The Dangerzone | EEF

The Dangerzone

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As Andrew mentioned in his blog earlier today, there are a multitude of ways in which fallout from the Eurozone crisis could hit the UK. In part, this is because each of the countries involved is a significant export market for the UK.

When trying to guage how big this impact will be, two pertinent questions arise: in what ways are our key export partners vulnerable to the crisis? And which exports are most at risk?

I'll attempt to answer those questions here.


What's the story

Growth Prospects*Debt/GDP ratio (2010)**
Greece is at the heart of the storm. Its main problem is that it has a large swathe of its economy outside of its taxation system and the government is spending beyond its means.Our biggest export to Greece is chemical products, most notably pharmaceutical products – the export of which may be particularly vulnerable to public sector cuts – given that total goods exports to Greece were already 21% lower in q2 this year than 2010q2, that's a sector that could be suffering.Greece has long road back to competitiveness and growth. Our forecast for 2012 is for the Greek economy to contract by more than 2% next year, further adding to the country's woes. 145%
Deficit as % GDP (2010)**


What's the story

Growth Prospects*Debt/GDP ratio (2010)**
Italy is the next-most vulnerable country in the Eurozone. Although the country has a relatively small budget deficit, the debt to GDP ratio is significant and, as yields on Italian debt soar, this creates issues around the country's ability to pay.Italy is the UK's 7th largest export market in Europe. Electrical equipment and defence & transport equipment are top exports. Italy is arguably in a stronger position than Greece, but it is crucially vulnerable if the Eurozone's bailout fund loses credibility. Our forecast for 2012 growth is just 0.2%.118%
Deficit as % GDP (2010)**


What's the story

Growth Prospects*Debt/GDP ratio (2010)**
Spain is different from Italy in that, although its debt-to-GDP ratio not as high as some, its government's budget deficit is significant, raising questions about the country's ability to keep control of its debt burden.Spain is the UK's 6th largest export market in Europe. Key exports include pharmaceutical products and vehicles. Spain is facing stringent and unpopular public sector cuts which are likely to hit domestic demand in the short term. Our forecast for growth in 2012 is a weak 0.3%.61%
Deficit as % GDP (2010)**


What's the story

Growth Prospects*Debt/GDP ratio (2010)**
France is vulnerable to the Greek crisis through its banks' exposure to Greek debt. It is also vulnerable in that the backing it has provided to the ESFS might undermine the position of its own public sector finances. There have been hints that a downgrade from its AAA status is likely. This would push up yields on French government debt (which are already starting to rise, AAA rating or not) and reduce the sustainability of the government's debt.France is the UK's 3rd biggest export market in Europe and key exports include electrical equipment, pharmaceutical products and defence equipment. France has fared better than many of its European neighbours since the crisis ended, and growth in 2012 is forecast to be 0.7% 82%
Deficit as % GDP (2010)**
* Forecast source: Oxford Economics, 2011
** Source: Eurostat, 2011

Next week we will be looking at how the crisis in the Eurozone is infecting markets, in particular through its impact on confidence.

And then we'll go into why we still have reason to be optimistic in the medium term…

…but a reminder that we can't take opportunities for growth for granted. The government needs to work hard to attract investment and growth.


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