A trouble shared, they say, is a trouble halved. But when it comes to economics, don’t be so sure. A trouble shared can be a trouble doubled. And looking at the UK and Germany today, we have double trouble ahead: which economy is more likely to be first into recession?
Ahead of the approaching deadline of a no-deal Brexit, the UK’s economic slowdown has been headline news. UK gross domestic product (GDP) fell by 0.2 per cent in the second quarter, the first time it has contracted since 2012. A further decline in the July-September period – which would make for a formal recession – is now touch-and-go: ironically, it may require resumption of panic stocking by companies ahead of the Halloween no-deal deadline to keep the economy from two successive quarters of negative GDP growth.
What a state we have come to when our hopes of avoiding an imminent recession rest on abnormal buying ahead of a feared supply chain disruption. The ailing UK is seen again as the sick man of Europe, and the author of its own misfortunes.
But here it seems, we are not alone. Latest figures show Germany’s economy – the largest in Europe and for so long the powerhouse for the Continent – shrank during the April to June period. A decline in exports dampened growth. The country’s GDP fell by 0.1 per cent compared with the previous quarter, according to the Federal Statistics Office. Germany narrowly avoided a recession last year and the latest reading takes the annual growth rate down to 0.4 per cent.
As for the outlook, early signs for the third quarter “look ominous” according to Andrew Kenningham, chief Europe economist at Capital Economics. “Manufacturing business surveys for July were all gloomy. And while the services sector should continue to hold up better, there are some signs that the slump is spreading to the labour market.” The manufacturing PMI recorded its worst quarter since the first quarter of 2013, and a sharp downturn in industry confidence caused economic sentiment to fall to a near three-year low in June. Other figures showed there had been a 1.5 per cent fall in industrial output in May.
While the overall figures were negative, Chancellor Angela Merkel’s government still believes the economy will grow slightly this year and does not think further stimulus is necessary.
What ails Germany is not Brexit – through some 15 per cent of its auto exports may be at risk in the event of a UK exit from the EU without a deal. Its main problem is an overall decline in exports: with China a critical market for Germany, the country has been hit by the trade tariff wars between China and the US. Some recent surveys of business confidence have been notably downbeat, so recession is a distinct possibility.
“Industrial production is suffering from a severe setback of less global demand and increasing international trade problems,” says Klaus Deutsch, head of economic and industrial policy at business lobby group BDI. The US has threatened to impose extra tariffs on European-made cars, something that would hit the likes of BMW and Mercedes-Benz particularly hard. BDI predicts a recession would be hard to avoid next year if the current global turmoil continues.
Nor is the slowdown on the Continent confined to Germany. Economic sentiment in the eurozone fell to its lowest point in nearly three years in June, with the largest losses reported mostly in Germany and Italy. Fresh data from the European Commission showed its main indicator of economic confidence dropped to 103.3 points in June, down from 105.2 a month earlier, reaching its lowest level since August 2016.
Italy saw confidence drop by 1.5 points. France, the Netherlands and Spain also recorded losses in economic sentiment. The eurozone has been battling growing fears about slowing global growth and the impact of the hostile trade war between the United States and China.
This slowdown across the Euro bloc is set to heighten policy tensions in Italy and the likelihood of further escalation of its dispute with Brussels. The European Council looks set to give the green light to start an Excessive Deficit Procedure triggered by too much Italian debt. The fear is of fiscal escalation, higher borrowing costs forcing the economy into recession, and a political crisis.
The European Central Bank, led by Mario Draghi, may now be tempted to cut rates or buy more bonds to stimulate the eurozone economy. Last month, the International Monetary Fund cut its growth forecasts for the global economy for this year and next, citing US-China tariffs, US car tariffs and no-deal Brexit.
All this hardly bodes well for the European single currency – or for sterling, which is heading for further falls as 31 October approaches, with fears that inflation will be driven up. But there are brakes to the downside. First, sterling has already fallen against major currencies including the dollar – down some 23 per cent from its pre-2016 EU referendum level. On both foreign exchanges and equity markets, the prospect of a no-deal has already begun to be priced in, with the FTSE 100 Index down almost eight per cent in the past two weeks.
Even so, would a further 10 per cent fall in sterling constitute a crisis? Not so much, if the euro is also looking shaky. While a further fall in the pound would have an immediate impact on import costs, there would be a boost to domestic production as imports become more expensive, while exports should also increase over time. And overseas earnings of UK companies would also be boosted on currency translation.
So: double worry on recession, and the potential for more disruption in markets. But market movements are often overdone, and a correction follows. That is little consolation in the immediate term. What is needed is an easing of US-China trade tensions: this would do much to lift the slowdown clouds over Europe and indeed all major economies.