UK’s economy shrinks unexpectedly by 0.1% in October 

GDP figures underline scale of challenge for Labour to get the economy growing

《Guardian staff and agencies Fri 13 Dec 2024》

Britain’s economy shrank by 0.1% in October, underlining the scale of Labour’s challenge to get the economy growing.

Figures from the Office for National Statistics showed the unexpected fall in GDP was driven by declines in construction and production, while the dominant services sector stagnated.

Economists, polled by Reuters, had expected the economy to grow by 0.1%. It follows a decline of 0.1% in September and sluggish growth of 0.1% in the third quarter of the year, according to figures last month.

Keir Starmer said last week it was the government’s “aim” to make the UK the fastest-growing G7 economy, while pledging to deliver higher real household disposable income by 2029.

However, a range of companies have said they plan to slow spending and hiring after Labour’s budget in October, which included £40bn of tax rises.

Economists said the second successive monthly contraction in GDP meant the economy had grown for only one of the five months to October, and might mean the economy shrank for the fourth quarter as a whole.

The chancellor, Rachel Reeves, said the figures were “disappointing” but insisted Labour was putting the economy back on track for growth.

“While the figures this month are disappointing, we have put in place policies to deliver long-term economic growth,” said Reeves. “We are determined to deliver economic growth as higher growth means increased living standards for everyone, everywhere.”

Business groups have complained that measures announced in the budget, including an increase in employer national insurance contributions, add to their costs and deter investment.

Production output fell by 0.6% in October because of falls in manufacturing, mining and quarrying, while construction fell by 0.4%.

“The economy contracted slightly in October, with services showing no growth overall and production and construction both falling,” said Liz McKeown, the director of economic statistics at the ONS.

“Oil and gas extraction, pubs and restaurants and retail all had weak months, partially offset by growth in telecoms, logistics and legal firms.”

Paul Dales, the chief UK economist at Capital Economics, said it was “hard to tell how much of the fall is temporary as activity was put on hold ahead of the budget”.

“The clear risk is that more activity was cancelled or postponed after the budget,” he said, citing weak PMI data. “There is every chance that the economy went backwards in the fourth quarter as a whole.”

Figures last week showed that growth in the UK’s dominant services sector slowed to its lowest rate in more than a year in November as firms digested business tax rises in the budget.

The closely watched S&P Global UK services PMI survey scored 50.8 in November, slowing from 52.0 in October.

The pound fell to its lowest level against the US dollar in nearly two weeks, dropping as much as 0.4% in early trading.

Analysts said the contraction in the UK economy could make it more likely that the Bank of England monetary policy committee will vote to cut the base rate when they meet later this month.

“These latest figures will send a chill through the corridors of Westminster, as the government’s growth agenda looks increasingly at risk,” said Isaac Stell, investment manager at Wealth Club.

“With more and more companies stating they will cut back on hiring and investment to deal with the rising costs related to the budget, the question will be, where will growth actually come from?”

The disappointing growth figures came as a survey by GfK showed that consumer confidence remained suppressed in December amid the “continuing uncharitable view on the UK’s general economic situation”.

The market research company’s latest consumer confidence survey said that consumers “don’t know where they are going” and are still thinking twice about big-ticket purchases.

Anna Leach, the chief economist at the Institute of Director, said: “As we head further into the festive season, and consumer confidence remains in the doldrums, many businesses are continuing the process of updating their business plans for the coming year to accommodate significant increases in employment costs.

“The recent blows to businesses have made the task of achieving stronger sustainable growth harder.”

Separate ONS trade data showed imports and exports of goods fell in October. Exports to the European Union were higher than exports to the rest of the world for the first time in nearly a year.

“A weakening export climate amid rising global policy uncertainties and declining business confidence, exacerbated by the impact of recently announced budget measures, raises concerns about sustaining the growth momentum,” Hailey Low, associate economist at NIESR, said.

Last month, the Bank trimmed its annual growth forecast for 2024 to 1% from 1.25% but predicted a stronger 2025 with 1.5% growth, reflecting a short-term boost to the economy from the budget.⍐

British politics enters the “death zone”

British politics enters the “death zone”

Every party in British politics is in danger, whether they think it or not

Funny things happen to the human body above 26,000 feet (8,000 metres). Brain cells die. Blood turns to thick red custard. Vessels in the eye spontaneously burst. Brain swelling can lead to coma or worse. Mountaineers call it “the death zone”, and with good reason. In British politics the death zone is less visceral, but no less serious. Any party that spends too long in the 20s or below in the polls is in deep trouble. Usually only one major party is unlucky enough to be so disliked. Today, they all are.

