Even lacklustre Britain, for all its challenges, is outperforming failing countries in the EU

The UK is starting this year on the front foot, but tying us closer to the bloc is not the way to make progress

The German economy is stagnating. Last year was bad enough. The first official estimates suggest that output (measured by GDP) shrank by 0.3pc over 2023 as a whole – a full year recession. Unfortunately, the omens for 2024 are no better.

Two leading business polls this week are already indicating that Germany is mired in recession. The latest HCOB PMI survey, compiled by S&P Global, signalled that activity in services and manufacturing was still contracting in January. In contrast, the equivalent UK PMI index rose to a seven-month high and has been above the “neutral” 50 level for three successive months.

The leading national survey, compiled by Germany’s Ifo institute, also showed that sentiment among German companies deteriorated further at the start of the year. The weakness was broadly based, with retail trade and construction under the cosh too. The Ifo’s own Business Cycle Traffic Lights model is flashing red, for recession.

So, what has gone wrong? Part of the problem is that Germany’s industrial model is broken. In a nutshell, the manufacturing sector had become too reliant on cheap Russian oil and gas to make expensive goods to sell to China. The energy crisis and the weakness in global demand has, therefore, hit Germany particularly hard. Manufacturing production has been trending down for years. But there is a lot more to it. The German auto sector has only just started to recover from a series of shocks since 2016, including the emissions scandals, the enforced transition to electric vehicles, flawed green energy policies and the supply disruptions caused by the pandemic.

German car production did at least rebound by 18pc last year (matching growth in the UK). But it was still 12pc below its pre-covid level. And now, the disruption to the flow of imported components through the Red Sea threatens to put the brakes on again.

Both monetary and fiscal policy are playing a role too. It is no surprise that the weakest sector is construction, which is particularly sensitive to higher costs and higher interest rates. German house prices have already fallen by about 10pc in a year.

At the same time, Germany’s exceptionally strict budget rules allow little room for government spending or tax cuts to take up the slack. German inflation was quicker to fall than in the UK, but then so was wage growth, meaning that the squeeze on real incomes was similar. UK consumers can at least look forward to further falls in inflation, some additional help in the March Budget and bigger cuts in interest rates

The upshot is that the German economy looks poised to contract again this year. In contrast, the EY Item Club is now forecasting that the UK economy will grow by 0.9pc this year, rising to 1.8pc in 2025.

It is still touch and go whether the UK slipped into the shallowest of recessions at the end of 2023. My guess is that strength in private services was just about enough to offset the weakness of retail sales and the impact of NHS strikes. Either way, though, things are already looking up.

By this point some may be thinking that this is just indulging in schadenfreude. But no one should take any pleasure from Germany’s economic problems. It remains a key trading partner, with the crisis at the heart of the euro area going a long way towards explaining the renewed weakness of UK exports to the EU.

Others might say that it is unfair to compare the UK with Germany alone, given the particular problems that the latter is facing. Indeed, those wanting to talk up the relative performance of “Brexit Britain” are often accused of “cherry-picking” weak data from Germany.

However, this misses two points. First, Germany is still the most important economy in the euro area, accounting for around a third of the bloc’s GDP (excluding Ireland’s dodgy data). Its problems have dragged down neighbours, notably Austria and the Netherlands. They have already been joined in recession by Denmark, Luxembourg, Sweden and (with the same caveat about the GDP data) Ireland.

Second, while Germany may be the “sick man of Europe’, other large EU economies are faring little better.

In particular, France’s PMI data for January were even worse, with the manufacturing output index at a 44-month low, and fiscal space has been exhausted there too. Both Germany and France are struggling with social unrest, including protests from farmers and others worried about immigration and the cost of living. And between them, the two economies account for around half of euro area GDP.

Some other EU members with different economic models are doing better, notably Italy, Spain and Greece – all of which have benefited from the recovery in tourism and related services after Covid. However, cracks are creeping in here too.

Italy’s economic growth has also been flattered by an unsustainable construction boom, fuelled by government subsidies and tax breaks.

Spain benefited last year from exceptionally low inflation owing to relatively aggressive government intervention to keep energy prices down – something only a small economy could have done without distorting the entire European energy market. With the price of natural gas now much lower that advantage has faded. Whatever our own economic challenges – and there are many – the UK is at least starting the year on the front foot, while the EU is stumbling. Tying us ever closer to a failing economic bloc surely cannot be the best way forward.