LONDON — Economic growth in the European Union for 2023 will likely depend on how severe winter will be this year, as the region suffers from high energy prices amid struggles to secure gas due to the war in Ukraine, former U.K. chancellor Philip Hammond said in an interview with Nikkei.
Governments in the region are rushing to secure energy by extending the life of nuclear power plants and boosting renewable energy, but the chancellor said these efforts are “not going to make a big enough difference.”
Q: What is your view on the outlook for the U.K. and eurozone economies?
A: My central view is that 2023 will be a very hard year for the U.K. economy. Inflation will be declining, growth will be negative … [and] household incomes will be under intense pressure because earnings will not keep up with inflation.
I think in 2024 the situation may start to stabilize with weak growth [and] inflation continuing to decline, ultimately back to maybe overshooting below the 2% target. But I would expect that after the general election in 2024, whoever wins, there will be a further need for fiscal tightening.
I think the eurozone economy is on a knife’s edge. Whether negative growth can be avoided depends on how severe the winter is. I think it is likely that euros will be either just in growth or just negative growth. But it will be a small budget unless we get some very severe winter shock from severe cold weather.
Q: Is there any chance that your harsh economic outlook will soften?
A: If the conflict with Russia were to suddenly be resolved so that the energy market could return to normal functioning, the markets in materials could return to normal operation … [and] would clearly boost the economy at a downward pressure on inflation. But I think that it’s unlikely to happen during 2023.
If China opens up more quickly than perhaps we had anticipated, that will be an upside opportunity for euro exports and the economy.
Q: Is there a view in Europe that it will be more difficult to secure natural gas next winter?
A: Yes, I think that’s quite the likely situation. Unless we have a very mild winter now and enter summer with sufficient gas in stock, it will be very difficult to get through the winter of 2023 with sufficient stockpiles. There’s global competition for this gas and Europe will not find it easy to get all the gas it needs during 2023 to rebuild stocks ahead of next winter. And many of the other measures that are being looked at, like extension of the life of nuclear power stations [and the] reopening of coal-fired power stations, are not going to make a big enough difference [next winter], I think.
This problem will last into the spring of 2024. Hopefully, by the autumn of 2024, we should have enough additional input capacity available in Europe to operate natural gas.
Q: How do you assess the outlook of the German economy, which is the driving force of the EU economy?
A: The German economy has been built over the last 20 years to devalue the [euro]. I think German consumers have been secure in their jobs with exporting companies. So I’m not sure that the undervaluation of the euro as a German currency is going to end anytime soon. But it’s definitely an important factor.
The loss of cheap energy supplies is [another] important factor. That’s going to be more difficult in the future.
I think Germany is challenged by stagnation in trade by U.S. pressure around trade with China. European countries have felt a lot of pressure from the U.S. about trading technology goods with China. So my prognosis for the German economy over the longer term is that it will underperform.
Q: Do you agree that the current economic slump seems more severe in the U.K. than in Germany?
A: I agree. Almost all European countries have been hit by energy shock and by COVID shock, but only Britain has been hit by the Brexit shock. There will be a differential, a negative differential experience in the UK. It’s probably 3% to 4% of GDP. Serious, but we shouldn’t overstate it.
The best strategy for the U.K. now is to try to realize the opportunities that are now available that would not have been available if we were members of the European Union. Unless we find some measures that would not have been available if we were members of the European Union, then we will not achieve any benefit from Brexit to offset the very high costs of Brexit. So now [the U.K.] has to look at the possibility of radical deregulation.
Q: Do you think policies aimed at combating higher energy prices, on which European countries are spending huge amounts of money, are sustainable?
A: I think European governments were hoping the energy price spike would be a temporary phenomenon. If they believe it was a temporary phenomenon, then it’s probably the right policy. But it is, of course, not sustainable [in the long run].
So I think European governments have to work out how to move from temporary support to smoothing the path to a new energy economy. They will have to provide a smooth trajectory to an economy of much higher energy prices. It will mean that the transition to renewable energy will be facilitated. I think we’re going to see gas remain part of the energy mix for the foreseeable future and probably more European gas production.
Source : NikkeiAsia
