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.
Click here to read the piece in full.