Early indications next week could suggest that the Russo-Ukraine war is not yet doing great damage to European economies. Purchasing managers’ reports on Tuesday are expected to confirm flash readings that showed service sector activity continuing to expand strongly in the UK and respectably in the eurozone, albeit accompanied by big rises in prices and costs.
Instead, the eurozone’s problem is that its economy was fragile before the war. Although official figures should show a small rise in retail sales volumes in February as the impact of Covid receded, these sales will remain below the summer’s levels – and this is before higher oil prices squeeze real incomes further.
The picture will be even more lacklustre for industry. Although Thursday’s figures should show a small rise in German industrial production in February and decent rises in factory orders in recent months, this would leave output not just below last summer’s levels, nor even merely below 2018’s peak, but also lower than in 2007. German industry was suffering a slowdown even before Covid, and from a weak starting point.
Figures from France and Italy will show an even worse long-term trend. Although French industrial production should be up in recent months, it’ll still be well below its 2000-07 levels. And Italian output will not just be weaker than it was then, but will show no growth since the late 1980s.
Such numbers highlight that the region has suffered years of stagnation. Exactly why this should be is a matter for debate. A shift from manufacturing to services is part of the story, as is overly tight macroeconomic policy and the long-run impact of the financial crisis. Worrying about short-term fluctuations distracts us from this much bigger issue.
In the UK, we could see the start of a fall in inflation – house price inflation, that is. The Halifax could report that its measure of annual house price inflation has fallen from 10.8 per cent to around 10 per cent. This could be the start of a bigger fall simply because some large price rises last spring will drop out of the annual data.
Month-on-month prices will still be drifting upwards, at least for now. Longer-term, though, the question is whether an ongoing lack of supply of houses will support prices more than rising mortgage rates, a lack of affordability and falling real incomes depress them.