《  Britain | Bagehot, Dec 11th 2024 The Economist 》

Britain’s main parties are remarkably unpopular. Labour sits at 26% in the polls on average, eight points below what was already the most efficient (or disproportionate) landslide victory in British electoral history. It is joined by the Conservatives, also on 26%, which is only a shade above their performance in the general election, itself a historic low. Nigel Farage’s populist band Reform uk ticks up to 21%, which is enough to trigger excitable headlines but not enough to guarantee replacing the Liberal Democrats as Britain’s third party, never mind usurp the Conservatives as an alternative party of government.

Each is a slip from falling into an electoral crevasse. First-past-the-post is generous to the party on top and merciless to those beneath it, which have to scrap for every second of media coverage, every pound from donors and every inch of voter head space.

Strangely, few in Westminster seem concerned. In the Labour ranks, success has led to complacency. Polls are dismissed. The party commands a majority of 163 mps and has at least four clear years of government before they face voters again. Yet clouds are already gathering in the valley, even if the view from the top—or from inside a ministerial car—looks splendid. Labour Together, a think-tank close to the leadership, believes the danger is losing voters to the right; others argue that the danger lurks to the party’s left, with people drifting to the Greens. So far both camps are correct: Labour is bleeding support in all directions.

Similar denial afflicts the Conservatives. Tory mps have been cheered by Labour’s lousy start. Yet although Labour’s support has bled, the Conservatives have barely benefited. A few months after their worst performance in a general election they remain more or less where they were: a historically unpopular party.

Some around the party are willing to face reality: “Many, many people came to hate the Conservative Party and will for a long time,” wrote James Frayne in a report for the Centre for Policy Studies, another think-tank. Most, however, are so blasé they notice only the unpopularity of Labour rather than their own. It is the same confused logic that leads people suffering hypothermia to strip naked and run into the snow.

If any party can be optimistic about life in the death zone, it is Reform UK. This is largely because it has the least to lose. The party has only five MPs and is barely five years old. It is still underresourced, with a handful of staff and little cash, akin to early-20th-century mountaineers having a crack at Everest in pyjamas and tweed. Even so, the latest iteration of Mr Farage’s two-decade-long quest to blow apart British politics is arguably his most successful. One poll put Reform UK second, behind the Conservatives and above Labour.

In Mr Farage’s telling Britain is on the brink of one of its once-a-century political ruptures, when a party is shifted from being a party of government to a straggler. For all his bullishness, Reform uk is just as close to death as glory. Such is the surreal workings of Britain’s first-past-the-post electoral system, there is a minimal gap between Reform uk winning two, 20 or 200 seats at the next election; between a historic breakthrough or another chapter in Mr Farage’s almost-made-it political life.

The only other time all major parties entered the death zone was in the pits of the Brexit years, in the spring and early summer of 2019. Theresa May’s dying Conservative government tacked along in the low 20s. Jeremy Corbyn’s historically unpopular Labour Party joined them. Mr Farage’s outfit, then named the Brexit Party, peaked at roughly the same level. It was an extraordinary period, which was treated as such by everyone in Westminster. Commentators dragged out “King Lear” quotations to sum up the rage of the public: “I will do such things, / What they are, yet I know not: but they shall be / The terrors of the Earth.”

In 2019 British politics managed to escape the death zone, but it was a destructive endeavour. Mrs May was removed and replaced by Boris Johnson, who purged his party, triggered a constitutional crisis and forced an election. It was a painful experience that few remember fondly, but it gave voters what they wanted: an end to the stasis of a hung parliament and Britain’s departure from the European Union. At least the screaming stopped.

Into thin air

This time a strange incuriosity has befallen Britain’s political class. The voters are screaming just as loudly as they were in 2019, yet few are paying the calls any heed. Back then the cause of the discontent was obvious. Now the screams are harder to decipher. Are Britons angry about the state of the NHS, or the economy, or immigration? A good chunk of Westminster has decided to zip its tent and hope that the storm passes. Politics is relative, runs the logic. It is sometimes enough simply to be the least hated. Whoever does triumph, by default, will take a victory lap and claim death was never near.

