Britain

Britain has reclaimed its place as the world’s sixth largest economy from Brazil and will be larger than France by 2022, a leading forecaster has predicted. However, the UK will not be able to avoid a relative decline over the next decade — falling to eighth behind India, Brazil, and Russia but avoiding the dramatic plunge expected for France and Italy — according to the Centre for Economics and Business Research (CEBR). Brazil overtook the UK over the past year but has slipped to seventh in CEBR’s World Economic League Table rankings due to the weakness of its currency. The South American giant is expected to overtake the UK again in 2014.

According to the Institute for Public Policy Research (IPPR), consumer and business morale had been dampened by talk of years of austerity and uncertainty over the eurozone crisis. The risk is that 2013 could be groundhog year for the UK economy. The government was counting on "something just turning up" to lift the economy. The government's official economic forecaster, the Office for Budget Responsibility, expects the UK economy to grow by 1.2 per cent in 2013. But the IPPR said such growth could only be achieved if consumers started spending more, which would require them to take on more debt. This would be a significant change from the trend of the last four years, and is very unlikely.

According to the Centre for Economics and Business Research, the UK economy had a 50/50 chance of falling into a triple-dip recession next year. Household budgets would continue to be squeezed. People would be underemployed rather than unemployed and would suffer another year of falling incomes in real terms, with very slow pay growth failing to keep up with inflation. Britain's economic growth will outpace that of any other major European country over the next couple of years.

Predicting that recession would continue in the eurozone in 2013, with only marginal growth in 2014, the CEBR expects that Britain would grow by 0.8 per cent and 1.4 per cent respectively.

Britain's economy will return to modest growth in 2013 after flat lining this year, with developments in the eurozone posing the biggest risk. The National Institute for Economic and Social Research (NIESR) has revised down its 2013 growth forecast to 1.1 per cent from 1.3 per cent, due to a weaker global outlook. Risks to the UK economy are dominated by the external environment. NIESR expect that Britain's monetary policy was likely to remain accommodative until 2020. Britain's austerity measures pushed through by the governing coalition continued to damage the country's recovery. A return of domestic demand and business investment is required for a sustained recovery.

In 2013, the British government seems, however, optimistic as they believe the country’s economy will grow to about 1.2 per cent. But a leading think-tank has forecasted a much grimmer reality. The Institute for Public Policy Research has recently issued a report warning that the UK will suffer little or no growth at all in 2013, a repeat of what happened last year. The NIESR has also revised down its 2013 growth forecast to 1.1 per cent from 1.3 per cent, due to a weaker global outlook. Risks to the UK economy are dominated by the external environment. Developments in the euro area are most important, both because of trade and financial sector linkages.

The British Chambers of Commerce has revised its growth forecast for 2013 and 2014 downwards in its latest economic forecast. The BCC believes the economy will grow by one per cent during 2013, down from its earlier 1.2 per cent forecast. GDP growth in 2014 has been revised downwards from 2.2 per cent to 1.8 per cent. Lower growth in 2013 and 2014 is attributed to reduced growth globally and the prospect of further austerity measures. Although there will be a slow improvement over the medium-term, GDP will only return to its pre-recession levels at the end of 2014. UK GDP growth in 2013 and 2014 will have to rely more on household consumption. It is critical that further falls in inflation continue to ease the squeeze on disposable incomes and help to sustain domestic demand.

Luxembourg

The Grand Duchy of Luxembourg, one of the smallest member states within the European Union, is located between Germany, France and Belgium. As Luxembourg has always been supportive of economic opportunities, of the development of foreign relations and of larger scale integration, the dimensions of its economy and of its home market are exceeding the size of national territory. The country, with its open economy exporting more than 85 per cent of its production, was an ardent defender of the introduction of the euro. Luxembourg is a trustworthy and recognised economic and political partner both on European and international level and is integrated in one of the main economic and monetary unions. Besides, the Grand Duchy plays a key role in the development of the Greater Region, the cross-border area composed of the Grand Duchy and its neighbouring countries Germany, France and Belgium.

Luxembourg's GDP grew by 2.7 per cent in 2010, but slowed to 1.6 per cent in 2011. A mild recession was forecast for 2012, with Luxembourg's GDP is expected to have grown 0.5 per cent, followed by a weak recovery to 0.9 per cent growth in 2013. Private consumption slowed to an estimated 0.8 per cent in 2012 and likely to decelerate further to 0.7 per cent in 2013 as confidence weakens. Employment growth will slow or come to a halt, as will real wage growth, with the indexation mechanism being curbed so as not to compensate fully for inflation. Assuming stronger consumer confidence, private consumption will pick up to 1.6 per cent in 2014.

