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As Europe Economy Stumbles, Britain Offers Hesitant Hope

Posted by Unknown on Friday, August 15, 2014

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International Business |As Europe Economy Stumbles, Britain Offers Hesitant Hope



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LONDON — Is Britain, once described as the “sick man of Europe,” becoming Europe’s economic powerhouse?


A day after it emerged that the eurozone economy was again flirting with the prospect of recession, the news out of Britain on Friday was altogether more encouraging: The economy was powering ahead at its fastest pace in more than six years.


British gross domestic product grew 3.2 percent in the second quarter compared to a year ago, up slightly from a preliminary estimate of 3.1 percent published last month, official data showed. For the first time, the size of the British economy surpassed its precrisis level, “a major milestone,” in the words of George Osborne, chancellor of the Exchequer.


Compared with the 0.8 percent expansion of the British economy over the last quarter, G.D.P. in the eurozone’s biggest economy, Germany, contracted by 0.2 percent. The French economy, No. 2 in the 18-member bloc, stagnated.


Britain has grown faster mainly owing to a combination of cheap money with low interest rates, an easing-off in austerity measures and a booming residential and commercial property market, all of which have helped bolster demand.


But behind the impressive headline growth in Britain lurk major weaknesses, economists say. Worries about a housing bubble are rising, and an expensive pound, up 14 percent against the dollar since March 2013, risks undermining exports.


More fundamentally, Germany and France, which jointly account roughly half of eurozone output, reached their precrisis levels of G.D.P. three years ago. Britain has been playing catch-up, said the analyst Robert Wood of Berenberg Bank.


“We have had a very bad recession and until recently a very slow recovery,” he said. “France’s recovery is slow but its recession was never that deep, and Germany has had a strong recovery from a weak recession.”


“Basically the U.K. is growing faster than the core eurozone countries after doing very, very poorly over the past seven years,” Mr. Wood said. “This is by no means an amazing economic achievement.”


The fact that the British economy, more dependent on the financial sector than its large neighbors on the Continent, took this long to claw its way back from the depth of the crisis has weighed on living standards, which have worsened in recent years.


Although unemployment has fallen to levels unthinkable a year ago – currently 6.4 percent – rising inflation and low productivity growth have squeezed wages.


Pay for workers in Britain is expected to grow by a mere 1.25 percent in 2014, at half the pace predicted as recently as May, and below the rate of inflation of about 2 percent.


For the best part of five years, Britain has recorded no growth in productivity — a measure of G.D.P. per hour worked. The Bank of England is projecting productivity to increase about 0.25 percent this year and 1.75 percent in 2016. The average increase was 2.5 percent from 1998 to 2007.


Mark J. Carney, the governor of the Bank of England, said at a news conference this week that a “sustained expansion here at home will ultimately require growth in productivity and real incomes, both of which have disappointed.”


It is a schizophrenic recovery, which presents a conundrum for policy makers at the Bank of England trying to determine an appropriate cost of credit and for the government, as British voters complain about a cost-of-living crisis. Most analysts predict the bank will keep interest rates at their 0.5 percent low through early next year.


Economists say it is too early to look at the conflicting data as a structural change. The fallout from the financial crisis in terms of investor confidence remains palpable and if strong growth prevails, productivity and wages may yet follow.


The figures released Friday by the Office for National Statistics showed that in June alone, the services sector drove growth, expanding by 0.3 percent, and by 3.6 percent when compared with a year earlier, the fastest pace since early 2008.


Construction output was unchanged, a better performance than in the preliminary figures published last month that had shown a contraction of 0.5 percent.


One wild card is how the slowdown in the eurozone affects the British economy in coming months. Economists say tensions in Ukraine and sanctions against Russia will hurt Britain less than its European neighbors. But as manufacturing in Germany and elsewhere is hit, there will be ripple effects through Britain’s close trade links with the Continent.


Even before sanctions took effect, the political uncertainty appeared to take a toll as British manufacturing lost steam in the second quarter, rising just 0.2 percent from April through June, its slowest pace in more than a year.


“The U.K. domestic economy looks good. It’s growing strongly and is likely to keep growing strongly,” said Mr. Wood of Berenberg. “The one blot on the copy book is manufacturing: It has grown over the last year but has weakened on Ukraine tensions. The U.K. manufacturing sector is very tied into eurozone manufacturing. It’s very closely tied into what happens in Germany.”



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