Despite its fatal name, most climbers survive the death zone. Even the deadliest mountains kill only a small percentage of those who attempt to scale them. Nevertheless, preparation, caution and bravery are all needed to survive. Not many in Westminster are yet willing to accept that the stakes are that high. Forgetting the risks is the quickest way to die. ■

Illustration: Nate Kitch

Why the Franco-German engine that powered the EU is currently kaput

Michel Barnier hands over the reins to the new prime minister, François Bayrou.
Photograph: Anadolu/Getty Images

Why the Franco-German engine that powered the EU is currently kaput

Beset by political crises and economic turmoil, the bloc’s two biggest countries are both at a crossroads

“When France and Germany advance, all Europe advances. When they don’t, it grinds to a halt” was how former French president Jacques Chirac put it almost a quarter of a century ago at one of the periodic love-ins between the EU’s two biggest member states.

So what would Chirac, who died in 2019, make of the current condition of the famed Franco-German engine which, since the bloc’s inception, has powered so much of the postwar European project? It looks not so much faltering as comprehensively bust.

Emmanuel Macron on Friday appointed a new prime minister, his loyal centrist ally François Bayrou, who becomes France’s fourth premier this year and will have the daunting task of trying to assemble a stable government after the collapse last week of the country’s shortest-lived administration since 1958.

 《Jon Henley in Paris and Deborah Cole in Berlin Sun 15 Dec 2024 The Obsever UK》

Meanwhile France’s public-sector deficit is on track to exceed 6.1% of GDP this year, more than double the eurozone limit; public debt is 110% of GDP and rising; and the bond markets this month rated France as marginally less creditworthy than Greece.

In Germany, the fractious centre left-led coalition in power for the past three years collapsed last month under the weight of its own ideological contradictions and the pressure of multiple crises triggered by Russia’s full-scale invasion of Ukraine.

Whoever becomes chancellor after the 23 February elections will have to tackle the world’s worst-performing big economy, beset by high energy and labour costs as well as bureaucracy, crumbling infrastructure and plodding digital expansion.

The slowdown with key trade partner China has also dealt a blow to German exports, a traditional strength, while the all-important car industry has been slow to develop attractive electric vehicles (EVs) and now faces the threat of swingeing US tariffs under Donald Trump.

With France unable to hold fresh parliamentary elections until July and Germany possibly without a new government until June, the political febrility at the top of the EU’s two most influential countries will inevitably hobble EU decision-making.

Paris and Berlin are seen as the EU’s core power axis, driving policy and defining the main contours of its agenda. With both capitals unable to make big policy decisions for want of strong governments, the bloc could face months or more in the mire.

The two powerhouses’ parallel economic and fiscal woes will also weigh heavily on the EU. Some analysts believe the bloc’s two largest economies – accounting for 41% of the 27-member EU’s entire GDP – would both contract economically in 2025.

The timing could not be worse, with Europe facing the return of America-first policies under Trump’s second presidency, with German industry (in particular) in crisis.

The embattled Emmanuel Macron with chancellor
Olaf Scholz. Photograph: Nadja Wohlleben/Reuters

Quite how it came to this is not too hard to understand. Figuring out how France and Germany might be able to pull themselves out of their ongoing political and economic doom spirals, however, is not so easy.

When the German government imploded last month, observers were less surprised by its demise than astonished that it had limped on for so long.

When chancellor Olaf Scholz fired his obstreperous finance minister, Christian Lindner, on 6 November over a bitter months-long budget dispute, he set in motion a chain of events that optimists say give the country a vital shot at renewal.

“Do we dare to powerfully invest in our future as a strong country? Will we secure jobs and modernise our industry? Are we ensuring stable pensions, reliable healthcare and good nursing care?” a defiant Scholz said on Wednesday.

Lindner’s sacking left Germany with a rump minority alliance of Scholz’s Social Democrats (SPD) and the ecologist Greens capable of only the most perfunctory policy-making from now until a new government is in place.

On Monday, Scholz, historically unpopular but nonetheless standing as his party’s candidate for re-election, will face a confidence vote he has called to trigger the new election.

Marine Le Pen’s far right party joined forces with the left to oust French PM Michel Barnier.
Photograph: Alain Jocard/AFP/Getty Images

If Scholz loses the MPs’ ballot, President Frank-Walter Steinmeier will dissolve parliament and Germany will officially embark on an intensely truncated campaign broken up by the Christmas holidays.

