Germany will capitalize on recovery, and Turkey will shine, but government budget cuts could bite some European businesses, says HSBC
Despite concerns about the stability of the euro zone, 2010 proved more positive for the European economy than we were expecting. While some countries are clearly experiencing difficulties, Europe as a whole made good progress toward recovery. So what of 2011? Clearly, given the size and scope of the continent, it is difficult to paint a single unified picture for Europe's economic outlook. But on a country-by-country basis, some clear stars are emerging. Germany, for example, has emerged this year as Europe's economic powerhouse. By far the largest economy in Europe, Germany has ensured its growth by seizing export opportunities more firmly than it did even before the recession. It helps, of course, that Germany produces products that are in demand in emerging economies, such as machinery and luxury cars, but the country's innovative response during tougher economic times also left it well-placed to capitalize on the recovery. In fact, the government's policy of paying manufacturers financial subsidies to help cover staff wages, as opposed to laying off workers, has allowed German businesses to ramp up production quickly in response to growing demand for its products. The result is a German economy likely to post growth in excess of 3.5 percent for 2010. While in the coming year export demand from the emerging world will likely be less frenetic, Germany is still expected to report solid growth of around 2 percent in 2011. German businesses will benefit from the positive impact this growth is having on confidence among domestic consumers, who—not usually noted for their spending power—are starting to save slightly less and spend more. This suggests Germany's strong recovery might spread out from the export sector. Diversifying Export Markets
Turkey also is likely to continue its strong economic recovery in 2011. With low levels of government debt and a banking system undisrupted by the global financial crisis, Turkish businesses will be able to avail themselves of the country's low cost base and manufacturing competitiveness. Despite not manufacturing products that emerging markets, such as China, demand, Turkish manufacturers currently export to the large Western European market and have in recent years been diversifying their exports, particularly to the Middle East—a trend we are likely to see continue. In fact, trading internationally will continue to be important for many European countries in 2011. Poland has a large domestic market that offers opportunities to its manufacturing sector. But by virtue of their smaller size, countries such as the Czech Republic and Slovakia will continue to explore overseas trade opportunities. In the U.K., a strong political focus has been on trading internationally as a means to boost growth. Whether this has had an effect, the U.K.—like much of the rest of Europe—certainly had a better year than predicted, with annual growth in 2010 set to register at around 2 percent. British businesses do seem optimistic for 2011, and their prospects are likely to be boosted further by a more competitive pound. Impact of Spending Cuts
Of course, while previous years have seen governments around Europe pumping money into their economies, 2011 is set to be the year of fiscal retrenchment, when measures taken to redress large government deficits start to bite. Countries without budget deficits, such as Switzerland, Norway, and Sweden, will escape unscathed, but elsewhere in Europe businesses will need to be aware of the impact public spending cuts may have on their prospects. These cuts, however, won't simply be about governments spending less, but rather about spending differently. Public bodies will change their procurement processes to look for new efficiencies. For example, the U.K. government doesn't plan to spend less public money in 2011—although the lack of growth in spending has the potential to be painful—but is instead overhauling the way it uses and pays for external services. For businesses, this wholesale stock-taking will undoubtedly present opportunities to tender for new contracts and showcase more flexible solutions. The swing of the pendulum from financial stimulus to retrenchment will undoubtedly challenge many businesses in 2011. There's also a real need for greater stability and a tangible solution to the debt issues in the euro zone. For innovative businesses, though, there continue to be strong opportunities and, in many countries, the potential for growth.