Bill Jamieson UK braves the Brexit storm

COMMENT

BILLJAMIESON | Executive Editor of The Scotsman

UK braves the Brexit storm

But there are choppy waters ahead for the EU itself.

After the doom-laden predictions for the UK ahead of the EU referendum in June, we should by now be performing the last rites for the economy and preparing for the mother of all recessions.

But in recent weeks both Purchasing Managers Index surveys and official data have pointed to a marked rebound in August after the initial shock reaction to the ‘Leave’ result.

Construction output defied dire predictions of a fall in July and instead held steady. Across UK manufacturing the latest PMI showed an encouragingly strong bounce in August on the July figure. The manufacturing PMI surged back up to a 10-month high of 53.3 after nosediving to a 41-month low of 48.3 in July. New orders strengthened markedly.

Consumer confidence across the UK saw some recovery in August after its July nosedive. And in the dominant services sector, UK figures showed a strong recovery in August after slumping to a seven-year low in July. We’re by no means out of the woods. But it now looks likely, not just that the UK will avoid that much-feared post BREXIT recession, but also that the third quarter will show growth, albeit modest. For the time being, it is not so much the UK economy we have to worry about – but the eurozone.

Looking at latest figures, growth across the continent’s biggest economies is sluggish at best. The 0.3 per cent estimate for growth in the second quarter was hailed on the Eurostat website as progress but is a slowdown on the 0.5 per cent recorded for the first three months of the year – and is the slowest pace recorded for two years. The European Commission’s latest forecast is for 1.6 per cent growth this year, so what’s not to like? Just this: it came with a warning that “the lift from cheap oil is set to gradually wane while the lagged boost from the euro’s depreciation will soon have run its course.”

In August the Commission’s Economic Sentiment Indicator fell back due to “weakened confidence in all business sectors” while “the marked decrease in industry confidence was caused by the sharpest deterioration in managers’ assessments of the current level of order books since February 2009.”

Meanwhile the PMI Composite Output Index for the euro area reached a 19-month low in August while retail trade confidence plummeted by 2.7 per cent “due to managers’ more negative views on the present and expected business situation.”

Its country by country analysis points out that France’s economy ground to a halt as strikes and disputes hampered production. Italy’s economy also stagnated, amplifying concerns over the country’s fragile banking sector. A stark contraction in fixed investment dragged on Germany’s growth and renewed apprehension about the pace of investment in the region’s largest economy, although the GDP result still managed to overshoot expectations.

On a sunnier note, Spain continued to be one of the region’s top performers thanks to an improving labour market and booming tourism sector.

For the time being, it is not so much the UK economy we have to worry about – but the eurozone.

Uncertain times

Now all this might not matter a jot or a tittle to businesses here and across Europe. Small and medium sized firms in particular don’t spend much time huddled over European Commission economic sentiment indicators or the Composite Output Index. They just get on with it.

But the problem here is that the lacklustre outlook for the eurozone could add to apprehension over political events and developments across the area, with several critical elections pending. Support for the status quo is waning across a number of countries and the eurozone’s two largest economies, France and Germany, face key elections next year.

Political stability is also at risk in Italy, and Spain remains in political limbo after two rounds of inconclusive elections.

And beyond elections, heightened security concerns are threatening the region’s tourism sector, while the migrant crisis has provoked tensions between countries.

It is natural for politicians to look to improving economic growth to bear down on unemployment and lift household confidence. But the latest forecasts offer little comfort. The FocusEconomics consensus forecast panel has kept its growth forecast for this year unchanged at 1.5 per cent, slowing to 1.4 per cent next. Unemployment across the eurozone is stuck at 10 per cent.

France is not the only country facing a challenge from the Rise of the Far Right. It is also strong in Austria, the Netherlands and Denmark – countries enjoying full employment or close to it. And there are Far Right challenges in Spain and Portugal.

Economist Nicolas Bouzou points out that all developed countries have, over the past decade, been experiencing an immense economic and social transformation connected to globalisation and innovation. Deep changes in the Internet, robotics, genetics, artificial intelligence are triggering a huge wave of ‘creative destruction’ – a new economy is replacing a former one – creating winners, but also many losers.

Short term worries about Brexit – here and across the eurozone – pale before the greater disruption this change portends. And against this the EU has no magic bullet to fire. In this wider scheme of things, even modest growth of 1.5 per cent could come to look a solid achievement. n