Is the eurozone killing the UK recovery?

George Osborne says the UK’s recovery is being “killed off” by the eurozone crisis.

This is unconvincing.

One might presume from the Chancellor’s argument that our exports have taken a hammering thanks to weak demand in our biggest market.

But actually, as this chart of GDP by expenditure courtesy of the bank ING shows, exports have been one of the few reasonably performing parts of our economy in recent years:

Exports have now recovered their pre-crisis levels in real terms. So while the eurzone farrago is unlikely to be beneficial for our exporters –  to put it very midly –  it’s not actually held them back so far.

Of course, the Coalition might argue that our exporters would have made even more of a contribution if the Europeans had sorted things out. But on the Office for Budget Responsibility’s forecasts, trade has actually come in better than expected. In June 2010 the OBR predicted net trade would contribute 0.9 percentage points of GDP growth in 2011:

In fact, net trade contributed 1.2 percentage points of growth last year, as this from the OBR’s Budget report this year shows:

Without that positive contribution from trade, our economy would have contracted over 2011 as a whole.

What has really crushed growth, as one can see by comparing the two OBR tables, is the significantly worse than expected performance of private consumption and business investment.

Other things stand out from the first levels chart from ING. Government expenditure is up 3.8% on pre-recession levels. And investment spending, having utterly, collapsed is yet to register any sort of recovery.

Two thoughts.

First, the fact that Government has played such a crucial role in sustaining national expenditure should cause us to tiptoe slowly away from those on the right who say that the solution to our econonomic difficulties is to slash state spending dramatically faster.

Second, reversing that investment collapse is clearly the priority if we are to see any sort of recovery. So what’s been holding it back? It’s possible to argue that the blame lies with the eurozone for undermining business confidence. But, as Labour have pointed out, this rather lacks force given that the German economy, at the very heart of the eurozone, has recovered its pre-crisis output levels, as this shows:

There are other pain transmission channels. ING points out that our banks have £659bn in eurozone exposure to the eurozone, equivalent to 43% of out GDP. That might have constrained their lending to the UK economy, undermining growth. But, again, German banks are also massively exposed to the eurozone, yet that has not held the German economy back.

And the problem is less one of constrained bank lending as UK firms sitting on their cash surpluses. The CBI calculates that the corporate sector has around £750bn on their balance sheets. If they wanted to spend, they could.

So why won’t they? Weak consumer spending is clearly one explanation. Real wages have been hammered by a combination of higher than expected inflation and weak pay growth. When the public aren’t spending, firms hold off from investment because they fear there will be no demand for their products.

The debate about the extent to which the Coalition’s VAT rise last year has exacerbated this weakness will continue. So will the argument about whether the Government’s investment cuts programme has been needlessly hasty and whether more state spending now would crowd in more private investment.

But one thing looks pretty clear: if the eurozone is killing off the UK recovery, it is stabbing the life out of a corpse.

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• Skaramouche

  A weak currency does not help exports when the country has to import raw materials and energy as the UK does – quite the opposite.

   

• http://twitter.com/ponot1 ponot

  As a helpful Tory back bench MP pointed out, whilst telling Gideon to stop making excuses, Switzerland has a greater share of it’s exports going to the EU than does the UK.  It has managed growth of over 2%.  Out of 3 other G6 members in the EU only Italy has worth growth rates than the UK.  Time for a reality check methinks.

• http://www.yahoo.co.uk/ Firozali A.Mulla

  The upcoming Federal Reserve meeting on June 19-20 will be one of
  the most important events of the entire year. Faced with an economic outlook that’s
  clearly weaker than it was six months ago, the central bank ought to undertake
  a more stimulative course of action. And yet, there’s little indication that
  the Fed’s governors are considering any such thing. Even more remarkably,
  there’s almost no pressure coming from inside the political system for the
  federal government’s main macroeconomic stabilization agency to stabilize the
  economy. Instead, when Fed Chairman Ben Bernanke went to the Hill last week, he
  was hectored by conservative members calling for tighter money,
  while Democrats did nothing to call for the sort of pro-growth policies that
  represent their best hope for November. The left ought to be lobbying Bernanke
  for a looser money supply and more quantitative easing. Instead, the only
  criticism from the left that Bernanke took on the Hill was over the relatively
  unimportant subject of JPMorgan CEO Jamie Dimon’s role on the New York Federal
  Reserve Bank’s board of directors. It’s just not Democrats on the Hill who are
  ignoring the truly critical matter of Fed policies. As the annual Netroots
  Nation conference this weekend in Providence, R.I., attendees were
  all-too-aware that the weak economy is the biggest short-term threat to their
  larger political project. At the same time, they remained woefully uninterested
  in the subject of monetary policy, the main tool the government can use to
  boost the labor market. Instead, the economic policy discussion among
  progressives remains fixated on the politically impossible and substantively
  inadequate concept of fiscal stimulus. A Saturday- morning high-profile
  economic policy roundtable featuring Paul Krugman, AFL-CIO chairman Richard
  Trumka, and progressive think tankers Heather McGhee and Erica Payne drove this
  blind-spot home. The Federal Reserve was discussed only clankingly, and even
  that segment myopically focused on Dimon’s New York Federal Reserve role. I thank you Firozali A.Mulla DBA

• Fool_Brittania

   Is the eurozone killing the UK recovery?

  No, way.

  Osborne and Cameron managed it all on their own.