Bill Jamieson: A healthy zone vital for growth

FOR the past few months the dire news flow from the Euro- zone has cast a dark shadow over Scotland’s export prospects. But, astonishing as it may seem, the Eurozone’s major economies are not – or not yet – in melt-down and have been performing rather better than feared. France and Germany may yet escape recession. And latest economic data even suggest a modest pick-up.

Now these are critical days for Scotland’s economy and Scotland’s exporters. Domestic demand is flat on its back. Household budgets are being squeezed by inflation and ultra low earnings growth. The result is subdued consumer spending for as far ahead as we can see. Public spending is also under severe pressure as we grapple with an enormous budget deficit and debt totals. It is to exports that we have turned for salvation. Almost half our non rest-of-UK exports go to the Eurozone. So any significant downturn there will feed back into our domestic economy and further cloud our own prospects.

Here the news has been dire. But judging by the latest survey data and forecasts, due to emerge this week, the Euro- zone’s biggest economies are not on the brink of a calamitous decline as the crisis over sovereign debt and concerns over the health of Europe’s banks would suggest.

However, any forecast of future economic performance is highly conditional on Euro- zone leaders emerging with a credible and convincing “bazooka” to tackle the deepening debt crisis by Wednesday at the latest. Further slippage would unnerve markets, while a package that falls short of market expectations of the massive fire-power required to deal with a potential Greek default and contagion will trigger the very flight of capital and liquidity seizure that could plunge the Euro area into a catastrophic melt-down.

Greece is already in social and political turmoil. The ability of the Greek government to deliver on the latest austerity measures is in doubt, while markets fear that Italy, Spain and Portugal may prove the next weak links in a chain of ruinous insolvency. Without large and convincing measures to defuse the sovereign debt crisis, back-up support for Europe’s banks, and a massive enlargement of the Eurozone’s bail-out fund, all bets are off.

For the moment stock markets have been rallying in the tentative hope that the latest series of summits will not result in Europe’s leaders hitting the self-destruct button.

Growth downgrades across the Eurozone continue to dominate the business headlines. But the picture is more mixed than a headlong plunge into recession. This is particularly the case for Germany. In its latest monthly bulletin released last week, the Deutsche Bundesbank suggests that German GDP grew strongly in the third quarter. Barclays Capital economists are forecasting real GDP growth of 0.5 per cent quarter-on-quarter, after growth of just 0.1 per cent in the April-June quarter (and 1.3 per cent in the first three months of the year).

However, business confidence has taken a battering and the business outlook for the winter of 2011-12 has fallen further. The IFO business index fell from 107.5 in September to 106.4 in October. The business climate index for manufacturing has fallen slightly but is still assessed as favourable. The numbers, says Barclays Capital, broadly confirm its current forecast of a slight contraction in German economic activity in the final quarter, with a decline of 0.1 per cent after 0.5 per cent growth in the third quarter.

Says economist Thomas Harjes: “We still expect a modest recovery in economic activity in early 2012, and the improvement in manufacturers’ export expectations gives us some comfort, but this remains a close call”.

Over at UBS, the economy watchers expect October manufacturing data (due out this week) for Germany to show an uptick from 50.3 to 50.5 and the service sector PMI also to improve, from 51.5 to 51.7 – readings that, if confirmed, offer a flicker of hope.

Arguably of more interest – and some surprise – for Scots exporters is the debate gathering pace in Germany over tax cuts (yes, that’s right, tax cuts).

In September German tax revenues rose 7.3 per cent year-on-year. Wage tax revenues are up 9.6 per cent year-on-year and VAT revenues have risen by 5.1 per cent. These two taxes together contribute around 60 per cent of total tax revenues. According to a report in the German newspaper Handelsblatt, these numbers can be expected to stimulate a debate about how to proceed with tax-cutting plans.

Last week the conservative-liberal coalition decided against “bracket creep”, a development that may result in a tax relief of between ¤6 billion and ¤7bn a year.

In France the picture is more problematic, with the government economic commission poised to announce this week a downward revision in its growth forecast. Currently this stands at 1.75 per cent for 2012. The consensus of independent forecasters is 0.9 per cent. The French business climate index released last Friday showed a slight decrease from 96 in September to 95 in October.

Nevertheless, the forward-looking components of both the manufacturing and services sectors suggest that activity should stabilise in the coming months. As for the jobs market, business leaders consider that the level of job creation, excluding temporary employment, has risen slightly over the past few months. UBS expects the October PMI data for France for both manufacturing and services to show modest rises. And it is forecasting a GDP growth out-turn for France next year of 1.9 per cent.

Scots manufacturing exporters may not be able to match the 3.9 per cent pace of growth notched up in the first quarter compared with the immediate previous three months, and some slackening in the pace is inevitable. But food and drink exports, particularly whisky and spirits, should continue to do well.

And, assuming Eurozone leaders act boldly this week and muster the fire power required to tackle the chronic debt crisis, the two biggest markets in the Euro area should escape recession, giving grounds for hope for export growth here in 2012 and beyond.