And Europe is down but not out

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Tuesday February 16 2021

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By Ambrose Evans-Pritchard and Jeremy Warner

Surprise, surprise: Brexit Britain may beat Europe back to pre-pandemic GDP By Ambrose Evans-Pritchard, World Economy Editor The UK economy did not suffer a bigger contraction than the eurozone last year after all. The narrative of a particularly British fiasco – believed by the London media, and the world – is essentially untrue. It never made sense that the UK’s output figures should have been exceptionally disastrous. We now have the data, and we can see more clearly that it never happened. It was a story of apples and oranges. “The UK actually outperformed other countries in Europe slightly if you look at nominal GDP, and we’re expecting another outperformance this year,” says David Owen from the US bank Jefferies. The like-for-like nominal GDP contraction was 10pc in Spain, 6.2pc in France, 4.8pc in the UK, 3.8pc in Germany, and 2.3pc in the US. This alters the historical verdict on the Johnson government and the British Sonderweg – to borrow a German term. Neil Shearing from Capital Economics reaches the same broad conclusion. “We’re clustered in the middle of the pack with Germany, France, and Italy. We might beat some of the others and get back to pre-pandemic levels by the end of this year, if there are no nasty surprises,” he said. Confusion over past data is due to measurement models. The Office for National Statistics deducts a fall in visits to the doctor and reduced classes at school from accrued GDP. Most other countries do not. They tend to calculate extra health spending as a boost to GDP. Hence a giant anomaly. This is well-understood by the economics fraternity. It has been badly misunderstood by the lay commentariat. What we have had is an epidemic of bogus quantification. The illusory effect will reverse on the way up. The UK’s headline growth figures will be flattered – and look ridiculous – by mirror-image effect. “The economy is poised like a coiled spring. As its energies are released, the recovery should be one to remember after a year to forget,” says Andy Haldane, the Bank of England’s chief economist. “A year from now annual growth could be in double-digits,” he says. Households have amassed “accidental savings” of £125bn, and have paid down consumer debts by £20bn. Companies have a war chest of £100bn. Mr Haldane thinks a large chunk of this money is going to flood back into the real economy rapidly.   SOURCE: BANK OF ENGLAND   The shape, speed, and logistical back-up for the UK vaccine roll-out pulls forward economic reopening by roughly three months relative to the eurozone. New company births have been surging. There were 201,820 business formations in the fourth quarter, a sign that the UK’s flexible labour and product markets are adapting very fast to the digital leap forward caused by the pandemic. There is a risk that the recovery boomlet could fizzle out by the end of the year if Schumpeterians run amok or the Treasury reverts to austerity too soon. But that same risk applies in spades to Europe. The IMF warns that Germany, Spain, and the Netherlands all have contractionary fiscal settings this year. The Haldane corkscrew may be over-optimistic but it is certainly more plausible than the OECD’s dire forecast. It expects the UK to languish at the bottom of the developed world this year. Output will be 6.4pc below pre-pandemic levels at the end of 2021, and still 3pc lower at the end of 2022. Its French chief economist thinks France and Italy will pull far ahead of the UK this year. I am willing to take the other of that trade with conviction, to use hedge fund parlance. While Emmanuel’s Macron’s chief focus for weeks has been on how to outflank Marine Le Pen on the hard-Right over multiculturalism and Islamist ideology, he has allowed his country to drift into a vaccination crisis that entails huge economic cost. Just three million doses have been administered. The numbers protected are less because France is sticking to the double-dose rule. The rest of February will be used adding a little extra immunity with boosters, rather than broadening immunity as fast as possible. Large numbers at high risk will have no protection for a long time to come. Some 35pc of new cases in France are the English variant, rising to 45pc in greater Paris and 80pc in Dunkirk. South African and Brazilian variants have broken out in the Moselle. Total new infections are bubbling along at just over 20,000 a day. It looks stable but French epidemiologists say this is wishful thinking. Mr Macron is defying his scientific advisers, gambling that he may be able to escape without another lockdown. Schools remain open. One might conclude that he is making exactly the same mistake that the UK made before Christmas, except that he has less excuse knowing what we now know. Whatever happens, France has no chance of returning to normal economic life for several months. There will be no Haldanian coiled spring recovery before late 2021. By then labour hysteresis and the latent insolvency of small firms will be that much worse. Italy faces the same painful choices. The B117 variant is suddenly 18pc of cases. Health authorities are again calling for an immediate lockdown. Vaccination has been faster than in France but is constrained by the shortage of doses. Premier Mario Draghi has had to kick off his tenure by blocking the reopening of ski lifts, setting off the first explosive divisions in his bizarre coalition. Italy risks losing the early summer tourist season as well. Mr Draghi cannot safely spend his way through another quarter of economic distress given a public debt ratio threatening to break through 160pc of GDP. He has a horrible dilemma.   