a smidgen over the 12 months to the first quarter.

As ever, Italy is bringing up the rear.

Consumers are barely increasing their spending and the cash-strapped government has been unable to provide any stimulus. Export growth was also feeble in the year to the first quarter of 2018.

Hopefully, the unusually sharp fall in foreign sales in the first three months of this year, which accounted for most of the annualised weakness, is a one-off.

A somewhat rosier picture emerges when Italian investment spending is considered. It has grown more over the past year than investment in the other big economies, rising by almost 5pc.

Whether the coming to power of a Trumpian government will kill off companies' appetite to invest in their businesses remains to be seen.

And what of our nearest neighbour? "The UK economy has been resilient in the aftermath of the Brexit vote". So say the dispassionate analysts at the Economist Intelligence Unit in their latest European Regional Overview report. They are right.

But while the UK economy has done better since the referendum than remainers sometimes claim, Brexiteers should be worried about the export engine they claim will start to hum once they are out of the EU. Despite the big competitiveness boost of a weaker pound, export growth since early 2016 has been below the eurozone average and the rates recorded in the other big European economies.

The imaginary shackles which hold Britain back from being a global exporting powerhouse simply don't exist to shake off. If UK Inc can't do better at a time of strong global growth and a competitive exchange rate, there is reason to fear if and when its trading relationship are disrupted by Brexit.

These uncertainties may finally be showing up in the investment spend figures. In the year to the first quarter, UK-side spending on plant, machinery, premises and infrastructure and the like rose by just 1.5pc. That was a fraction of rate across the EU as a whole. It is too early to say for sure, but the sort of fears expressed last week by the boss of Jaguar Land Rover for the future of his plants in Britain are spreading as the risk of a no-deal Brexit rises.

But last week also brought some reassurance about the current state of the British economy. The June PMIs point to further resilience, indicating solid and strengthening growth in the second quarter.

That is much needed. Britain will leave the EU in just 264 days. If it exits without a deal it will need as much momentum as possible to get through the shock.

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