Eurozone gloom casts shadow on UK recovery

Britain is not immune from the economic problems which continue to plague the eurozone and some of the UK’s major trading partners, writes Kathryn Hopkins


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.”

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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.