The UK and Germany, two of Europe’s largest economies, are showing signs of weakness as they grapple with the impact of high interest rates, energy shortages, and the ongoing pandemic. Both countries reported negative or flat growth in the third quarter of 2023, raising concerns about the outlook for the rest of the year and beyond.
UK economy stalls as interest rates bite
The UK economy failed to grow between July and September, according to the latest figures from the Office for National Statistics (ONS). This was the worst performance since the first quarter of 2023, when the economy contracted by 1.5% due to the lockdown restrictions.
The ONS said the latest growth figures showed a subdued picture across all sectors of the economy. The services sector, which accounts for about 80% of the UK’s output, saw a small decline over the three-month period, while manufacturing and the construction sector recorded marginal growth.
The chancellor, Jeremy Hunt, said higher interest rates were hitting growth, but added that the economy had performed better than expected this year. He said the economy had grown by 3.9% in the first half of the year, compared to the forecast of 2.5% in the March budget.
However, he acknowledged that the economy faced “significant challenges” in the coming months, such as the energy crisis, supply chain disruptions, and inflation. He said he would focus on supporting growth and jobs in the Autumn Statement on 22 November, and hinted at possible tax cuts for businesses.
The Bank of England has raised interest rates 14 times in a row since August 2022, to try to tame soaring price rises. Interest rates are at a 15-year high of 5.25%, and are expected to remain high for some time. The Bank’s governor, Andrew Bailey, said last week it was “much too early” to be considering rate cuts, despite the weak growth figures.
Economists said the UK economy was likely to remain stagnant for the rest of the year, and warned of the risk of a recession in 2024. Paul Dales, the chief UK economist at Capital Economics, said the drag from higher interest rates was growing, and predicted that the economy would shrink by 0.5% in the fourth quarter. He said he did not expect the Bank to start cutting rates until late next year.
German economy shrinks as energy crisis hits
Germany, the eurozone’s largest economy, also reported disappointing growth figures for the third quarter of 2023. The economy shrank by 0.1%, after growing by 1.6% in the previous quarter. This was the first contraction since the second quarter of 2020, when the economy plunged by 9.8% due to the pandemic.
The Federal Statistical Office said the main reason for the decline was the sharp drop in energy production, which fell by 12.4% in the third quarter. Germany has been hit hard by the global energy crisis, which has pushed up gas and electricity prices to record levels. The country relies heavily on gas imports from Russia, which have been reduced amid geopolitical tensions.
The energy crisis has also affected other sectors of the economy, such as manufacturing, which saw a slight decrease in output in the third quarter. The construction sector, however, grew by 2.4%, boosted by public investment and residential building.
The German government said the economy was still recovering from the pandemic, but admitted that the energy crisis posed a serious challenge. The economy minister, Peter Altmaier, said the government was working on measures to ease the burden on consumers and businesses, such as subsidies, tax relief, and regulatory changes. He said the government expected the economy to grow by 2.5% in 2023, down from the previous forecast of 3.5%.
Economists said the German economy was lagging behind its eurozone peers, such as France, Italy, and Spain, which have reported stronger growth in the third quarter. They said Germany needed to boost its domestic demand and investment, and diversify its energy sources. Carsten Brzeski, the global head of macro at ING, said the German economy was a “growth laggard” in Europe, and warned that it could face a “winter of discontent” if the energy crisis persisted.
