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Analysis

Out of sync: will UK miss out on Europe’s economic recovery?

by Stewart Fleming | 04.04.2017

For Britons who have become used to seeing the economies of the eurozone pilloried as sclerotic has-beens, the latest news from the region will no doubt come as a shock. “Eurozone jobless at 8-year low as economic recovery gathers pace” was the headline today on the front page of the Financial Times, which reported that nearly one million eurozone citizens have found work in the past year.

Separately Eurostat, the EU’s official statistical agency, said last month that employment jumped in 2016. The year ended with 154 million in work, the highest level since the third quarter of 2008.

Dig a bit into the detail, as economist Christian Keller of Barclays Bank has done, and you come up with the evidence that the EU is now participating in “a synchronised upswing in the global economy”. Recovery has, of course, been underway for almost four years in the United States, where unemployment is down from over 10% to under 4%. Germany too, incidentally, is now close to full employment (also under 4%), in part because of labour market reforms which other eurozone countries have baulked at. Their failure is part of the reason eurozone-wide unemployment is still knocking on 10%.

Holger Schmieding of Berenberg Bank dismisses the idea that the eurozone recovery is a flash in the pan. It is, he says, broad-based. Official, policy-focused interest rates are being held at close to zero, even a touch below. Austerity is coming to an end as budget policy is now adding to the economic stimulus from the European Central Bank. All components of demand, private consumption, government consumption, investment and exports are playing a supportive role.

For the UK, however, the economic outlook is deteriorating, not quickly, but at a pace which may begin later this year to chip away at prime minister Theresa May’s popularity, especially amongst poorer voters who were led to believe their economic fortunes would improve with Brexit.

Inflation is rising – partly because of the Brexit-induced devaluation of the pound. With wages under pressure, this is going to chip away at consumers’ real incomes. It is widely expected that after the borrowing bonanza which has kept the economy on track in the past few years, consumers will begin to keep their credit cards closer to their chests. The idea that the British economy can “rebalance” swiftly so that exports will fill the hole left by fading consumption, is a pipedream. As a result, Barclays expects economy-wide growth, which hit 2.2% in 2015 to steadily decline to 1.3% in 2018.

More generally, even the United States economy, which is the most advanced on the road to recovery, will only be expanding by around 2.2% next year. The legacy of the financial crisis, which began in 2007, still lingers on.

There is, of course, much that can go wrong, particularly in the political sphere.

France’s presidential election, which begins at the end of this month, would deliver a Europe-wide shock if Marine Le Pen, the right-wing nationalist, were elected. Political leaders’ inability to deliver radical reform, along with its hobbled banks and excessive government debts are still keeping Italy’s economy out of the recovery lane.

Meanwhile Britain’s Brextremists have to hope that the Brexit talks go smoothly and swiftly even for current, diminished UK economic expectations to be met.

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Edited by Luke Lythgoe