Global trade tensions could be new normal

THE European economy has pretty much ground to a halt – and this has very little to do with Brexit. If, however, the Brexit negotiations go badly, then the sky darkens – and not just across Europe. We have just had some poor figures for the UK in the final quarter of the year. The particularly shocking element was that the economy seems to have shrunk in December.

If that is right, and those of us who have been around for a while know these figures are often wrong, it would suggest that there has indeed been a sharp deterioration over the Christmas season.

Some of that must surely be related to caution about the UK’s relationship with Europe.

It would be absurd not to acknowledge this, though it may also be a reaction to people bringing forward their seasonal purchases because of November’s Black Friday inducements.

This is not good, not good at all. But the slowdown in Europe has been worse. The eurozone economy had a strong first half of the year but something went badly wrong in the summer.

The Italian economy went into recession – it shrank for two consecutive quarters.

Germany shrank in the third quarter and seems to have grown hardly at all (we don’t have the figures yet) in the final three months.

And France grew only slowly, with 0.3pc growth each quarter.

In fact, after a slower first half than most of Europe, in the second half it looks as though the UK has actually grown faster than Germany, France or Italy.

I find this really alarming. You would expect an uneven ride in the UK, because whatever your views about the long-term case for and against Brexit, disruption is never good.

But a wider slowdown across the continent would be troubling indeed.

There are, I think, two big questions here. One is specific to Europe. Is it inevitable that it will be a slow-growth area, and are we seeing more signs of that now?

The other is whether the tension between the UK and Europe will become the norm for the world, damaging growth everywhere.

On the first, the slow growth of Europe’s workforce and the continent’s ageing population mean it will struggle to be a vibrant region. In fact, it won’t be. So how will young Europeans react to that?

We are too close to this second half of 2018 slowdown to know quite what is going wrong. But there is something about Germany’s over-dependence on exports (big hit from slowdown in China); Italy’s lack of competitiveness under the euro (very little rise in living standards since it was launched); and France’s structural rigidities (the ‘gilets jaunes’ stopping reform).

The eurozone’s unemployment rate is 8pc. That is at the top of the cycle. How will people react when the cycle turns and it starts to rise again?

THE second question was raised by Mark Carney, governor of the Bank of England, in a speech in London yesterday. “In many respects,” he said, “Brexit is the first test of a new global order and could prove the acid test of whether a way can be found to broaden the benefits of openness while enhancing democratic accountability.

“Brexit could affect both the short- and long-term global outlooks.”

That must be right. There has been just enough political support for greater trade freedoms to keep cross-border trade increasing, not just in absolute terms but proportionate to GDP. But only just.

Getting further trade rounds through the World Trade Organisation process has ground to a halt. Regional trade deals, such as Nafta, are being renegotiated, and the US-China trade relationship (which is under WTO rules) is under threat.

However, you can understand these tensions, because the US and Mexico on the one hand and the US and China on the other are economies at very different stages of development.

Were there to be a real rupture between the UK and the EU, then that would be the first time that trade barriers were erected between countries that had had completely open trade for more than a generation.

It would set a precedent for the world. If there is not enough political support on either side for the UK and the EU to agree an acceptable deal, what does that say about the climate for preserving trade freedoms more generally?

My own view is that our global economy does need to be more sensitive to local pressures. International trade has to be seen to benefit both sides, and too often that has not been evident.

The rows within Europe, most recently between Italy and France, suggest the benefits of EU membership are not evident to many people on the continent.

This ought to be fixable. It rather needs to be. Europe will be a slow-growth region come what may.

But the greater the tensions, the worse the outcome. Simple as that. (© Independent News Service)

‘International trade has to be seen to benefit both sides – and all too often that has not been evident’