London Business School’s Dr Vania Stavrakeva recently made one of her regular appearances on Bloomberg’s The Tape podcast, speaking about the prospects for the Eurozone economies.
The discussion first turned to Germany, the world’s fourth largest economy, which has been confronted by structural problems that could signal the end of almost two decades of prosperity. Germany fell into recession in the first quarter of 2023, with the country exposed to falls in demand from countries such as China in key export areas such as cars, machinery, tools and chemicals.
Germany reported a foreign trade deficit last year, its first in many decades, and while it has returned to a trade surplus this summer, exports remain sluggish.
Speaking on Bloomberg’s The Tape programme and on Bloomberg TV, Dr Stavrakeva spoke more broadly about the economic situation across Europe and the UK, drawing comparisons with the US economy.
Significant structural differences lie behind the divergence in performance between the US, Europe and the UK. The German economy is, for example, significantly different to the US economy explained Dr Stavrakeva, adding that one would expect inflation to be high in Germany, and to see stagnation and a further fall in economic growth.
Widening the discussion to the fundamentals of the economic environments across the EU, UK and the US, Dr Stavrakeva observed that the Eurozone economies are much more open than the US, for example exposing the Germany economy to a fall in its trading relationship with China.
“China has decreased its demand for imports due to slowing growths. Germany exports 2.5 percent of its economy to China and therefore the external shock of slowing imports to China has had a tremendous impact on the German economy,” said Dr Stavrakeva.”
“By contrast, the percentage of US GDP in terms of its trading relationship with China is 0.6 per cent.”
The appreciation in the value of the Euro against the US dollar has had another significant impact on the Eurozone, with the Euro gaining against the dollar by close to 12 percent
Dr Stavrakeva was asked if economic stimulus programmes announced by the Chinese government would begin to turn the economy around in the coming year.
“The Chinese government has been endeavouring to do this for some while now. I do not believe that they have anything new to offer and are in a downward trend. This is not a one-blip deviation from growth but rather a trend. The country, and its trading partners, will now have to adjust to a new lower level of economic performance.”
The appreciation of the Euro is massive and it will continue to affect the Eurozone significantly, said Stavrakeva. “Another major shock lies in the fact that the leading EU economy is dominated by manufacturing and the shockwaves associated with higher oil and gas prices has impacted the marginal cost of production in that country’s manufacturing sector.”
Looking ahead to 2024, Dr Stavrakeva believes recession will come to the Eurozone and UK, and yet both the EU and the BoE will continue to need to hike interest rates.