A weakening Europe Post Brexit has the potential to affect global growth
Business, Industry, Markets

A weakening Europe Post Brexit has the potential to affect global growth 

Last updated on December 3rd, 2018

As the year is coming to a close, it is once again time to take a look at the countries’ of the world performances for 2018. Especially Europe Post Brexit.

The European Union economy, with its 19-nation single currency area and 28-nation members, felt a growth of 0.4% in the first quarter of 2018 but is still quite below its trend rate given the ongoing deliberations or Brexit deadlock.

This growth further dropped to a mere 0.2% in the third quarter which destroyed the hopes of the Eurozone economy finally being able to recover from the constraints of the euro crisis back in 2011-2013.

It was only last year, in 2017, that the Eurozone was briefly growing at a 3.6% rate, which was 2.4% above trend. This looked promising to everyone especially since the fiscal and monetary policies of the EU are easing and there was firm global growth. Promising enough for the continent to start becoming the next hegemon, replacing the US economy which was forecasted to slow down in the coming years.

Realizing that Europe will not be a global growth conduit brought back the loom and gloom over the countries.

What caused this slowdown on the Eurozone economy? Analysts have suspected the following temporary and permanent occurrences to be the main contributing factors:

  • A decline in world trade growth slowed down the eurozone’s growth as a whole, Germany included. Net exports fell from 1.4% last year to -0.2% this year. World trade growth specifically fell from 5.2% in 2017 to 4.5% so far this year. With China and other emerging economies slowing down in world trade, the effects damaged Eurozone economies as well. See graph above for reference.
  • Italy and the UK have been quite vocal with their personal goals this year. Italy with its rising yield spreads which were a response to concerns about the new government’s budget sustainability and the UK with its continuing transition to exiting the EU, whether or not it will be a swift exit or a hard Brexit. Europe post Brexit is expected to witness a slowdown.
  • While the ease of fiscal and monetary policies have continued to maintain growth, this was offset by exchange rate and oil price effects. The latter canceled out whatever positive impact the former had for the economy.
  • Bad weather. Construction and retail sectors are negatively affected once the weather turns for the worse.
  • The UK labor market is experiencing over-full employment which is creating a lot of pressure on wage policies. In the Eurozone as a whole, wage inflation increased amidst structural reforms in the labor market.
  • Supply constraints such as labor market shortages that causes wages to be negotiated, labor costs increasing and possibly profit margins declining, have also become a factor affecting the slow growth.

Mario Draghi, the president of the European Central Bank in his speech last week, tackled some of the factors mentioned above. He also gave emphasis that business investments and the labor market has remained firm throughout this stagnant growth and placed the blame on more temporary causes like bad weather which is appraently to get worse in Europe post Brexit.

According to European Commission forecasts, “The UK will sink to the bottom of the European economic growth league next year to join Italy as the slowest-growing economy in the EU, before falling further the year after to anchor the table alone”.

These predictions are based on the possibility that Brexit was to happen smoothly but Britain will still lag behind all of the other EU members.

The commission also forecasts a GDP growth of 1.2% in 2019 and 2020 with consumer spending growth remaining weak and continuing at subpar performances.

With GDP forecasts continuing to decline, including for 2019, it entails that this stagnant growth is not a temporary issue.

Germany was not exempted from the general slowdown in the Eurozone and fell sharply in the previous month alongside Italy. Spain, however, became experienced growth amidst the decline.

The UK in comparison with Eurozone both shows a slowing down in growth, with the latter experiencing this more sharply at the start of the year. Overall, the UK level of production decreased by 1.2% compared to what was expected and it is increasing in value. Observing the trend global stakeholders must now look towards revamping their investments in Europe post Brexit in order to adapt to the changing political and economic environment .

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