A recent poll put the centre-right CDU/CSU on 31%, followed by the far-right Alternative for Germany (AfD) on 18%, Scholz’s SPD on 17% and the Greens on 13%. The FDP and new leftwing conservative Sahra Wagenknecht Alliance are both scoring right around the 5% threshold for parliamentary representation.

The smart money as Germany’s next leader is therefore on Friedrich Merz, a longtime rival of his more moderate fellow Christian Democrat Angela Merkel, whose 16-year tenure as chancellor largely left Merz in the political wilderness.

He used the time to build a small fortune in business, notably at the German unit of multinational investment firm BlackRock. Merz, whose notoriously hot temper has reputedly mellowed slightly with age, has vowed to pull Germany out of a deep economic slump while taking a harder line on defence, Russia and migration.

But because Merz’s centre-right CDU/CSU alliance, assuming it comes in first, has little chance of winning an absolute majority, its choice of coalition partner will inevitably water down his economic reform plans. All major parties have ruled out cooperating with the far right. 

“Germany’s current economic model, in which the supply of cheap fossil fuels and the production of cars with combustion engines play a central role, seems outdated – but politicians rarely dare to say this openly,” said Kai Arzheimer, a political scientist at the University of Mainz. “I’m at least sceptical that there will be a genuine fresh start in the near future.”

Friedrich Merz, in a suit and tie and wearing glasses, frowns as he holds his hands up to clap

Friedrich Merz at the Bundestag in Berlin, on 5 December. Photograph: dts News Agency Germany/Rex/Shutterstock

If the new government fails to turn things around quickly, it is the anti-migration AfD, backed particularly by eastern voters, that stands to benefit the most.

Ursula Münch, director of the Academy for Political Education thinktank in Bavaria, said that with the SPD likely to become Merz’s partner, creating a middle-of-the-road government, disappointed hopes and disillusionment could prove to be a toxic mix.

“The expectations of the electorate, corporations and the media are very high – too high,” she said, given the years-long dodging of pressing structural problems as Germany has fallen behind. “That will overtax any government.”

But Münch said the emerging consensus that Germany needs to tackle its weaknesses head on could offer a compelling mandate to a straight-talking chancellor with a sufficient majority. “That would make me pretty confident that the Germans could become more optimistic again and develop more trust in democracy,” she said.

France’s current political problems – the country is undergoing its worst period of political volatility since the second world war – stem largely from Macron’s decision to dissolve ­parliament after his centrist forces were heavily defeated by Marine Le Pen’s far-right National Rally (RN) in this spring’s European elections.

In the parliamentary election, the New Popular Front (NFP), a coalition of left-leaning parties ranging from the mainstream Socialist party (PS) to the radical-left France Unbowed (LFI), headed by the political firebrand Jean-Luc Mélenchon, won the largest number of seats.

Macron’s alliance was beaten into second place and the RN (although it finished as the largest single party) placed third. Parliament was divided into three roughly equal and opposing blocs – broad left, centre and right/far right – none of which, crucially, enjoyed anything approaching a parliamentary majority.

After weeks of dithering and refusing to appoint a prime minister from the left, Macron tapped Michel Barnier, a veteran conservative and the EU’s chief Brexit negotiator, backed by a fragile minority alliance of centrist and centre-right MPs.

This month, the far-right RN joined forces with the left-leaning NFP to topple Barnier’s government in a no-confidence vote over the 2025 budget, which included about €20bn (£16.5bn) in tax increases and €40bn in public spending cuts.

Bayrou, his replacement, must try to cobble together a more solid ruling majority, possibly involving some of the centre left – or at least to secure a “non-aggression pact” that would not leave the new government prone to exactly the same threat, a no-confidence vote backed by both left and far right, as Barnier’s.

The parliamentary arithmetic, however, remains the same. Macron “seems to be getting ready to build a more stable governing pact with Conservatives, Socialists, Communists, and Greens”, who “seem ready to make compromises and avoid another government at the mercy of the RN”, said Rym Momtaz of the Carnegie Europe thinktank.

“But that’s only a temporary fix. He still doesn’t have a solution to reverse the surge in popularity Le Pen has enjoyed since 2017, and her significant chances of being elected president in 2027.”

