Brussels Upwardly Revises EU Growth Expectations

Yesterday, the European Commission upwardly revised their growth forecasts for the EU as energy insecurity fears subside and economies enjoy ‘softer-than-expected’ landings. Brussels is now expecting the 27-state bloc to register 1% growth this year, marking an increase of 0.2 percentage points for earlier predictions. With recessionary fears easing and energy insecurity concerns easing, they also raised 2024’s estimate 0.1 percentage points to 1.7%, suggesting that the medium-term outlook remains positive notwithstanding persistent inflationary challenges and the conflict in Ukraine. When looking at the Eurozone specifically, Brussel’s expect the currency union’s economy to expand 1.1% this year and 1.6% next year. Here, the commission predicts that the German economy will expand 1.4% in 2024 – with marginal growth of just 0.2% this year. This comes as the Bank of England expects the UK to see growth of a quarter-of-a-percent in 2023 and three-quarters-of-a-percent the year after.

Ireland: Ireland is expected to be top of EU’s growth list, with expectations that the county’s economy will grow 5.5 % and 5% over 2023 and 2024, respectively. This follows meteoric growth for the country which has seen their economy soar 12% in 2022 and 13.6% in 2021 – much of which was driven by a major boost in pharma and tech exports over the pandemic. Ireland’s low-tax environment has continued to attract foreign investment and taxes on intellectual property assets are now a key source of revenue for Ireland. This dynamic has helped Dublin to raise around €22.6bn in corporation tax last year - a gargantuan 182% rise from half-a-decade ago – thus helping to increase public spending and investment. Nevertheless, recently Ireland has seen a significant drop in computer, electronics and optical products singling some concern for a cornerstone of the county’s economy. Only yesterday, Industrial production in Ireland fell 26.3% between February and March.

Sweden: Conversely, Sweden is expected to undergo a recession this year with economists predicting the Scandinavian country to be the worst performer amongst the EU. Chiefly, Sweden’s growth has been hit by a property market slump, deeply problematic for a country whose home-ownership rate is a considerable 70%. The dip has hindered consumer confidence, and hit household finances, particularly given the high level of Swedes on variable mortgage rates. In recement months, the Swedish construction sector has also been hampered by raising interest rates which has dampened investment, and a weakening krona has also exacerbated Stockholm’s economic challenges. Furthermore, the Swedish government has also done relatively little (compared to other EU states) to help business and consumers against rising energy costs, thus damaging growth as pockets dry up.

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NatCon Conference

Rishi Sunak is facing pressure from within the party this week, with the National Conservatism conference taking place this week. The more right wing gathering of conservatives has had a lot to say around immigration in the last couple of days – which seems like getting on the front foot, as migration statistics due out later this month could show net migration as high as one million people and there’s nothing like doubling down on rhetoric to cover up for years of policy failings! Suella Braverman said there was no good reason for worker visa rules to continue to be relaxed and that British workers should be trained to pick fruit, drive HGV’s and work in abattoirs – all areas that previously we’ve tried to recruit for internally and failed. Another area of concern for many is the tax rise by stealth that Rishi Sunak imposed when he froze income tax thresholds for six years – which means that people getting pay rises that are in line with or below inflation could be dragged into a higher rate tax band, greatly reducing the benefit of their pay rise. The OBR forecasts that by 2028 this will yield a further ￡26bn a year in tax revenue and push more than 2 million into the higher rate tax bracket, which would make it one of the largest tax hikes as a percentage of GDP on record! The Times has more https://www.thetimes.co.uk/article/income-tax-rise-uk-rishi-sunak-2023-hmrc-h9f0v0tqg?utm_source=Sailthru&utm_medium=email&utm_campaign=Best%20of%20Times%20-%20Tuesday%2016th%20May%202023&utm_term=audience_BEST_OF_TIMES

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UK Employment Data

As the BoE continues to grapple with double-digit inflation, this morning’s employment data has revealed that public sector pay has risen by 5.6% on an annualised basis – the greatest rise in 20 years. This comes as private sector pay grew by 7% including bonuses and 6.7% excluding bonuses. As such, policy makers will want to ensure that the economy avoids any undue wage-price spiral effect as they try to bring inflation back down to their 2% target. This rise in wages of course comes following the BoE’s Huw Pill stating that British households should “accept that they're worse off", though when accounting for inflation average pay including bonuses fell by 3% in the year to January to March, and 2% excluding bonuses.

This morning’s data from the ONS also indicates that unemployment has risen higher-than-expected to 3.9%. This marks the highest level of unemployment since the early 2022 as the number of unemployed people rose by 60,000. While unemployment rose, the economic activity rate also increased – rising 0.4 percentage points to 79%. This was primarily driven by a rise in the number of part-time employees and self-employed workers, many of whom are returning to the workforce following the ‘Great Resignation’.

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Industrial Production Slumps Across Eurozone

As Brussel’s tried to encourage markets with expectations of higher growth, industrial production levels slumped across the Eurozone, marking their largest decline since the pandemic. Industrial production fell 4.1% between February and March, far worse than expectations of a 2.4% decline. Here, the decline in the production of capital goods was a major factor behind the overall decline as well as the production of intermediary goods.