Across the world, stock and commodity markets have tumbled on fears that we may be heading into a prolonged multi-year stagnation. Particularly depressing is the return of the Eurozone policy crisis, like a putrid stench from a long-blocked drain.
The plunge in the oil price, down 24 per cent since June to $87, marks a worrying drop in global demand – and a telling coda to the failed independence referendum campaign. Meanwhile, around the world governments are stymied by massive piles of debt left over from the 2007-09 financial crisis.
The one silver lining is that an interest rate rise here has been pushed back well into next year. But this lining is also part of the cloud: a return to more “normal” rates would have signalled that we had lifted clear at last from a crisis era. Now we seem reliant on emergency monetary policy for the foreseeable future.
There are, however, reasons why we should not give in to despair amid this gloom. Within the IMF assessment there were notable country differences. The 2014 forecast for the US was revised up by 0.5 per cent to 2.2 per cent.
And the UK’s growth projections continued to impress. Indeed, its projections suggested that the UK economy should overtake France next year. Survey data for the UK continue to look positive on balance. As Arbuthnot economist Ruth Lea points out, the much-followed Markit/CIPS surveys for September were upbeat about construction and services, although they showed weaker manufacturing results.
The services sector (78 per cent of the economy) continues to do the heavy lifting in the recovery and is now 6.4 per cent higher than in the first quarter of 2008. However, industrial production is still 9.7 per cent below 2008 Q1, dragged down by falling North Sea oil and gas, and manufacturing is 4.4 per cent down. The “much vaunted ‘rebalancing’ of the economy from services towards manufacturing,” she notes, “has simply not happened”.
But it is the Eurozone that is – once again – the centre of global apprehension. The IMF forecast has been downgraded once more, this time to just 0.8 per cent for 2014 and 1.3 per cent for 2015. The growth rates for Germany, France and Italy were all lowered. Worryingly, the IMF now assesses that there is a 40 per cent chance of a return to recession in the currency bloc. Its banks are still weak, and lack the muscle to support economic recovery – this six years after the financial crisis started in 2008.
There are two particular concerns: Greece and Germany.
The Greek budget deficit might be low, but its national debt is heading for 168 per cent of GDP. Now add to this the politics: growing voter anger over unpunished corruption and, more pressing, the fear that the current coalition could collapse, leading to a snap election early next year. In this event, the far-left Syriza, which came close to winning last time, might gain power, pledged to reverse spending cuts and to default on debt. Fears have returned that Greece would be kicked out of the euro and shut out of international markets. As a result, Greece’s cost of borrowing has shot up – the yield on the ten-year Greek government bond has risen from around 6 per cent to nearly 9 per cent, the highest level this year.
Germany’s problem may be surprising but in some respects as worrying. Latest figures suggest the economy is faring badly, with falls in August for industrial output (4 per cent), factory orders (5.7 per cent) and in exports (5.8 per cent). The plunge in exports was the worst since January 2009. There is a strong possibility that German GDP may shrink again in the third quarter, technically indicating a return to recession.
In a scathing assessment of Germany, Philippe Legrain, economics writer and former adviser to European Commission president José Manuel Barroso, says the country suffers from “stagnant wages, broken banks, insufficient investment, poor productivity growth, dismal demography and sluggish growth”.
Its growth model, he says, “is beggaring Germans as well as their neighbours”. Since 2000, GDP growth has averaged only 1.1 per cent a year: 13th out of the 18 countries in the Eurozone and behind Britain (1.5 per cent) and America (1.7 per cent).
Germany has not become more dynamic, it has simply cut costs. Businesses have stopped investing and so has the government. Handicapped by under-investment, “Germany’s sclerotic economy struggles to adapt. Despite Schröder’s reforms, it is harder to lay off a permanent employee than anywhere else in the OECD. Starting a business is a nightmare: Germany ranks 111th globally, behind Albania and Senegal, according to the World Bank’s Doing Business rankings. “
While compressing wages to subsidise exports is bad for Germany, “it is”, says Legrain, “disastrous for the rest of the Eurozone” and is spreading instability. “German banks’ recklessly bad lending of its excess savings, funded a consumption boom in Portugal and lent the Greek government the rope with which to hang itself, and since the bubble’s burst Germany has exported debt deflation. Nor is Germany a ‘growth locomotive’: its weak domestic demand is a drag on growth elsewhere”.
Foisting the German model on to the rest of the Eurozone makes matters worse for struggling southern European economies.
And trying to turn the Eurozone into a greater Germany “is also harmful for the rest of the world – not least Britain, the Eurozone’s biggest trading partner. Stagnant demand crimps Britain’s and other countries’ exports”.
Add to this harsh assessment the policy gridlock between the European Commission, member governments and the central bank and it is hard not to arrive at a deeply pessimistic conclusion about prospects. Little wonder markets have taken fright. And to think, not so long ago, Britain’s business, media and political establishment were united in their conviction that euro membership would be just the ticket for us. «