Luxembourg's economic prospects, like those of the rest of the eurozone, have been adversely affected by the region's debt crisis. A drop in demand, belt-tightening and a general loss of confidence of households and companies in the economy are the overarching forecasts for 2013. With the eurozone entering a recession, STATEC reports that Luxembourg will not get off lightly. Public finances and the labour market are likely to be hit, affecting a number of sectors including industry, construction, transport, retail, services and other businesses. The diffusion of the crisis and its consequences are likely to spread across other sectors and will most likely extend beyond 2013.

Inflation reached around 2.5 per cent mid-2012, rising to three-per cent in September and October. The average nominal wage costs, however, did not increase in line, particularly in the industry and transport sectors. As a result, it has affected the purchasing power of earners. On a positive note, Luxembourg's economy grew at a better than expected level with GDP climbing 0.4 per cent in the second quarter of 2012. The financial sector, however, which showed an alarming decline in the first quarter, now appears less affected by the recent economic downturn. The forecast for 2013 has deteriorated, as economists observe the worsening situation in the eurozone.

France

The French economy grew by an estimated 0.1 per cent in 2012, dropping from 1.7 per cent in 2011 and missing the government's forecast for 0.3 per cent. The outlook would improve only marginally heading into 2013, estimating growth of 0.1 per cent in both the first and second quarters. The economy will grow less in 2013 than the 0.8 per cent forecast the Socialist government has built its budget on. The French economy would have to accelerate abruptly in the second half, growing one per cent for two straight quarters to meet the government's forecast of 0.8 per cent GDP growth for the whole year. According to the national statistics agency Insee, the French economy contracted towards the end of 2012 and will barely grow in the first half of 2013. After expanding 0.2 per cent in the third quarter of 2012, GDP in the eurozone's second-largest economy is estimated to have contracted 0.2 per cent in the final three months of this year and is seen posting only 0.1 per cent growth each quarter in the first six months of 2013. The IMF predicts economic growth of a mere 0.4 per cent in 2013. France hasn't posted a growth rate as high as one per cent quarter-on-quarter in over six years and hasn't recorded two consecutive quarters of growth at one per cent or higher since the turn of the century.

Meanwhile, France’s unemployment rate is crashing through the symbolic 10 per cent mark this year. Though the French President has hailed 2013 as the year of the "great battle for jobs", latest figures show a rise in the jobless rate for the 19th consecutive month — and the forecast is for worse to come. France's faltering economy shed a further 30,000 jobs in November, pushing the unemployment rate to its highest level in almost 15 years. Mass job cuts are expected to continue into 2013. According to the Insee, 75,000 jobs will be lost in the first six months of 2013, half of which will be in industry. Insee expects the unemployment rate to reach 10.9 per cent by the middle of 2013.

French President reiterated that the government was targeting a reduction of the public deficit in 2013 to three per cent of GDP despite new official data showing economic growth way below forecast. The government's growth forecast is crucial to keep the country on track to bring its deficit down to three per cent of GDP in 2013 from 4.5 per cent in 2012. Weaker growth without further austerity measures will put the target out of reach. The government has already taken tough measures, consisting mainly of tax increases, to remain on track to hit its deficit target in the face of a slowing economy. Since coming to power in May, the French President has increased taxes by more than seven billion euros ($9.27 billion) in 2012, and the 2013 budget will add around 20 billion euros.

Economists now warn that further austerity measures risk can be counterproductive by pushing growth even lower. Insee warned that tax increases at the end of 2012 are already weighing on household spending, the main French growth driver. As consumers anticipate further tax increases at the end of next year, consumer spending will have contracted 0.1 per cent quarter-on-quarter in the final three months of 2012 and then will show no growth in the first two quarters of 2013. Falling corporate investment will also drag on the French economy. Insee expects that investment by nonfinancial companies, after dropping by 0.3 per cent at the end of 2012, should slip by 0.2 per cent in the first quarter of 2013 before posting zero growth in the second quarter.

France's public debt recently topped 90 per cent of the value of everything produced in the economy in a year, well above the eurozone average of 60 per cent. However, its debt level is not an enormous amount, greater than the UK or Germany. These numbers are not unusual in the context of eurozone economies in general. What distinguishes France is the lack of political will to address them and, as a consequence, a projected debt to GDP ratio which would place it firmly among its crisis-hit neighbours.