Eurozone. EY Eurozone Forecast September 2013

Transcription

1 Eurozone EY Eurozone Forecast September 213 Austria Belgium Cyprus Estonia Finland France Germany Greece Ireland Italy Luxembourg Malta Netherlands Portugal Slovakia Slovenia Spain

2 Outlook for Germany Leading the Eurozone out of recession Finland Estonia Ireland Netherlands Germany Belgium Luxembourg France Italy Austria Slovenia Slovakia Portugal Spain Greece Malta Cyprus Published in collaboration with

3 Highlights Germany will continue to grow more strongly than the other core Eurozone economies, with GDP growth forecast at.6% this year and 1.7% in both 214 and 215. Strong economic fundamentals, such as sound fiscal conditions and low leverage of the private sector, lay the basis for a further expansion of the domestic economy and put Germany in a good position to benefit from the global recovery. We expect GDP growth to average 1.5% per annum in Falling exports to the Eurozone led to weaker manufacturing orders and production in 212 and Q1 213, as well as depressed investment, which was also affected by adverse weather conditions. But investment rebounded in Q2 as demand in the region picked up. With the economy already operating close to full capacity, investment is expected to grow by 4% a year in and about 3% in Meanwhile, the restructuring of banks balance sheets proceeded at a sustained pace during the crisis and the sector will be able to provide the necessary liquidity to firms. Moreover, lending conditions remain very favorable compared with the rest of the Eurozone and companies have room to increase leverage, as their debt is low at around 9% of GDP compared with an average of 136% of GDP in the Eurozone. GDP growth % Unemployment is expected to remain stable at around 5.5% in 213 and 214, but then decline from 215 as activity expands. Limited spare capacity implies earnings growth will be sustained in the medium term. Recent wage agreements in the manufacturing and retail sector have resulted in pay increases that largely outpace price rises. Real wage growth will support consumption, which is expected to increase 1% in 213. We forecast consumption growth will average 1.2% a year in The general election on 22 September is likely to confirm Angela Merkel as Chancellor, as her approval rating remained above 6% in August and her center-right coalition consistently led the polls. As a result, fiscal policy is not expected to change direction. With public debt above 8% of GDP, the Government will maintain a prudent fiscal stance and is expected to keep the budget close to balance in the medium term. Downside risks remain significant in both the Eurozone and emerging markets, and exports are key to unlocking capital spending, as shown by recent trends. While Germany s strong fundamentals enable the economy to cope with difficult external conditions, only a pickup in external demand will allow it to meet its full potential. GDP growth 214 Exports of goods and services growth % -. 9% Unemployment 5. 4% EY Eurozone Forecast September 213 Germany 1

4 Leading the Eurozone out of recession The outlook for Germany remains positive, as it helped to lift the Eurozone out of recession in Q2 213, with GDP expanding.7% on the quarter, after stalling in Q1. Strong economic fundamentals lay the basis for a further expansion of the domestic economy, with sound fiscal conditions, low leverage of the private sector, a skilled and competitive labor force, significant investment in research and development and excellent infrastructure all helping to put the economy in a good position to benefit from the expected global recovery in In the shorter term, the early stabilization of the Eurozone economy will offset the negative effects of the current slowdown in emerging markets. As a result, we now expect German GDP to grow.6% in 213 and 1.7% in 214 compared with the.3% and 1.6% respectively forecast in our June report. We then expect GDP growth to stabilize at just above 1.5% a year in Investment to rebound in the short term The decline in demand from Eurozone countries which account for around 4% of German exports and the resulting drop in manufacturing orders in 212 and Q1 213, led to investment plans being delayed. Moreover, German exporters are exposed to increased competition from Japanese companies, which are benefiting from a significant depreciation of the yen triggered by the Bank of Japan s aggressive policy easing. Finally, investment in the construction sector was hit by adverse weather conditions in early 213. However, the drag from all these factors is expected to ease in the short term. In particular, manufacturing orders from the Eurozone increased 2.9% on the quarter in Q2 and are expected to continue to expand as economic activity in the region resumes. Moreover, the depreciation of the yen against the euro has already lost momentum and will moderate further in the medium term. Finally, investment in construction jumped in Q2 as weather conditions normalized. We forecast investment growth will average 4% a year in 214 and 215 and about 3% in German companies will be able to afford ambitious investment plans as their debt is Germany (annual percentage changes unless specified) GDP Private consumption Fixed investment Stockbuilding (% of GDP) Government consumption Exports of goods and services Imports of goods and services Consumer prices Unemployment rate (level) Current account balance (% of GDP) Government budget (% of GDP) Government debt (% of GDP) ECB main refinancing rate (%) Euro effective exchange rate (1995 = 1) Exchange rate ($ per ) EY Eurozone Forecast September 213 Germany

