The Scotsman

European economies prepare for growth

- David Kohl David Kohl is Chief Economist atbelives Bank Julius Baer

With the Eurozone economy emerging from stagnation, supported by improving external demand and further receding inflation, the European Central Bank is shortly expected to start cutting interest rates. More broadly, as the slowdown in global growth dynamics is bottoming out, and the global manufactur­ing cycle is showing signs of turnaround, global growth is expected to pick up moderately in the second half of the year.

A pattern of weak industrial activity, particular­ly in energy intensive sectors, had been visible in Eurozone economies, although a surprising­ly resilient labour market is helping to partly offset this. Both UK and Scottish growth dynamics reflect these conditions, although there are indication­s that both are beginning to move in the right direction again, with the UK exiting its short, shallow recession earlier in the year.

Overall, the global backdrop will gradually brighten this year. The Chinese economy is attempting to counter its structural weakness in real estate by expanding its industrial activity, which should stimulate global trade and provide important support for economic activity in Europe.

While industrial output prices have increased by over 22 per cent in Eurozone economies and more than 24 per cent in the UK since beginning of 2021, prices in China increased just 5 per cent during the same timeframe. This has improved competitiv­eness of Chinese industrial goods and created downwards pressure on prices in Europe, softening the positive impact on European growth from exports.

Monetary policy by the European Central Bank and Bank of England has slowed credit activity notably in the past two years and more certainty that inflation is returning to target will allow central banks to start cutting rates. Competitiv­e pressure from Chinese exports will force higher productivi­ty growth in Europe at a time when labour shortages make streamlini­ng work processes much easier.

Elevated European energy prices incentivis­ed the exploratio­n of alternativ­e energy sources and the broader sector holds promising prospects.

In contrast to the tailwinds from accelerati­ng global growth, lower energy prices, lower inflation, and less restrictiv­e credit conditions, fiscal policy will remain a headwind for growth this year. In Scotland, income tax rates have increased, notably affecting higher earners, while the most recent UK Budget further increased the overall tax burden.

 ?? ?? David Kohl believes the global backdrop will gradually brighten
David Kohl believes the global backdrop will gradually brighten

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