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The U. K. ‘s expansion will outpace that of Germany and the eurozone in the coming years, as the continent faces a deeper recession due to higher interest rates.
While the German and British economies in the three months to September put both in danger of recession, UBS analysts expect Britain to recover within a year.
This is not the same as Europe’s largest economy. Berlin is already grappling with a budget crisis after Germany’s highest court ruled the government broke the law by using Covid cash to fund net zero spending.
Real estate across the country also suffered double-digit declines.
Problems have been compounded by a slow transition away from cheap Russian gas, which analysts believe will continue to hold back Germany’s recovery next year.
UBS economists forecast a 0. 5% expansion next year for the eurozone’s largest economy, followed by a modest acceleration of 0. 8% in 2025.
In contrast, the United Kingdom will grow 0. 6% in 2024 and 1. 5% the following year.
Confidence in Britain’s revival is reflected in recent bets from traders who believe UK interest rates will fall from 5.25pc to 3.5pc by the end of next year.
Lower inflation may also provide a more favourable economic backdrop for Rishi Sunak, giving him more room to cut taxes ahead of a general election scheduled for the autumn.
As for the eurozone, its growth remains stunted due to issues across its core nations, with UBS predicting that the bloc as a whole will expand by 1.2pc in 2025 – which is behind Britain’s growth rate.
This scenario will be the same in the coming years. By 2026, UBS expects the UK to grow by 1. 3% and the eurozone by 1. 1%, while Germany lags behind at 0. 9%.
Reinhard Cluse, an economist at UBS, said the trading giant simply failed to overcome last winter’s energy crisis.
He said: “Manufacturing was especially weak, with new orders dragged down by lower Chinese demand.
“In addition, the energy crisis continued to leave its mark as production in energy-intensive industries was much weaker than in other sectors, even as energy prices declined.”
Cluse added that the UK will be boosted by “the recovery in real incomes against a backdrop of falling inflation”.
UBS’s forecast coincides with the International Monetary Fund’s (IMF) latest forecast, according to which the UK will overtake Germany almost every year until 2028.
The global watchdog also expects Britain’s growth to outpace the eurozone in four of the next five years.
Sanjay Raja, an economist at Deutsche Bank, expects the wonderful resilience of the UK economy this year to continue into 2024, preventing GDP from contracting and allowing a firmer recovery to take hold in the second half of the year.
He said: “There are smart reasons to be positive about our ability to weather a recession.
“We will see a prolonged era of genuine, positive wage expansion amid falling inflation. That in itself will be a boon to households.
In part, growth has been achieved thanks to falling energy prices, which have given households and businesses a boost as bills have come down.
The phenomenon that is accumulating in migration also helped GDP, Raja said, because more people means more economic activity.
At the same time, the U. K. has been strangely resilient to emerging interest rates, Raja said.
He said: “Household and corporate balance sheets are still very strong.
“It is not just excess savings that gives us some confidence in the ability of households and businesses to cope with the shocks and obstacles arising from tighter financial and fiscal policies.
“It’s the fact that debt ratios are still traditionally low compared to the last two decades. “
On the other hand, the eurozone is already on the verge of entering recession.
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