THROUGHOUT 2012, the coalition government frequently cited the turmoil in the Eurozone and, to a lesser extent, the growth slowdown in China as contributors to the UK’s relapse into a double dip recession.
Now that the crisis in the Eurozone looks to have stabilised and that forecasts for growth in China have turned upwards, could these developments lift our prospects in the year ahead?
Throughout the first half of the year the Eurozone danced on the brink of an abyss. “Crisis summits” seemed unable to defuse widespread apprehension. Market confidence in government debt had all but collapsed. And the Greek economy was in such an appalling state that exit from the Eurozone seemed only a matter of time.
Much discussion centred not so much on whether this would happen but what the trigger event would be and how a Greek exit could be managed without a domino-style collapse of confidence hitting Spain, Portugal and Italy.
In the event a powerful intervention by Mario Draghi, president of the European Central Bank brought a step back from the edge. He effectively promised to do “whatever it takes” to save the euro. Together with the election of a Greek coalition government, this brought an almost immediate easing of tensions. Agreement to extend the Greek loan programme and provide the means for a debt buy-back further contributed to a mood of improvement in recent months, giving rise to hope that a euro melt-down had been avoided.
Stricken government bond yields have eased down, sentiment has improved and agreement on plans for a single banking supervisor for the Eurozone gave a further boost to confidence. While the Eurozone crisis can in no way be said to be over, could we now be past the worst?
The problem is that while financial market confidence has indeed stabilised, there has been very little evidence of improvement in the real economies of the Eurozone – and precious little of a recovery this year. Hopes rest on a long-haul path to improvement – and crucially that political commitment to banking reform remains strong.
The aim is to have a single banking supervisor operational by early 2014 and that, with the achievement of this structure, other critical agreements covering fiscal affairs will follow. Attention now swings to a critical meeting of the European Council next June. The glacial pace of movement is exasperating. But it has characterised the response of Eurozone finance ministers and heads of government since the start of the crisis – indeed, this danse macabre on pressing economic reform from one platitudinous summit to another with long intervals for dinner could fairly be said to be one of its contributory factors. Urgency seems an alien concept.
The promise of European Central Bank action in bond buying in no way lessens the need for action to reduce budget deficits and undertake difficult reform. But agreement on the next stage is conditional on a range of compromises being reached between member governments, and all of them are under intense pressure from electorates to ease up on austerity and boost employment.
Conditions “on the ground” are, if anything, getting worse. Eurozone gross domestic product (GDP) contracted by 0.1 per cent in the third quarter to be 0.6 per cent lower than a year previously. The economies of Greece, Spain and Italy continue to contract. France and Germany both showed small gains but the German economy now looks to be slowing again.
As for unemployment, it continues to rise. The figures for October saw the EU17 unemployment rate reach 11.7 per cent compared with 10.4 per cent a year previously. In Greece and Spain unemployment rates are now over 25 per cent, ominously on a par with that experienced in the 1930s Great Depression. Youth unemployment is in excess of 55 per cent. HSBC economists are forecasting that Eurozone GDP will contract by a further 0.2 per cent in 2013 with unemployment rising in Germany, France, Italy and Spain – the latter to 27.5 per cent. So for all the talk of stabilisation, the outlook is still dire, and UK exporters will find the Eurozone another uphill struggle.
However, while there seems little break in the black clouds over the UK and the Eurozone, the greatest economic story of all continues to unfold – the dramatic shift of economic power and activity towards Asia Pacific – China in particular.
HSBC chief economist Stephen King refers to it as “the great rotation” and argues that it is impossible to understand the behaviour of the global economy without acknowledging the gravitational pull of China.
Over the last decade, per capita incomes have barely risen in the “old world” whereas in China, they have risen at a faster rate than in any other decade in the post-war period. Other major emerging nations have also offered impressive performances but none of them comes close to matching China’s electric pace.
After a modest slowdown in growth to “just” 7.8 per cent in 2012, King expects Chinese GDP to deliver an increase of 8.6 per cent in 2013. Although this may still seem low by Chinese standards, China is now a much bigger economy than it used to be and it will contribute more to global growth in 2014 than ever before.
This is good news for the UK which needs a great leap forward in its China trade to make good the continuing softness of exports to the Eurozone. UK exports to China totalled £13.8 billion in 2011, up 18 per cent on the previous year, so a resurgence in China’s economy would be good news here.
However, even here bets need to be hedged. The Great China Story of the past two decades has been driven in large part by the insatiable appetites of Western consumers. And in the past decade especially, this demand was fuelled by an explosion in household debt.
The bursting of this debt bubble and the consequent spending cutbacks by consumers mean China cannot rely on demand from European domestic consumers as it once did. And it has property bubbles of its own to wrestle with.
Tempting though it is to see the Eurozone and China lifting our prospects, it is unlikely that either will make a discernible impact in 2013. This is set to be a recovery haul far longer in duration than the 1930s and we have to prepare ourselves for this – and its consequences.