The sick man of Europe?

The UK has long been considered a poor relation to its EU neighbours, often mocked as the sick man of Europe.

Now, the two biggest economies in Europe, Germany and latterly, France, can both lay claim to this title.

In an extraordinary turn of events that would have been inconceivable a decade ago, both countries have seen a vote of no confidence with French PM Michel Barnier forced to resign. Germany’s coalition government fell apart in November and a general election is now set for 23^rd February, with a confidence vote on 16^th December.

France is Europe’s second-largest economy; it has no prime minister and no government. President Macron must appoint a new premier and attempt to get a 2025 budget approved by parliament as soon as possible. However, there is no real end to the political instability in sight. The French budget deficit is set to rise to 6% of GDP this year, twice the EU limit and needs addressing. State spending in France is 58% of GDP!

To complicate matters, a general election is not possible until July 2025. What will Macron do?

Meanwhile, Germany, once the engine room of Europe, has seen real GDP stagnating since the second half of 2021 and was set for another year of tepid growth, even before Trump’s election victory. Germany looks as if it will now have the weakest economic growth compared with other leading EU countries and the US.

Germany has had to adapt to the post-Ukraine war energy shock, where it had become too dependent on Russian gas. Meanwhile, its second biggest export market, China, has been in the economic doldrums at the same time Chinese EV competition has fundamentally altered the outlook for Germany’s car giants. Volkswagen, Germany’s largest private-sector employer, is threatening domestic plant closures for the first time in its history. Now there is the threat of Trump tariffs, which the head of Germany’s Bundesbank estimates could knock GDP down by 1%.  

For Brexiteers, no doubt a case of the Klingon proverb ‘Revenge is a dish best served cold!’

In the UK, the Labour government has made a far from encouraging start. While business confidence has been dented by the budget, UK economic growth is expected to accelerate in 2025 as infrastructure spending kicks in. However, this assumes the various government spending review committees – there are 150 of them – get a move on!

Political turmoil and economic woes in two key members of the EU and NATO are not helpful as we head into 2025 and will leave Putin feeling smug. In addition, Donald Trump will take office on 20^th January with potential tariffs and a potential Ukraine peace deal – issues for France, Germany, and the UK to come to terms with.

 

What have we been watching?

 

The Trump trade, with Bitcoin breaching $100,000 on hopes of further measures to deregulate cryptocurrencies following the appointment of Paul Atkins as Chair of the Securities & Exchange Commission. Trump again raised the spectre of tariffs and withdrawing from NATO unless European members increase defence spending. US jobs data was better than expected but has not diminished market expectations of a 0.25% US interest cut later this month. There was political turmoil in France and South Korea and more uncertainty in the Middle East! Meanwhile, the OECD published its latest forecasts, which show it expects global economic growth to remain resilient in 2025 and 2026. However, the OECD is worried about protectionism and trade, which, can be no surprise given Trump’s rhetoric!

The OECD is forecasting global economic growth of 3.3% for 2025 and 2026, with inflation easing further. Within this, 2025 US GDP growth has been raised from 1.6% to 2.4%, while the UK GDP growth has been increased from 1.2% to 1.7%. Growth in France and Germany is forecast to be 0.9% and 0.7%, respectively. China is tweaked up from 4.5% to 4.7%.

The situation in the Middle East has suddenly become even more complicated. The Islamist group HTS launched a surprise offensive and in just 10 days has managed to overthrow President Bashar al-Assad of Syria, who has sought political asylum in Russia. Assad had been supported by both Hezbollah and Iran. Many in the region will be glad to see Assad go, but HTS has its roots in al-Qaeda. Israel has seized positions in the Golan Heights buffer zone as Syrian troops fled. Meanwhile, US President-elect Donald Trump also issued an apparent warning to Hamas, threatening ‘all hell to pay’ if the hostages were not released.

Beyond Ukraine, the new Cold War continues to spread across Europe. As protests in Georgia over a delayed EU referendum continued, Kremlin mouthpiece Dmitry Medvedev said, ominously, ‘Georgia is moving rapidly along the Ukrainian path, into the dark abyss. Usually, this sort of thing ends very badly.’ Meanwhile, an investigation is underway after a land fibre-optic communications cable between Finland and Sweden was sabotaged.

The US/China technology Cold War continues. America introduced new export controls on critical components in AI chip manufacture. China responded by banning shipments of key raw materials, such as gallium, which are used to make semiconductors.

Strange events in South Korea. President Yoon Suk Yeol, who is facing corruption charges, declared a short-lived emergency martial law. The South Korean president then narrowly survived an impeachment motion by agreeing to shorten his term and not get involved in foreign or domestic affairs! This is not the first major corruption scandal to hit South Korea.

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UK retail sales fell by 3.3% in November, although the later timing of the Black Friday sales event meant that it did not fall within the latest data, resulting in artificially weaker annual results. Signs that UK manufacturing activity was impacted by the budget with the November PMI business activity reading dipping to 48.0. The PMI reading for activity in the service sector dipped to 50.8.

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In France, PM Michel Barnier was forced to resign following a vote of no confidence in the government, following his proposed €60bn austerity budget. Meanwhile, Eurozone manufacturing remains in the doldrums with a November PMI business activity reading of 45.2. German industrial production unexpectedly contracted in October.

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US manufacturing data was positive, with the November PMI business activity reading recovering to 49.7 while the new order indicator moved above into expansion above 50.0. The ISM November services PMI dropped from 56.0 to 52.0. US non-farm payrolls were better than expected in November at 277,000. Nonetheless, market expectations for a 0.25% interest rate cut in December by the Federal Reserve increased from 70% to 90%.    

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Japanese manufacturing activity declined at a slightly sharper pace in November with a PMI reading of 49.0.

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Chinese manufacturing activity grew at a faster rate in November with a PMI reading of 51.5. Given Japan’s manufacturing activity dip, perhaps a sign of Chinese manufacturers trying to beat potential Trump tariffs?

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Brent oil dipped to $71 despite OPEC+ postponing the rollback of voluntary production cuts by three months to April and lengthening production increases from 12 to 18 months.

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Not quite finally! Following last week’s Alpha Bites, Octopus Energy has discovered that it cost UK energy users £1bn in 2024 to temporarily shut down wind turbines in high winds to protect the grid from power surges!

Finally, Typhoo Tea, one of Britain’s oldest tea companies, was recently rescued from administration. Unfortunately, traditional tea sales in the UK have been declining as consumers switch to coffee, energy drinks or herbal teas. Whatever happened to having a cuppa in a crisis? We’ve certainly had enough of these in recent years: Brexit, the covid pandemic, war in Ukraine, the energy spike, the cost of living crisis and now Trump 2.0. Time to put the kettle on!

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Read Last Week’s Alpha Bites – A greener, dearer, darker future?

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Alpha Portfolio Management is a trading name of R C Brown Investment Management PLC which is authorised and regulated by the Financial Conduct Authority.