Slowing down but still growing healthily

The first quarter of the year registered a slowdown in GDP growth not only in the UK but also in continental Europe. Severe weather conditions affected most of the area, slowing down production and creating some delays for trade.

However, quarterly growth was still positive and a 0.4% quarterly expansion was reported for both the European Union aggregate and the Euro area.

Between the end of Q1 and the beginning of Q2, some concerns about growth arose after a few negative releases for trade and industrial orders in particular in Germany. However it now appears that the indicators for the second quarter are pointing to a good performance.

From the graph we can appreciate that the growth peak was reached around the second half of 2017 and now Europe has moved to the down side of the business cycle. However, we are still talking of a year on year growth of more than 2% and in the case of Spain – which is experiencing an extraordinary expansion after the Euro crisis – of 3%.

Resilient but not as good

As we have underlined more than once, UK economic growth has been resilient in the last year, however it was not as good as the one seen in most of the other EU countries.

The graph above shows how the EU including the UK has usually run faster than the EU without the UK. However, this trend clearly stopped since the start of 2017 when the EU27 has started to perform better and also the Euro area is now seeing higher level of growth - despite the not amazing performance of its third largest economy, Italy.

Difference in investment is the key

Amid low level of consumer confidence, private consumption was lower than usual in 2017 in the UK. However, the striking difference between UK and the rest of Europe was related to investment, particularly productive investment such as those in machinery and equipment, a metric similar but not equal to the ONS business investment.

Since the end of 2016, the investment situation substantially deteriorated in the UK whereas the rest of Europe saw impressive rate of growth on the back of a roaring economy and a synchronised world expansion.

It’s quite difficult not to relate the UK weakness and the loss of the investment cycle to the political uncertainty surrounding the “B word”. Despite a full order book and some capacity constraints, businesses did not feel comfortable enough to spend money for the future.

The peak is behind our backs, but positivity has not disappeared

The economic sentiment indicator released by the European Commission is an important composite leading indicator which joins confidence indexes of the various sectors that compose the whole economy.

The period between 2016 and 2017 showed an interesting convergence amongst countries with Euro area members finally shaking off the Euro crisis and improving their economic sentiment. Most of the European indicators peaked in December 2017 and since then they have started to decline. However the slowdown has been gentle and the indicator is still extremely positive compared to historical standards. This is unfortunately not the case for the UK where again the uncertainties about the nearby future are threatening positivity.

Notably, the EU is not safe form confidence threats as well. A trade war with the US will create a lot of damage to an economy which is still very export focussed (even though less than the recent past). Moreover, the populism wave is clearly not over and may create a lot of instability, harming big and small countries. As a final remark, a disorderly Brexit will clearly create great damage to the UK, but for sure it won’t be an easy situation for the rest of the European Union as well.