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Eurozone economy heads for decade-high growth as UK stalls

Published:Tuesday | September 5, 2017 | 12:00 AM

While the United Kingdom and the rest of the European Union are struggling to agree on divorce terms, it's increasingly clear that on the economic front they are diverging sharply.

In closely watched surveys of economic activity, financial information company IHS Markit said Tuesday that the economy of the 19 EU countries that use the euro is heading for decade-high growth rates while the UK's is increasingly sluggish largely due to uncertainty surrounding Brexit.

The purchasing managers' index, a broad gauge of economic activity, for the eurozone was unchanged at 55.7 points in August. The index is on a 100-point scale, with anything above 50 indicating expansion.

Though output growth in the third quarter is slightly down on the second quarter, the firm said the single-currency bloc is on course for economic growth of 2.1 per cent this year, its highest since 2007, when the global financial crisis started to bite.

The firm's chief business economist, Chris Williamson, said the moderate growth slowdown from the second quarter is no cause for alarm given that business orders remain strong.

"There's good reason to be optimistic that the current spurt growth has further to run," he said.

The scale of the eurozone recovery this year has caught many economists by surprise. At the year's start, many feared that the region, already disturbed by the UK's vote last year to leave the European Union, ongoing concerns over the euro and a slew of key elections, would face a difficult time.

Though uncertainty over Brexit remains, the Greek crisis seems contained and populist politicians failed to make the breakthrough many economists feared during those elections, notably in France.

One of the main arguments made during last year's Brexit referendum was about how the UK economy would be better off unshackled from a region that had battled one crisis after another for years.

While that will be determined in the long term, for now it's clear that the UK economy is starting to suffer from the Brexit vote. In the first few months after the vote, it held up better than anticipated, partly because of the pound's export-boosting 15 per cent fall.

In a separate survey, IHS Markit said the British economy appears increasingly sluggish as the uncertainty over the EU exit mounts. In March, Prime Minister Theresa May triggered the two-year Brexit timetable, but discussions between her government and the EU on what Brexit actually will mean have made little apparent headway.

And that uncertainty over the Brexit details is weighing on the British economy, as evidenced by the fact that the country is this year the slowest-growing in the Group of Seven developed economies.

IHS Markit's survey suggested that the slowdown, particularly in the crucial services sector, could be getting more marked.

It said the pace of growth in the services sector, which accounts for around 80 per cent of the British economy, eased to its slowest level since September last year.

Its purchasing managers' index for the sector fell to 53.2 points in August from 53.8 the previous month amid signs that "Brexit-related uncertainty continued to undermine business confidence".

- AP