Britain to outgrow Germany for years to come as eurozone growth engine stutters

High interest rates risk plunging Europe into recession while UK expected to rebound

Source - Daily Telegraph 29/12/23

UK growth will outpace Germany and the eurozone for years to come as the Continent faces a deeper recession caused by higher interest rates.

While both the German and UK economies shrank in the three months to September, putting both at risk of recession, analysts at UBS expect Britain to bounce back within a year.

That is unlike Europe’s largest economy. Berlin is already grappling with a budget crisis after Germany’s top court ruled that the government broke the law by using Covid cash to fund net zero spending.

House prices across the country have also suffered double-digit declines.

Problems have been compounded by a slow transition away from cheap Russian gas, which analysts believe will continue to hold back Germany’s recovery next year.

Economists at UBS anticipate growth of 0.5pc next year for the eurozone’s largest economy, followed by a modest acceleration of 0.8pc in 2025.

By contrast, the UK will grow by 0.6pc in 2024 and by 1.5pc the year after.

Confidence in Britain’s revival is reflected in recent bets from traders who believe UK interest rates will fall from 5.25pc to 3.5pc by the end of next year.

Falling inflation could also provide a more favourable economic backdrop for Rishi Sunak, giving him more scope to cut taxes ahead of an expected autumn general election.

As for the eurozone, its growth remains stunted due to issues across its core nations, with UBS predicting that the bloc as a whole will expand by 1.2pc in 2025 – which is behind Britain’s growth rate.

This will be the situation for years to come. As far away as 2026, UBS expects the UK to grow by 1.3pc and the eurozone by 1.1pc, while Germany is the laggard on 0.9pc.

Reinhard Cluse, economist at UBS, said the industrial giant has simply failed to recover following the energy crisis last winter.

He said: “Manufacturing was especially weak, with new orders dragged down by lower Chinese demand.

“In addition, the energy crisis continued to leave its mark as production in energy-intensive industries was much weaker than in other sectors, even as energy prices declined.”

Mr Cluse added that the UK will be boosted by “the recovery in real incomes amid declining inflation”.

Predictions from UBS chimes with the latest predictions from the International Monetary Fund (IMF), which has the UK outgrowing Germany in almost every year until 2028.

The global watchdog also expects Britain’s growth to outpace the eurozone in four of the next five years.

Sanjay Raja, economist at Deutsche Bank, expects the surprise resilience of the UK economy this year will continue into 2024, keeping GDP from shrinking and allowing a firmer recovery to take hold in the second half of the year.

He said: “There are good reasons to be optimistic that we can dodge a recession.

“We will see a sustained period of real positive wage growth in the midst of rapidly falling inflation. That in and of itself will be a boon for households.”

In part, growth has been achieved thanks to falling energy prices, which have given households and businesses a boost as bills have come down.

The surprise jump in migration has also aided GDP, Mr Raja said, as more people means that more economic activity is taking place.

At the same time, the UK has proven surprisingly resilient to higher interest rates, said Mr Raja.

He said: “Household and corporate balance sheets are still very strong.

“It is not just the excess savings picture that gives us some confidence that households and corporates can weather the shocks and headwinds from tighter monetary and fiscal policy.

“It is the fact that debt ratios are still historically pretty low compared to the past couple of decades.”

By contrast, the eurozone is already thought to be in recession.