Britain can avoid German woes, says HAMISH MCRAE

Germany is already in a recession, but we don’t need it in the UK. Perhaps Jeremy Hunt, our chancellor, feels good about the idea, if that was the price of getting inflation under control, as he told Sky News on Friday.

I don’t like what’s happening in the bond market because higher bond yields are pushing demand. But we managed to get through last year without a recession, as I thought we probably would, and now there’s a chance we can get through this year with a little bit of growth.

Germany, on the other hand, had just had two consecutive quarters of economic contraction, the classic definition of recession.

If you believe the latest forecasts from the International Monetary Fund, which have reversed their gloomy forecasts for Britain, the German economy will contract marginally over the course of the year, while the UK will grow by 0.4 percent.

That’s not great, and the other G7 economies are expected to grow faster. But a plus is better than a minus.

How are you? Well, the first thing to say is that no one should wish for a recession. A shrinking economy means falling incomes, fewer jobs, lower tax revenues and therefore less money for public services. So if we can get inflation down without crashing the economy, that would be by far the best outcome.

I worry that the Bank of England, which made the mistake of raising interest rates too slowly, will now make the opposite mistake of raising them too high.

But the most interesting thing here is the contrast with Germany. Both are successful economies, with Germany the world’s third largest exporter of goods after China and the US, and the UK the second largest exporter of services, also behind the US. Both have low unemployment and attract migrant workers. Germany has a current account surplus while the UK has a current account deficit. This is a contrast that perhaps explains the common perception that Germany is generally outperforming.

The problem if, like Germany, you depend on the export of goods to boost your economy is what happens when global trade relations become more viscous.

This is not simply a matter of the current scrap in the silicon chip industry, where the US has banned China from importing high-quality chips. Take a commodity such as cars. China is by far the largest market for Volkswagen, with 3.18 million cars sold last year. But China is racing ahead in producing its own brands, especially in electric cars, and VW is starting to lose market share.

Of course VW and the other manufacturers are making the switch. But China appears to have a competitive advantage in mass-market electric vehicles, which is particularly serious for Germany as cars are its largest export.

If the world continues to move towards a more confrontational relationship between the US and China, Germany will be particularly exposed. The UK has several vulnerabilities. Due to political pressure from the EU, some financial services leaked to mainland Europe and to Ireland after Brexit.

Europe is trying to cut back on British funding in much the same way China is trying to cut back on Germany’s car industry. Our universities may become too dependent on foreign students. China provides the largest group, with 150,000 young people studying here. But the British dominance of those two service sectors – finance and education – is remarkable.

Financial and professional services are the largest contributors to that second place in service exports, while UK universities have four of the top ten places in the world in the most recent QS ranking: Cambridge, Oxford, Imperial and UCL. The highest German is 49.

The point here is that the UK and Germany have different specialties. The question is which economies will come under more pressure if international trade relations become truly disruptive. And as we saw last week, the UK appears more resilient than economists expected a few months ago, while Germany has proved more vulnerable.

Let’s hope the Treasury and the Bank of England don’t screw things up now.