The British economy is in miraculously good health – the eurozone has stagflation
The contrast is extraordinary: the eurozone’s fragile recovery is fizzling out and large parts of the region are again flirting with recession; the UK has been growing briskly all year and seems to be accelerating.
Britain’s stubbornly resilient economy now has the added allure of a rock-solid Government with an absolute majority and Leninist discipline, committed to an expansionary investment plan as far out as the 2030s, and likely to remain in power long enough to see it through.
It is hard to see what positive catalyst can lift Europe out of its political temper tantrum and its low-growth trap. Germany never ceases to disappoint, held back by ordoliberal ideology and by a dysfunctional coalition that can agree on nothing.
Germany’s Ifo business climate index has fallen for the last three months, while S&P Global’s survey of German manufacturing has crashed to a nine-month low of 42.2, the sort of readings you see in a full-blown slump.
Germany has shed more than half a million jobs since early 2022 and the unemployment rate has ratcheted up to 6pc. “Companies in the manufacturing sector are slashing jobs month by month,” said Cyrus de la Rubia from Hamburg Commercial Bank and S&P Global.
Business failures have reached the highest level in a decade, rising 30pc over in the first half of the year as the lagged effects of high interest rates push Mittelstand family firms to the wall.
Yet Berlin is allowing internal demand to wither on the vine. It is tightening fiscal policy by 1pc of GDP this year to comply with the country’s debt-brake and an austerity ruling by the constitutional court.
It has slashed public investment to the bone even though Germany’s infrastructure is famously disintegrating. This is a political choice: the debt-to-GDP ratio is just 63pc and falling.
The euro bloc is in scarcely better cyclical shape. S&P Global says the manufacturing sector fell into deep contraction in July. Worse yet, cost inflation picked up at the same time. This nasty mix has a whiff of 1970s stagflation. It tells us that the eurozone’s sclerotic single market is not passing through the full gains of global deflation in traded goods and commodities.
New export orders fell for the 29th successive month, exposing euroland’s second Achilles’ heel: the region is paying the price for a chronic dependency on foreign demand to keep growth alive.
That is a risky formula in a world where China is playing the same game on a galactic scale, flooding markets with exports at cut-throat prices up and down the technology ladder.
Somehow, miraculously, the UK has decoupled from all this trouble, at least for now. The British economy is muddling through in better condition than almost anybody – including the Bank of England – expected. The UK is growing solidly even though it started fiscal belt-tightening last year, while France, Italy, and Spain have yet to begin in earnest.
The UK’s composite PMI surveys of services and manufacturing have outperformed the eurozone for 16 consecutive months, notwithstanding a technical recession over the winter.
The British economy was the G7’s top performer in the first quarter, with growth of 0.7pc. Robert Wood, from Pantheon Macroeconomics, says we are on track for 0.6pc this quarter, and getting better. “Growth is accelerating, business sentiment is booming and inflation is slowing,” he said.
It is almost a Goldilocks picture. The “forward-looking” components of the new data are on fire, foretelling a surge in pent-up business investment. Yet input cost inflation for firms has at the same time dropped to 41-month low. You could hardly hope for a more perfect blend.
The UK’s headline inflation is steady at 2pc and has (for now) undercut a sticky 2.5pc in the eurozone, a level that leaves the European Central Bank in a bind.
“We have had Brexit, Covid and interest rates back to over 5pc, and yet we still haven’t seen the UK economy crack. We’ve basically adjusted to the new trade arrangements,” said David Owen from Saltmarsh Economics. “Services are doing really well, and that is a big surprise.”
The UK’s trade deficit in goods and services narrowed to 0.5pc of GDP in the first quarter. It is today closer to structural balance than it was during the later years of EU membership. This suggests to me that the post-Brexit reshuffle in supply chains has led to more import substitution than meets the eye, lifting output as companies reshore to subcontractors in the UK.
The OECD has forecast dismal figures for the UK as usual, pencilling in growth of 0.4pc for this year, below Japan, Italy, France, Canada and America. This looks increasingly unhinged. Right now the UK is probably growing faster than every one of them.
The rating agencies have been upgrading Britain quietly for some time. I suspect that we are at a turning point where broader economic opinion across the world drops the “basket-case” narrative on Britain and starts to think of it as a normal country, and something of a safe haven.
Rishi Sunak began to restore political stability 18 months ago. The rehabilitation is now complete under Sir Keir Starmer.
It is Europe that is becoming progressively less governable, splintering to Left and Right in a ferment of revolt against the status quo, but without the status quo actually changing in any respect.
The pressure cooker can never entirely let off steam because it is nigh on impossible to sack the EU’s executive government, even when it persists in error. The Commission sits on top of everything as a permanent secular papacy.
France is stuck in a constitutional crisis, with no obvious way of creating a viable government. This is the result of a gerrymandered electoral outcome that perpetuates a discredited Enarque regime and arbitrarily disenfranchises 11m people who voted for the “wrong” party. This is storing up an even greater crisis for next year.
The eurozone may spring back to life over coming months as energy costs fall and real incomes recover, but that is far from certain. The EU’s Stability Pact is biting again and fiscal tightening is on the way. The lagged effects of past rate rises by the ECB are still feeding through. Loan demand is dead, the M1 money supply is still contracting.
Nor is the world reassuring. The flood of Chinese exports escaping depression at home is still gathering force. The US housing market has buckled, and rising US unemployment is close to triggering the recessionary Sahm rule.
The UK is largely defenceless against all of these global forces. But for now, at least, we seem to be in rude good health. Mirabile dictu.