SOURCE: EUROSTAT   For the OECD to conclude that Britain will be left behind this year by France and Italy, it has to make calamitous assumptions about Brexit. No such calamity is occurring. Nor is it likely to occur under any rigorous analysis of what constitutes authentic UK exports to the EU, as became clear in the faux media drama last week over JD Sports. The company is a retailer. It is having trouble shipping clothes from its UK warehouse to shops in Europe because the goods come from China and southeast Asia. It will instead have to ship directly from the Far East to its EU locations. That is of no macroeconomic relevance to the UK. The re-exports by JD Sports may show up as large items in the UK trade balance but they add almost no value. What we have had over the last month is decibel levels of noise over trade disruption but little clarity on economic scale or what may be permanent damage. Shellfish have been rotting in wharves because the EU has imposed an unexpected ban on live exports but the total value of these exports is £15m. It is not beyond the wit of man to redirect most of this fish for internal consumption. If scallops, oysters, clams, and langoustines are not appearing already on our shop shelves, they will do soon so long as market forces are allowed to operate. I am salivating at the thought of fresh spaghetti alle vongole or Saint Jacques à la crème from our own waters. The big container ports tell me that goods are flowing as normal. More ships are going directly from northern Spain to Liverpool and other ports, or from Antwerp to the Humber, instead of going by road. This is better for CO2 emissions and more efficient. There was a January scare over lorry loads through the Channel but that is hard to separate from the other effects: stock-building before the Brexit deadline; people holding back until teething pains are over; and the B117 coronavirus variant. The worst has already subsided. “It is much-improved since mid-January,” said the Road Haulage Association. The Government says lorry traffic is back to 98pc of normal. There is still a problem: roughly 40pc are going back empty compared to 20pc in the past. This is because customs clearance into the EU is needlessly complicated – arguably protectionist – but this is going to boomerang back against the EU when the UK ends its temporary waivers over coming months and starts to dish out the same treatment. At that point European exporters will lose British market share to competitors from the US, Mexico, Japan, Korea, China, Latin America, or South Africa. Once lost, it probably goes forever. Brussels is going to face pressure from European business to dial down its trade harassment regime. “Supply chain problems are hitting German companies very hard. The bottlenecks are becoming dramatic,” said Joachim Lang, head of the German Industry lobby (BDI), last week. He called for an immediate return to constructive trade dialogue between the EU and the UK. We will be hearing more about this. Supply chains are in ferment. British manufacturers have an added incentive to switch from EU suppliers to local production wherever possible. Nissan will produce more batteries for its electric vehicles in the UK. That is a direct consequence of the EU’s refusal to grant the UK ‘diagonal cumulation’ on Japanese parts under rule of origin thresholds. “Brexit, which we thought is a risk, has become an opportunity for Nissan,” were the revealing words of the chief operating officer. There has been much focus on the immediate economic shocks of Brexit, but almost none on the silent offsetting effects. This year is going to turn that perception upside down. The spotlight will be back on Europe’s woes.   The Think Tank   From ‘sexist’ stock markets, to levelling-up and Tory spending pledges, the Telegraph’s Business team are on hand to provide you with a daily dose of Economics. Read their latest analysis pieces here   Those hoping for Europe’s unravelling will once again be disappointed By Jeremy Warner, Assistant Editor I’m a little more positive about prospects for the European economy than Ambrose, though I share many of his doubts about the veracity of the OECD forecasts for the UK relative to the rest of Europe. “The only function of economic forecasting is to make astrology look respectable,” said John K Galbraith. Covid has further served to render anything said about the growth trajectory or otherwise of the economy look doubly suspect. It all depends on the speed with which vaccination programmes are wheeled out, whether new, vaccine-resistant strains emerge, and the consequent scope for lifting restrictions on economic activity. All the same, the apparent success of the UK inoculation programme does indeed seem to have turned the tables on the EU, and possibly allows for a rather swifter opening up of the British economy than may be possible in many Continental countries. The timing of this juxtaposition could scarcely be more embarrassing for the EU. Just at the moment when Brexit is meant to be causing maximum economic pain for the insurgent Brits, the UK economy looks poised to surge ahead. “Pour