• c
  • c
  • c
  • c
  • e
  • c
  • e
  • e
  • b
  • b
  • b
  • a
  • r
  • t
  • r
  • r

June 6, 2016

The European economy isn’t quite as much of a disaster zone as it might look

Although I am sure that Europe is likely to be the slowest growing region in the world on average over the next 30 years, it does look as though it is facing a bit of a cyclical upturn at the moment.

 

By far the most reliable business survey produced anywhere, the Ifo survey from Germany, last week confirmed that its business climate index had risen to 107.7 in May from 106.7 in April. Not only are German exports growing but investment and, especially, construction growth are pushing towards historic highs. The Harmonised European Business Survey which includes the surveys from Ifo and our own CBI as well as those from the respected institutes INSEE in France and ISCO in Italy is also showing much the same signal – the May survey (which reflects April data) was up by 0.5 to 105.7. For both surveys 100 implies trend growth so these stronger figures imply a significant upswing. These are serious and properly conducted surveys and the data from them can be used with confidence – although like all surveys of opinion, even if the surveys are correct, the opinions still might be wrong!

 

Three things seem to be happening. Europe’s wages are the highest in the world and uncompetitive – so they are not rising much. But falling commodity prices have meant that even stagnant wages have been associated with rising spending power. Second, a long investment downturn is finally turning. Some might just be replacement investment but there seems to be a real boost to IT investment. Third (sorry to bang on about this but it IS important) Europe is starting to develop its own Flat White Economy* and copying London. Stockholm is Europe’s second city for IT after London but both Berlin and Paris are starting coming up fast. And the Mediterranean coast is offering lifestyle perks (such as sunshine – in short supply in Northern Europe this week!) and Southern Europe’s low cost of living (particularly cheap property) to encourage young people to migrate to form a cheap but highly skilled labour force. Meanwhile Europe’s car sales are likely to be up 5% this year – possibly a consequence of cheap petrol.

 

Of course the Euro problems aren’t fixed and probably won’t be for a while.  This week the ECB refused to allow the Greek Central Bank to use Greek bonds as collateral for loans until more evidence of reform emerges. France –as is becoming increasingly apparent – is stuck in the mire of strikes organised by the CGT (the Communist Trade Union) as it tries to implement labour market reforms that were derided as too little too late when they were first attempted twenty years ago. But one of the things that the EU is good at (and there are plenty of things it is not good at) is the sharing of successful practice. As the reformed labour markets in Germany and Spain cause these countries to lead the way in economic growth, it seems unlikely that the laggards in reform will stand idly by.

 

Our long term growth forecast for Europe is about 1½% annual real GDP growth. As such Europe will become an increasingly peripheral part of the world economy, losing out not only to Asia but to the Anglophone areas like US, Australia and Canada as well as parts of Latin American and Africa. There are huge structural reforms necessary to reverse that trend. But provided the current commodity boom doesn’t reverse to an excessive extent, this year and next could be years of above trend growth with GDP rising by 2% or more, led by Germany and Spain compared with the downwardly revised 1.8 predicted by the European Commission a month ago.

 

*https://www.amazon.co.uk/Flat-White-Economy-Digital-Transforming/dp/0715650653/ref=tmm_pap_swatch_0?_encoding=UTF8&qid=&sr=

 

Douglas McWillaims, Cebr President

 

The site uses cookies, as explained in our cookie policy. If you agree to our use of cookies, please close this message and continue to use this site.

Accept & Close