Ger­many flirts with re­ces­sion, but Italy and France will bear the brunt

The Daily Telegraph - Business - - Business Comment - Roger Boo­tle is chair­man of Cap­i­tal Eco­nomics roger.boo­[email protected]­i­tale­co­nomics.com

Ev­ery so of­ten an eco­nomic statis­tic pulls you up short. This hap­pened last week with the re­lease of Ger­man fig­ures on in­dus­trial pro­duc­tion for Novem­ber. They were down by 1.9pc on the month, com­pared to ex­pec­ta­tions of a rise of 0.3pc. We all know that you shouldn’t place too much em­pha­sis upon a sin­gle month’s statis­tic. But this was the third month in a row in­dus­trial pro­duc­tion had fallen and it’s down by 4.7pc over the year. What is go­ing on?

When in­dus­trial pro­duc­tion first fell sharply in July, a com­mon re­ac­tion was to at­tribute this largely to weak­ness in car man­u­fac­tur­ing. It has its own spe­cial prob­lems as­so­ci­ated with the tran­si­tion from diesel and pro­longed dif­fi­culty in meet­ing emis­sions tests.

It has sub­se­quently be­come clear, though, that some­thing more gen­eral has been hap­pen­ing. After all, Novem­ber’s fall in car out­put was no more dra­matic than the av­er­age falls in other sec­tors. More­over, the prob­lem is not re­stricted to Ger­many. In­dus­trial pro­duc­tion has also been weak in France, Italy and Spain.

This is con­sis­tent with the slow­down in China and the as­so­ci­ated weak­en­ing of in­ter­na­tional trade. Ger­many is hit es­pe­cially hard be­cause it has a high share of ex­ports in GDP – about 47pc. Fur­ther­more, a par­tic­u­larly high pro­por­tion of its ex­ports go to China.

But this ex­pla­na­tion doesn’t fully stack up ei­ther for there is, as yet, no real sign of an eco­nomic slow­down in the United States, and China’s sta­tis­tics show im­ports from Europe slow­ing but still grow­ing. More­over, across the euro­zone there has been a weak­en­ing in the rate of in­crease of con­sumer spend­ing. This surely can­not be blamed upon the slow­down in China. I sus­pect that the right ques­tion to ask is not so much why the euro­zone econ­omy is now slow­ing, but rather why it man­aged to achieve rea­son­able growth from 2014 on­wards, and es­pe­cially in 2017. This growth spurt took many fore­cast­ers by sur­prise. Strong growth then was made pos­si­ble by the weak start­ing point; there was con­sid­er­able un­used ca­pac­ity. The fac­tors that drove the econ­omy for­ward were a mix­ture of a weak euro, ma­jor re­duc­tions in in­ter­est rates all the way down to mi­nus 0.4pc, quan­ti­ta­tive eas­ing, the end of fis­cal con­trac­tion in a num­ber of coun­tries and the ben­e­fi­cial ef­fect of lower oil prices on real in­comes.

It may well be that all that is hap­pen­ing now is sim­ply the fad­ing of these ef­fects that had caused the eco­nomic growth num­bers to come in tem­po­rar­ily stronger than the sus­tain­able norm, which is prob­a­bly growth of about 1pc. Mind you, the norm is not eco­nomic con­trac­tion.

Ev­ery­thing de­pends upon how sharp and long-lived the cur­rent slow­down proves to be. It is too early to be sure, but the Ger­man econ­omy may have con­tracted in the fourth quar­ter of last year, fol­low­ing a con­trac­tion in Q3. This would mean that Ger­many was for­mally in re­ces­sion. Mean­while, Italy has been flirt­ing with re­ces­sion for some time.

It is pos­si­ble that de­spite re­cent weak­ness, there could now be some steady­ing and even a re­cov­ery. Euro­zone growth this year could turn out to be 1pc or so. Al­though this would be pretty poor by in­ter­na­tional stan­dards, it would be strong enough to stave off any dire con­se­quences.

But it is plau­si­ble that the down­turn will get worse. The for­ward-look­ing sur­veys are weak. After all, quite apart from the usual eco­nomic in­flu­ences there are a num­ber of po­lit­i­cal fac­tors that will un­der­mine con­fi­dence: aware­ness the truce be­tween Italy and the EU is frag­ile, po­lit­i­cal in­sta­bil­ity in France, uncer­tainty in Ger­many about the post-Merkel era, wor­ries about trade wars and the in­ter­na­tional or­der and, last but not least, Brexit.

If the down­turn turned into a full-blown re­ces­sion, what then? We wouldn’t need to worry a great deal about Ger­many, which has done well and en­joys a low rate of un­em­ploy­ment. France would be a worry. A sig­nif­i­cant eco­nomic slow­down, never mind a re­ces­sion, would see un­em­ploy­ment rise. This would weaken pres­i­dent Macron’s po­si­tion and make it more dif­fi­cult for him to force through his re­form pro­gramme. If his pop­u­lar­ity falls any fur­ther then busi­nesses and fi­nan­cial mar­kets may come to worry that the next pres­i­den­tial elec­tion in 2022 could pro­duce a win for Ma­rine Le Pen. Above all, she is a French na­tion­al­ist and would want to re­assert French sovereignty in re­la­tion to the EU. That would re­ally put the cat among the pi­geons.

Con­cern should be greater about Italy. It has hardly en­joyed any up­turn over the last two years and in­deed its econ­omy has only grown by about 9pc since the for­ma­tion of the euro

20 years ago. In the mean­time the Ital­ian pop­u­la­tion and work­force has been swollen by im­mi­grants. Ital­ian GDP per capita is ac­tu­ally lower now than it was 20 years ago. The Ital­ian un­em­ploy­ment rate stands at 10.5pc. Over re­cent months it has been ris­ing a bit, but if the euro­zone econ­omy slows markedly then it would rise sig­nif­i­cantly. In these cir­cum­stances the Ital­ian debt bur­den would in­crease and Italy’s banks would look even dodgier. This would in­ten­sify pres­sure on the Ital­ian gov­ern­ment to be tough in its deal­ings with the EU and it would reignite ques­tions about the long-term sus­tain­abil­ity of Italy’s mem­ber­ship of the euro.

If these pres­sures start to mount in then there could be an early warn­ing of po­lit­i­cal reper­cus­sions to come in May’s elec­tions for the Euro­pean Par­lia­ment, with Euroscep­tic par­ties putting up a good per­for­mance. Of course, if all goes ac­cord­ing to plan, by that stage the UK will be out of the EU. Ad­mit­tedly, at that point we will be go­ing through our short pe­riod of bumpi­ness caused by dis­lo­ca­tions and uncer­tainty be­fore we start to re­alise the ben­e­fits of Brexit. Yet it is be­gin­ning to look as though what­ever hap­pens over here, things may be worse over there.

‘Ital­ian GDP per capita is ac­tu­ally lower now than it was 20 years ago. The Ital­ian job­less rate stands at 10.5pc’

Weak­ness in car man­u­fac­tur­ing has been blamed for a slow­down in Ger­man in­dus­trial pro­duc­tion, but the prob­lem has spread across other sec­tors and euro­zone na­tions

ROGER BOO­TLE

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