While the hierarchy in the European Union is playing hardball with the UK’s Brexit negotiators, they ought to be more than a little concerned about the economic situation in the EU, bearing in mind the importance of good ongoing relations with Britain.
Euro zone growth forecasts for this year have dropped to fresh lows, reflecting how global trade war concerns and political uncertainty are weighing on economic activity.
The revision is particularly steep for Germany, for years the powerhouse of Euro zone growth. Germany is now forecast to grow more slowly than France – which is still reeling from internal strife with recent massive domestic protests – while Italy, the
Euro zone’s third-largest economy, is also expected to be one of the worst performers with the economy shrinking by the end of 2018 when it officially slipped into recession, another sign of economic troubles in the EU.
Additional data from Brussels showed that overall Euro zone growth remained stuck at 0.2 per cent at the end of last year, its lowest level in four years. Germany was also hit with further bad news as figures released last week for December, showed retail sales suffered their sharpest fall in 11 years, plummeting 4.3 per cent. Netwealth economist Gerard Lyons said the figures exposed “deep-rooted structural problems” across the continent.
He said: “It’s not just Italy, we are seeing weakness across the board in the euro area. It has exposed how sensitive markets and economies have been to monetary easing and subsequent monetary tightening.” Economists surveyed by Consensus Economics expect Euro zone gross domestic product to rise less than 1.6 per cent this year — 0.4 percentage points lower than forecast last March, when estimates were at their most optimistic.
It compares with expected growth in 2018 of 1.9 per cent and would mark a second consecutive annual slowdown. The Euro zone grew 2.4 per cent in 2017, its highest level in a decade.
During the last two quarters of Italy’s contraction, Rome was embroiled in an intense standoff with the EU over its big-spending budget plan for this year.
The Italian government finally agreed to revise its expansive plan after the European Commission (EC) threatened to impose fines. But concerns still remain about the country’s high level of debt and its struggling banks.
The Economist Intelligence Unit (EIU) warned that the EC would be closely monitoring Italy’s fiscal performance and would not hesitate to issue “stern warnings” to Rome, which could unnerve investors and push up government borrowing costs. CMC Markets analyst David Madden said Italy’s fall into recession had already “spooked investors” and could weigh on the entire currency bloc. Prime Minister Giuseppe Conte said he expected a further contraction but that “all the elements” were there for a recovery in the second half of the year.
Fidelity International analyst Andrea Iannelli said the Brussels row “exacerbated” Italy’s weaknesses and that while the standoff had come to an end, the latest figures highlighted the challenges that still lay ahead. Following the GDP data, Oxford Economics said: “2019 will very likely be remembered as a year of no growth in Italy — not a great track record for the first year of the populist government.”
Led by Germany’s economic slowdown, the single currency bloc’s woes continued with Euro zone Industrial production suffering its sharpest fall in almost three years by the end of last year. Bank of America Merrill Lynch analysts said it was likely Germany was already in a technical recession. It comes after Germany endured its biggest production decline in two years.
The largest decreases came in Ireland – where the economy had made enormous improvement after the global financial crisis – down 7.5 per cent, and Portugal, down 2.5 per cent, followed by Germany and Lithuania, which dropped 1.9 per cent.
Year-on-year, German production fell 5.1 per cent, second only to Ireland. Centre for Economics and Business Research economist Alastair Neame said: “Euro zone manufacturers look to be struggling as the global economy slows.”
He added: “Although temporary factors such as emissions standards may be affecting car production (and sales) the rise of protectionism and uncertainty are likely to have a long-lasting impact on the sector’s fortunes.”
Eurostat said production fell across all categories: energy, capital goods, intermediate goods, and durable and non-durable consumer goods. “The Euro zone has clearly shifted down a gear,” said Andrew Kenningham, senior economist at Capital Economics.
(The author is our foreign correspondent based in the UK. He can be reached at andyjalil@aol.com)
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