It seemed almost naive to even think it. The great Anglo Saxon consumer has been a key factor in moving the global economy forward in recent years. While most of the countries in the eurozone limped forward, the US and UK saw growth race ahead. But it was clear this could not continue; that sooner or later debt levels would climb too high. What then? Would the global economy go crashing in the wake of the consumer slowdown? Or, could the eurozone take up the charge?
It all seems to be happening the way we barely dared to hope. And leading the pack is Germany. After toying with double recession a few years ago, it now seems possible Germany could enjoy growth of 3.3 per cent over the coming months, or so says Capital Economics.
Across the length and breadth of euroland, GDP grew at an annualised rate of 3.3 per cent in the final quarter of last year. That’s a six year high, and, for once, greater than the growth enjoyed in both the US and UK.
And moving forward, Germany sits in the driving seat.
Until recently, Germany had relied on industrial production and gradually things had improved. But there is a snag with this: the sector relies on demand from overseas, and since the US is no longer expanding like it did, there were fears this recovery could stall. Then, when VAT saw a big increase in January, some thought that the economy could even go into reverse.
But the good news is that German consumers seemed to have shrugged off the VAT hike and put the bad old days of double recession behind them. Consumer confidence indices are at record highs. It’s easy to see why. In 2005 German unemployment was at 9.5 percent, double the level in the UK. Today, the unemployment rate, according to Capital Economics, is 8.4 percent, but is expected to fall to seven percent this year, and just 6.8 per cent next. Productivity gains have helped propel the Germany labour market forward. It’s as if the straitjacket of the eurozone, which forced too high a rate of interest upon Germany, had forced the country to return to its roots, with efficiency once more being the mantra of German manufacturing.
In France, however, the rigid labour market is still holding the eurozone’s second largest economy back. As Capital Economics put it, France has a “fundamental lack of competitiveness relative to Germany.” France grew by 2.1 per cent in 2006, compared to 2.9 percent in Germany. This year, Germany is expected to enjoy growth of 2.7 per cent compared to 2.1 percent in France, while next year both economies are expected to slow. But Germany will still have the edge, with expected growth of 2.1 per cent to the predicted French growth rate of two per cent.
But perhaps the big surprise is Italy. Last year the country saw growth hit a six-year high. It’s all a little odd. Italy is supposed to be beset with poor productivity, and poor competitiveness. Capital Economics reckons the explanation for this growth lies partially with illegal immigration, which has boosted companies’ ability to compete without the gains showing up in official figures. And as European consumers start to spend again, Italy, which is more focused on the production of consumer goods, seems to be sitting pretty for more growth still.
Meanwhile, Spain has, of course, been one of the stars of the region for some time. But with growth hitting 3.9 percent last year, with the IMF saying house prices are 30 per cent overvalued, Spanish consumers are actually seeing their saving to disposable income ratio going negative, and many have feared the good times might be nearing an end. On the other hand, immigration has helped keep a lid on wage inflation, and, since the country relies heavily on other eurozone economies for its exports, it is benefiting from the eurozone recovery. Capital Economics predicts that, despite the well publicised weaknesses in the Spanish economy, the country should manage impressive growth of 3.2 per cent this year and 2.7 per cent next.
But two of the biggest stars of the eurozone have been Greece and Ireland. Last year saw Greece manage 4.2 per cent growth, while Ireland expanded by an even more impressive six per cent.
Finally, stepping outside the Eurozone, Scandinavia is set to remain one of the most dynamic regions in the EU. In 2006, Sweden, Norway and Denmark enjoyed respective growth of 4.7, 2.9 and 3.2 per cent, and this year the growth is expected to fall to 3.8, 2.8 and 2.5 per cent.
So where does that leave Blighty? Actually, the UK has not slipped that far down the rankings. Last year it grew by 2.8 percent, only just behind Germany and way ahead of France. Furthermore, by 2008 Capital Economics reckons the UK will be back on the leaders’ board. It projects growth of 2.5 per cent in 2008, compared to a eurozone average of 2.2 per cent.
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