It hardly bodes well for France’s fiscal problems, meanwhile, that the trigger for the outgoing government’s collapse was a belt-tightening budget whose central objective was the partial restoration of France’s ailing state finances.

At least, though, France seems to have “learned the lesson” that it needs “a credible, slow, fiscal tightening”, said economist John Springford of the Centre for European Reform. Germany, which needs tax and labour market reforms and public investment to raise spending, has yet to make that step, he said.

From an EU perspective, however, some analysts are cautiously optimistic. “It’s a premature view that France and Germany are down and out,” said Mujtaba Rahman of the Eurasia Group consultancy. “By the second half of next year, we should see a re-energised Franco-German engine.”

Germany’s elections being brought forward to February was “very positive”, Rahman said: “We’ll have clarity earlier in the year, a more coherent coalition and a more Russia-sceptical chancellor. And Merz and Macron will be much more aligned on the big issues than were Macron and Scholz.”

Macron’s domestic woes will not vanish overnight. “But there does seem to be a sense of the national responsibility to form a government, pass a budget and provide the minimum stability that France needs – and that Europe needs from France,” he said.

Most importantly, Trump 2.0 “has given weight and credence to everything Macron has been saying on security, defence and strategic autonomy”, Rahman said. The Paris-Berlin tandem “will be reinvigorated – and with a new, improved EU leadership, these people will give Europe its best shot at mitigating the worst of what might be to come”.⍐

 

German Chancellor Scholz loses no-confidence vote, paving way for election

BERLIN, Dec 16 (Reuters) - The German parliament accepted Chancellor Olaf Scholz's invitation to withdraw its confidence in him and his government on Monday, clearing the way for an early election on Feb. 23 necessitated by the collapse of his government.

Scholz's three-party coalition fell apart last month after the pro-market Free Democrats quit in a row over debt, leaving his Social Democrats (SPD) and the Greens without a parliamentary majority just as Germany faces a deepening economic crisis.

Under rules designed to prevent the instability that facilitated the rise of fascism in the 1930s, President Frank-Walter Steinmeier can only dissolve parliament and call an election if the chancellor calls, and loses, a confidence vote.

The debate preceding the vote also opened serious campaigning for the election, with party leaders trading ill-tempered barbs.

The chancellor and his conservative challenger Friedrich Merz, who surveys suggest is likely to replace him, charged each other with incompetence and lack of vision.

Scholz, who will head a caretaker government until a new one can be formed, defended his record as a crisis leader who had dealt with the economic and security emergency triggered by Russia's full-scale invasion of Ukraine in 2022.

If given a second term, he said, he would invest heavily in Germany's creaking infrastructure rather than making the spending cuts he said the conservatives wanted.

"Shortsightedness might save money in the short term, but the mortgage on our future is unaffordable," said Scholz, who served four years as finance minister under a previous coalition with the conservatives before becoming chancellor in 2021.

Merz told Scholz his spending plans would burden future generations and accused him of failing to deliver on promises of rearmament after the start of the Ukraine war.

"Taking on debt at the cost of the young generation, spending money - and you didn't say the word 'competitiveness' once," said Merz.

Neither mentioned the constitutional spending cap, a measure designed to ensure fiscal responsibility that many economists blame for the fraying state of Germany's infrastructure.

CONSERVATIVES IN CLEAR LEAD IN OPINION POLLS

The conservatives have a comfortable, albeit narrowing lead of more than 10 points over the SPD in most polls. The far-right Alternative for Germany (AfD) is slightly ahead of Scholz's party, while the Greens are in fourth place.

The mainstream parties have refused to govern with the AfD, but its presence complicates the parliamentary arithmetic, making unwieldy coalitions more likely.

Scholz has outlined a list of measures that could pass with opposition support before the election, including 11 billion euros ($11 billion) in tax cuts and an increase in child benefits already agreed on by former coalition partners.

The conservatives have also hinted they could back measures to better protect the Constitutional Court from the machinations of a future populist or anti-democratic government and to extend a popular subsidised transport ticket.

Measures to ease unintended burdens on taxpayers could also pass if regional governments agree, but Merz rejected a Green proposal to cut energy prices, saying he wanted a totally new energy policy.

Robert Habeck, the Greens' chancellor candidate, said that was a worrying sign for German democracy, given the growing likelihood in a fractured political landscape that very different parties would again have to govern together.

"It's very unlikely the next government will have it easier," Habeck said.