encourager les autres”, so that others are not tempted into fleeing the coop, this is not; rather the reverse. But wait. The European Commission’s “interim winter forecast”, published late last week, offers humbled European leaders at least a glimmer of hope. This postulates that more than half of member states, including the two largest – Germany and France – will get back to pre-pandemic levels of output by the end of this year, or slightly faster than the Bank of England recently forecast for the UK. However, there is one rather big fly in the ointment. The EC forecasts are based on assumptions about vaccine roll out on the Continent which appear to pre-date the supply problems that caused such a stink at the end of last month. In particular, they assume that targets for vaccinating 80pc of health professionals and people aged over 80 by the end of March, and 70pc of all adults by the summer – originally published by the European Commission on 19 January – are met. This might still just about be possible if European countries adopted the British approach of a longer lag between the first and second dose, but the UK remains pretty much alone in this regard despite the European Medicine Agency’s apparent blessing. In the race between infections and injections, much of Europe remains firmly stuck towards the back of the peloton. This in turn might render the EC’s “downside scenario”, in which there is a slower roll out of vaccines, requiring tighter containment measures throughout 2021, rather more credible than its central forecast. Under the more gloomy scenario, euro area GDP doesn’t return to pre-pandemic levels until the beginning of 2023, a full year after what the Bank of England has pencilled in for the UK. For what it is worth, the EC insists that its central forecast, though now more challenging, remains realistic despite the slow start to vaccination. We’ll see. Big political egos and careers are at stake here. In France, Emmanuel Macron’s presidency hangs by a thread. In resisting pressures for another all-embracing national lockdown, he seems almost to have sided with anti-science lockdown sceptics, for he knows that politically he’s toast if forced to impose one. Infections are globally on a steeply declining trend right now; he’ll just have to pray that France is part of it. Daily confirmed cases have fallen sharply in France over the past week, so maybe he’s in luck. Yet in the absence of a credible vaccine strategy, it’s a slender thread on which to hang your political future. The other big factor determining speed of recovery is the degree of fiscal stimulus applied to the problem. On paper at least, the EU seems to have the bigger number in this regard with its Coronavirus Recovery and Resilience Facility, notionally worth €750bn. The winter forecast takes account of only a fraction of this spending, much of which has yet to be approved. As the national Recovery and Resilience Plans are gradually implemented, they ought to fuel a rather stronger recovery than the central forecast projects. The EU stimulus is not going to be nearly as impactful as the Biden package in the US, but at least it is something. For the UK, nothing similar has so far been announced. To the contrary, the signalling has all been about the need to rein in, rather than add more. Plainly we need to think about fiscal consolidation at some point, but the next 12 months is not it. The Budget next month may signal a more growth-friendly approach. Again, we’ll see. In any case, I suspect that when all is said and done, the UK will end up in much the same place as the rest of Europe in terms of its economic recovery from Covid, give or take a few months either way. As for whether the disease will prove the European Union’s final undoing, I doubt it. The centrifugal forces pulling Europe apart do admittedly look rather stronger once more than the integrationist purpose of the political elites trying to crunch it together. Even so, I wouldn’t bet against them. Like millennialists, we stand in a circle awaiting an end of days that never comes. Those hoping for a great, pandemic-inspired European unravelling will once again be disappointed. What I am reading It’s a bit of a cliche, I know, but Bill Gates on How to Avoid Climate Disaster. It really is rather good. Also, Populism: Before and After the Pandemic, by Micheal Burleigh, based on a series of lectures he did for the London School of Economics. A brilliantly erudite, suitably witty and irreverent look at the history of populism, in past and modern forms.     The best of Ambrose and Jeremy last week Jeremy Warner: It’s time for Boris to trust in UK’s vaccine success and take some risks   Ambrose Evans-Pritchard: Europe’s war on ‘equivalence’ risks violating international law – the UK should exploit the mistake   Jeremy Warner: Woodford was an accident waiting to happen – watchdogs failed to take action   Ambrose Evans-Pritchard: Conservatives must not surrender climate policy to the Left: a market carbon price works wonders   Jeremy Warner: The brave thing for Downing Street to do is face the truth on tax, grasp the nettle and raise rates   Let us know your thoughts Email Jeremy Warner or Ambrose Evans-Pritchard, with “Economic Intelligence” in the subject line. You can also follow Jeremy on Twitter. Neither writer can guarantee that they will be able to reply to all those who email, but they do appreciate your feedback.

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