The UK is expected to outperform Germany as the Eurozone faces the risk of a deeper recession due to higher interest rates.
Britain and Germany contracted in the three months to September, with Europe’s two largest economies potentially plunging further into financial recession.
However, analysts at UBS expect the UK to recover within a year.
Germany appears ready to continue the struggle as Berlin faces a budget crisis.
Olaf Scholz (left) and Rishi Sunak (right)
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Olaf Scholz is facing further pressure after Germany’s top court ruled that the government broke the law by using Covid money to fund net zero spending.
House prices in Germany have recently suffered double-digit declines amid the country’s economic turmoil.
Berlin’s dependence on gas produced by Moscow also had an impact.
Economists at UBS expect German growth to be just 0.5 percent next year, with 0.8 percent expected in 2025.
In contrast, the UK will grow by 0.6 percent in 2024, and see growth of 1.5 percent the following year.
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London city skyline during sunrise
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UBS expects the UK to grow by 1.3 per cent in 2026 and the euro zone by 1.1 per cent, while Germany is lagging behind at 0.9 per cent.
Traders are supporting the UK’s economic recovery as many expect the Bank of England to cut interest rates from 5.25 per cent to 3.5 per cent by the end of next year.
The change in economic fortune could help Rishi Sunak as the Prime Minister is expected to call an election sometime in 2024.
Lower inflation will likely provide the Treasury with more room to cut taxes.
German Chancellor Olaf Schulz
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“Manufacturing was particularly weak, with new orders falling due to lower Chinese demand,” said Reinhard Claus, economist at UBS.
“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 fell.”
“There are good reasons to be optimistic that we can avoid a recession,” added Sanjay Raja, an economist at Deutsche Bank.
“We will see a sustained period of positive real wage growth amid a rapid decline in inflation.
Bank of England
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“This in itself will be a blessing for families.”
He continued: “The balance sheets of households and companies remain very strong.
“It is not just the picture of excess savings that gives us some confidence in the ability of households and businesses to weather the shocks and headwinds caused by tightening monetary and fiscal policy.
“It is a fact that debt ratios are still historically low compared to the past two decades.”