The UK and euro zone may stay in a low growth

Based on seasonally and calendar adjusted quarterly data, GDP increased by 0.5% in both the eurozone and the EU.

>> What is the outlook for advanced economies?

In the fourth quarter of 2023, seasonally adjusted GDP remained stable in both the eurozone and the EU, compared with the previous quarter, according to a preliminary flash estimate published by Eurostat, the statistical office of the European Union. In the third quarter of 2023, GDP had declined by 0.1% in both zones.

According to a first estimation of annual growth for 2023, based on seasonally and calendar adjusted quarterly data, GDP increased by 0.5% in both the eurozone and the EU.

Compared with the same quarter of the previous year, seasonally adjusted GDP increased by 0.1% in the eurozone and by 0.2% in the EU in the fourth quarter of 2023, after 0.0% in both zones in the previous quarter.

Meanwhile UK GDP also fell just 0.1% in Q3 and monthly GDP data suggests a similar-sized fall in Q4. With any recessions being so mild and unemployment rates still so low, we might legitimately claim that the pair are experiencing soft landings even if growth has dipped below the zero line.

Now given some of the forecasts, central banks have made for the depth of the economic downturn, such as the near-2% decline in GDP for the year to Q4 2023 projected by the Bank of England soon after the turmoil of the very temporary Liz Truss government in late 2022, the outcome does not seem bad at all.

However, the problem in the Standard Bank’s view might actually be that the recessions, if they happen at all, will be almost too mild. Now that clearly seems a strange thing to say. We can hardly laud an apparent soft landing and then complain that it might be too soft. But the problem as we see it is that the mildness of the recessions rather suggest that the UK and euro zone are going to stay in a very low-growth funk rather than bound out of the economic downturn as they did when Covid restrictions were lifted, for example.

Bank of England Governor Bailey was hardly praising the fact that the UK might only experience a mild recession in recent comments. Instead, he was bemoaning the fact that Bank of England forecasts for future growth were the worst that he had ever seen. Here he was talking about the fact that the Bank currently puts growth in the year to Q4 2024 at zero and only 0.4% in the year to Q4 2025. Even the recovery in the year after that is nothing to write home about at 1.1%.

In short, there might not be much of a recession, but there’s not going to be much of a recovery either. Notable damage to the supply side of the economy caused by factors such as worker sickness is a particular bugbear of the Bank, leaving its forecasts below those made by the private sector, albeit not significantly so.

>> ECB has fallen behind the curve again?

The ECB is more upbeat, with a 2024 forecast for GDP of 0.8% and 1.5% for 2025 and 26, but the Standard Bank believes that they could be too optimistic as its calls are for 0.2% this year and 1% in 2025. Another point worth making, if you take the BoE’s view that the supply capacity of the economy has been deeply impaired is that if demand were to accelerate strongly, as inflation and interest rates come down, it could quickly re-ignite inflation because the supply capacity is not there to meet the rise in demand in a frictionless way.

The key point here seems to be that it’s only a case of two cheers for the soft landing in Europe because the take-off from here is going to be very modest. The outlook might not be so unlike that which we’ve seen in Japan for many years when its period of rampant growth gave way to decades of basically flat economic performance, with frequent, but often mild recessions.

For instance, Japan has experienced eight recessions since the 1980s compared to the four in the UK over the same period. Japan’s difficulties were not helped by the ageing population which restricted labour supply and potential output. But at least the ageing population meant that per-capita GDP remained quite healthy. This, plus the quiescent nature of the population meant that low growth did not give rise to significant social and political pressures: the LDP basically stayed in power throughout. But that’s not the same in Europe as we’ve been seeing. If the situation deteriorates further because being out of recession feels like being in recession to the electorate, due to such paltry growth, then social and political strains only seem likely to rise.