Eurozone gloom casts shadow on UK recovery

It wasn’t too long ago that politi­cians declared the worse was over in the euro­zone and that the zone was on the road to recov­ery. How­ev­er, the sit­u­a­tion once again appears to be bleak.

While it has not reached the same point as in 2011, when the 18-strong bloc was on the verge of break­ing up, the euro­zone is now in dan­ger of falling into a Japan­ese-style defla­tion­ary spi­ral, as well as tip­ping into reces­sion for the third time in six years.

The lat­est set of gloomy fig­ures from Euro­stat showed that infla­tion had fall­en back to a five-month low of 0.3 per cent in Novem­ber, down from 0.4 per cent in Octo­ber and well below the 2 per cent offi­cial tar­get of the Euro­pean Cen­tral Bank (ECB).

Growth is also dan­ger­ous­ly low, increas­ing by just 0.2 per cent in the third quar­ter of the year, with Ger­many, the eurozone’s pow­er­house econ­o­my, eking out a mea­gre 0.1 per cent expan­sion.

Debt-strick­en Greece, which almost tore the zone apart, is also becom­ing a prob­lem again, with hopes of exit­ing its bail-out pro­gramme ear­ly, when the Euro­pean author­i­ties and the Inter­na­tion­al Mon­e­tary Fund are uncer­tain that the Hel­lenic nation will be ready.

All this adds to pres­sure on ECB pres­i­dent Mario Draghi to embark on a full-blown pro­gramme of quan­ti­ta­tive eas­ing (QE), sim­i­lar to the US and UK, which he has so far been reluc­tant to do.

Most econ­o­mists now believe that it is not a mat­ter of if but when QE is intro­duced as the Frank­furt-based ECB has almost exhaust­ed its tool­box in the bat­tle to ward off the grow­ing threat of defla­tion, includ­ing slash­ing inter­est rates to a record low.

Vitor Con­stân­cio, vice-pres­i­dent of the ECB, has also con­ced­ed that the cen­tral bank would con­sid­er launch­ing a QE pro­gramme if exist­ing poli­cies failed to stave off defla­tion and rekin­dle growth.

“Pres­sure for the ECB to take fur­ther stim­u­la­tive action – and soon­er rather than lat­er – has been ramped up by the renewed drop in euro­zone con­sumer price infla­tion to 0.3 per cent in Novem­ber, ongo­ing weak eco­nom­ic news, a rise in unem­ploy­ment in Octo­ber and a con­tin­u­ing fall in bank lend­ing to euro­zone busi­ness­es,” says Howard Archer, chief UK and Euro­pean econ­o­mist at IHS Glob­al Insight.

The sit­u­a­tion has been ham­per­ing the growth of UK exporters for some time as the euro­zone is their biggest mar­ket

“How­ev­er, while Mario Draghi’s com­ments in late Novem­ber that euro­zone infla­tion and infla­tion expec­ta­tions need to rise as soon as pos­si­ble stoked spec­u­la­tion that the ECB could take fur­ther major stim­u­la­tive action at its Decem­ber meet­ing, any sub­stan­tial new ini­tia­tives look far more like­ly to hap­pen in the ear­ly months of 2015.”

Indeed, at the Decem­ber 4 meet­ing, the ECB dis­ap­point­ed mar­kets and failed to deliv­er QE for Christ­mas.

BRAKE ON UK EXPORTS

The sit­u­a­tion has been ham­per­ing the growth of UK exporters for some time as the euro­zone is their biggest mar­ket. Offi­cial fig­ures from the Office for Nation­al Sta­tis­tics (ONS) showed the UK’s deficit on trade in goods and ser­vices widened to £2.8 bil­lion in Sep­tem­ber, com­pared with £1.8 bil­lion in August.

Wor­ry­ing­ly, while Ger­many remains the UK’s largest trad­ing part­ner in terms of the val­ue of goods export­ed and import­ed, the Britain record­ed its largest-ever deficit with Ger­many in the third quar­ter of the year, reflect­ing a grad­ual decline in exports and rise in imports, accord­ing to the ONS.

As well as a declin­ing econ­o­my in the euro­zone, anoth­er bur­den for British busi­ness­es is the in or out ref­er­en­dum that Prime Min­is­ter David Cameron has promised if the Con­ser­v­a­tives are still in pow­er in 2017. There are con­cerns that this could put Euro­pean busi­ness­es off strik­ing deals with UK firms as they would not want to do busi­ness with a coun­try that is no longer a mem­ber of the Euro­pean Union.

Alis­dair McIn­tosh, direc­tor of Busi­ness for New Europe, the group against a so-called Brex­it or British exit from Europe, adds: “It would be impos­si­ble to nego­ti­ate the things that mat­ter most to busi­ness while also nego­ti­at­ing to leave. Nobody is like­ly to agree to pro­pos­als from the UK to improve con­di­tions for busi­ness in Europe, and to reform and improve the EU, if we have said that we intend to leave.”

How­ev­er, it is not all doom and gloom, and there will be some oppor­tu­ni­ties for UK exporters next year in the euro­zone, accord­ing to EY.

Tom Rogers, senior eco­nom­ic advis­er to the EY Euro­zone Fore­cast, says Ger­many and Ire­land will be two strong mar­kets for UK exporters next year. While the euro is set to con­tin­ue to depre­ci­ate, this will part­ly be off­set in Ger­many by the fact that it plans to intro­duce its first-ever min­i­mum wage in Jan­u­ary. This will boost con­sumer spend­ing and in turn increase imports.

Ire­land, which has staged a dra­mat­ic trans­for­ma­tion since hav­ing to go to the author­i­ties with its beg­ging bowl in 2010, will also be a strong export mar­ket, with its imports fore­cast to rise by 8 per cent this year and 4 per cent next year.