Eurozone and external demand - beyond the trainwreck

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At the start of the year we identified four main challenges to growth over 2011: government cuts, access to finance, commodity prices, eurozone trainwreck.

This was also in the context of what we already knew to be weak consumer demand driven by reductions in real incomes, a weak housing market, and higher unemployment.

Domestic demand was undoubtedly weak and with the uncertain spillover impact of government cuts to come, the fear was it could become weaker.

The big shift since the start of the year has been the substantial weakening in external demand.

Though we might try to claim we had this risk in our sights, our flagging of the eurozone as a risk was more in the nature of an apocalyptic Lehman-scale financial markets meltdown. The sort of risk that was undoubtedly hugely negative but hard to be specific about.

While that unfortunate scenario could still yet materialise, the actual impact of the crisis that we are seeing, the generalised downward pressure on overall external demand is something we perhaps didn't appreciate.

So how exactly is the eurozone crisis impacting on us?

Felicity has spoken about the three generalised impacts outlined by Mervyn King in May. But these generalised impacts hide a lot of complexity and specificity.

While the eurozone-wide challenges are the main threat to external demand, there's actually a wide variety of challenges faced by the specific markets in Europe where we are now seeing weakness.

So with this in mind, we're coming out in the next few days with a series of blogs on:

Specific challenges to eurozone countries that are key UK export markets;

The spillover of the crisis into external demand more generally via confidence impacts on markets outside of Europe;

Why in the medium term, we still have reason to be optimistic about the prospects for UK manufacturing, despite the impacts on Europe;

Why the UK cannot afford to take opportunity for granted and must compete hard to attract investment and drive growth.

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