Why these major economies may defy recession forecasts | World News - Hindustan Times

Why these major economies may defy recession forecasts

Bloomberg |
Jan 13, 2023 06:46 PM IST

Recession 2023: Europe’s two biggest economies may have succeeded in skirting a recession in the fourth quarter, defying downbeat expectations.

Europe’s two biggest economies may have succeeded in skirting a recession in the fourth quarter, defying downbeat expectations and offering hope of similar feats throughout the advanced world.

Recession 2023: Germany and UK defying forecasts may skirt recessions for now.
Recession 2023: Germany and UK defying forecasts may skirt recessions for now.

Read here: World food prices hit record high in 2022 despite December fall

Consumer-fueled momentum buoyed both Germany and the UK, according to offical estimates of gross domestic product released Friday.

Officials in Berlin suggested the euro zone’s motor probably stagnated in the quarter, while British data for November showed output rose unexpectedly by 0.1%.

With both economies labeled just weeks ago by the OECD as this year’s likely laggards within the Group of Seven, generous subsidies for energy bills are cushioning households against the worst cost-of-living crisis in a generation. It raises the possiblility of a soft landing for the world economy.

Further reasons for hope come from China’s emergence from Covid-19 lockdowns and warmer weather in Europe, which is reducing energy demand and reliance on Russia for supplies.

At the same time, there’s a danger that inflation stoked by stronger demand could persist. That would complicate decision making by central banks from the US to the euro zone, which are struggling to decide how much further interest rates need to rise to quell price pressures.

“Germany and the UK are very much in the same situation — high inflation meets generous fiscal support and an economy saved by the weather,” said Carsten Brzeski, head of macro at ING in Frankfurt. Still, “while the data offer some hope that the crisis won’t be as bad as feared, I’m struggling to think of 2023 as a year where everything will be just fine.”

Read here: Global economy must start bracing for low inflation: Ex RBI Guv Raghuram Rajan

As recently as November, the European Commission was forecasting that Germany was succumbing to the deepest recession in the euro region, which itself was predicted to mildly contract during the fourth and first quarters.

The UK, according to its officials, was already in the midst of an even more severe slump — a projection shared by the Bank of England.

Instead, both economies are showing unexpected resilience. Germany — whose initial and tentative fourth-quarter assessment by statisticians is the first for any G-7 country so far — expanded 1.9% in 2022 as a whole. That’s more than the 1.8% median prediction of economists.

Britain, meanwhile, showed a second consecutive month of expansion, an outcome foreseen by only one forecaster among 32 polled.

While different narratives affect each country, not least since the UK’s exit from the European Union in 2020, the unifying theme in each is the continuation of wholesale support to consumers to weather the cost-of-living squeeze.

In Germany, disposable income in 2022 posted a record increase, aided by Chancellor Olaf Scholz’s coalition. Ministers offered a tax break on bonuses, and most emphatically they ensured that gas bills in December were bankrolled by the public purse.

‘Incredibly Robust’

“Private consumption was incredibly robust in the fourth quarter,” said Andreas Scheuerle, an economist at Dekabank. “Industry has also been stronger than expected, with carmakers playing no small role.”

In the UK, the reversal of a tax rise on payrolls is likely to have brought a similar fillip to disposable incomes, with Prime Minister Rishi Sunak’s government trying both to fight inflation and cushion consumers from rising energy bills. World Cup football matches also boosted consumer-facing businesses and helped offset the impact of strikes, statisticians said.

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“We’re in the process of digesting the big shocks of the past year, and we’ve made good progress in learning to cope with higher energy costs,” said Holger Schmieding, chief economist at Berenberg in London. “With inflation past the peak, the situation is improving — the recession in the UK will be milder, and Germany may avoid it entirely with a bit of luck.”

The unexpected buoyancy in each economy may yet prove fleeting — not least if the current respite in energy prices reverses as China reopens. While natural gas prices in Europe have fallen in recent weeks, they remain about five times higher than in the US or the levels before the pandemic.

Equally, the threat that growth resilience may drive more inflation can’t be discounted. Annual price gains in both Britain and Germany are about 10%.

For the European Central Bank and BOE, whose first decisions of the year are on Feb. 2, the silver lining of a canceled recession may still be overshadowed by the cloud of inflation.

Euro-zone policy makers are seen likely to keep raising interest rates aggressively, with a half-point move anticipated. Friday’s figures may strengthen calls for further increases in borrowing costs in the UK, too.

Read here: IMF chief's advice to China on reopening economy amid Covid

Meanwhile, one quarter of good news on growth could well also turn out to be short-lived, according to ING’s Brzeski.

“Consumers haven’t seen the worst of the gas-price increase, factories will start to feel last year’s decline in orders eventually, and the tailwinds of post-pandemic catch-up spending will recede,” he said.

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