Is Brexit making the eurozone’s economic problems worse?

In the second half of last year the German economy shrank, so the new official forecast for growth this year of only 0.5 per cent comes not as a surprise but a shock. Italy is already officially in recession, while France is growing very slowly. So the UK economy is growing faster than the three biggest eurozone economies at the moment.

There is an obvious point here to be made about Brexit. The UK has confounded expectations that the uncertainties generated by the attempts to leave the EU would push the economy into recession. This week’s employment figures were strong, and there are forecasts that next month unemployment will drop even further, to 3.8 per cent. But core Europe is in trouble. Why?

The first thing to say is that Germany’s problems have very little to do with Brexit and a lot to do with a wider slowdown in the world economy. There has been a slight fall in export orders to the UK for plant and machinery, but that is not the main problem. It has been hit by two other things.

One is the general troubles of the motor industry, and in particula​r the shift from diesel cars to electric and hybrid ones. The industry, with its suppliers, accounts for about 5 per cent of the entire economy. The slowdown there has knocked at least 0.5 per cent off overall growth.

Second, it has been hit by a more general decline in exports, as the world economy has slowed. Part of this is a fall in demand from China, but actually the problem is more widespread. Germany is a brilliant exporter of manufactured goods. But the market for those goods has gone soft.

It would be an exaggeration, but one with some truth in it, to say that Germany is brilliant at making things that the rest of the world no longer wants to buy.

What happens next? If the rumbling trade war between the US and China switches to a US attack on Europe, then Germany is in the front line.

Germany has a huge imbalance of trade with the US, and it has been estimated that were Donald Trump to put a 25 per cent tariff on German cars, this would halve the country’s car exports to America. Unfair? Well, the EU has a 25 per cent tariff on US car imports, so you can see the political case for a challenge.

If export demand, on which the German economy is so dependent, slackens, can domestic demand pick up the slack?

Here there is some hope. Actually German consumers have kept up their purchases through the winter, providing a reasonable base for growth. The government is plannin​g to ease its tight fiscal policy, though as yet we don’t know when and by how much. There is some scope for that, as the country is running a budget surplus – a rare occurrence in the world today.

But I think the rest of Europe has to accept that the locomotive for the eurozone will not pull it along any faster this year. Forecasts for next year predict a recovery, but it is hard to be confident about them. This time last year forecasts for this year were pretty positive and look what has happened. Add in the serious weakness in Italy, an important market for German goods, and it is hard to see a strong rebound.

That leads to a final point: the long-term weakness of core Europe. If this sort of slowdown happens near the top of a boom, what happens if there is a real slump? Europe, for all sorts of reasons including its demography, seems condemned to be a slow-growth region. This is nothing to do with Brexit, but the UK’s difficulties with Europe do not brighten the region’s future prospects.