5 low at just 9% of GDP compared with a 136% Eurozone average. Other factors will also contribute to the strong expansion of investment in the next few years. supported by favorable lending conditions and tight spare capacity Firstly, low interest rates will stimulate capital spending as the external outlook improves. In Q2 213, German companies paid an interest rate of just 2.7% on loans with maturity longer than five years, compared with rates of 3.3% and 5.4% for French and Italian firms respectively. Germany will maintain its stable status within the Eurozone and, as a result, cash will continue to flow in and keep interest rates low, giving German firms a significant advantage over their competitors. Tight interest rate margins will weigh on banks profit margins, but will be offset by a steady rise in lending volumes. Restructuring of bank balance sheets proceeded at a sustained pace during the crisis and the sector will be able to provide the necessary liquidity to firms. Banks have strengthened their capital ratios and have improved the quality of assets in their balance sheets. In particular, they have reduced their foreign exposure, more than halving claims to troubled Eurozone countries. The narrowing of the output gap will create the need for additional production capacity and stimulate investment over the medium term. Capacity utilization has reached its historical average in Q3, while we estimate the output gap will be below 1% in 213 as a whole. Another clear sign that the economy is operating near capacity is the historically low level of unemployment, which has remained steady at 5.4% since mid-212. Unemployment is expected to decline further from 215, as the rise in output and a falling labor force will move a larger share of the population into employment. With household consumption regaining strength With unemployment at record lows, workers demand for pay rises has intensified in 213, after years of restraint. Trade unions achieved a 4% pay increase for millions of workers in the manufacturing sector in May. Meanwhile, employers in the retail sector offered a 2.5% wage rise from July. This is still above inflation, which has remained below 2% so far in 213. Robust real wage growth will allow consumption to increase by around 1% in 213, outpacing GDP growth for the first time since 1999 (excluding recessions). Figure 1 GDP growth: Germany vs. rest of Eurozone Figure 2 Consumption and investment % year 6 Other Eurozone 4 Forecast % year 5 4 Consumption (right-hand side) % year Forecast Germany 2 3 Investment (left-hand side) EY Eurozone Forecast September 213 Germany 3

6 Leading the Eurozone out of recession We expect consumption growth to then stabilize at 1% 1.5% in In particular, the share of consumption in GDP has been on a long-term downward trend it averaged 57.6% in the last decade, down two percentage points from its average in However, given the solid rise in real wages, low household debt and a revival in the housing market, there are upside risks to our consumption forecast in the medium term. inflation will stay above the Eurozone average Tight spare capacity and robust wage growth explain why inflation has not declined in line with the Eurozone average in 213, and stayed at 1.9% in July. While inflation may rise temporarily above 2% in the short term, it is likely to be below 2% in as a whole. The expected decline in oil prices in 214 should feed through to an easing of inflation to 1.7% in the medium term. Moreover, although wage increases have picked up, they do not point toward a buildup of inflationary pressure. Meanwhile, house prices were 6.2% higher than a year earlier in Q2 213, as the housing market has attracted investors in search of safe investments. Home ownership has also increased somewhat in recent years, although it remains the lowest across Eurozone countries at 46%. The volume of mortgages continued to fall in 213 and upward pressure on prices is expected to ease once uncertainty at the Eurozone level subsides. As a result, the risk of a property bubble in Germany appears low. However, robust house price growth will support consumption in the short term and help reverse the long-term decline in construction. Policy is expected to remain cautious after the election The center-right coalition of the Christian Democratic Union and Christian Social Union with the Free Democrats led the polls ahead of the general election, which is due to be held on 22 September. Moreover, Angela Merkel remains popular and is expected to remain as chancellor. As a result, we expect the fiscal stance to be unchanged under a new government. With public debt above 8% of GDP, the new administration is expected to try to keep the budget close to balance in the medium term. Nevertheless, pressure on Germany to loosen its fiscal policy is likely to ease as the recovery in the region broadens. Moreover, we estimate fiscal stimulus in Germany would have only limited positive spillovers to the rest of the Eurozone only around 1% of exports from the Mediterranean countries go to Germany. Indeed, fuelling a further rise in inflation in Germany may prompt an increase in interest rates that would hurt the recovery in peripheral economies. as external downside risks are significant The main downside risks still lie beyond Germany s borders. As exports represent 4% of GDP a relatively high share for a large developed economy Germany would be affected significantly by a deterioration in the external outlook. In particular, the Eurozone recovery may fail to materialize in the short term, postponing a pickup in exports and investment in Germany. Moreover, a breakup of the single currency is still possible in the medium term. As the limits of austerity have been reached in troubled economies, adverse political developments could lead some countries to opt out of the euro, as their primary fiscal balances which exclude interest payments rise into positive territory. Meanwhile, potential output growth in the main emerging economies has been revised down since June as they struggle with their own structural problems. Further downgrades cannot be ruled out. Exports are the key to unlocking capital spending, as shown by recent trends. While Germany s strong fundamentals allow the economy to cope with difficult external conditions, only a pickup in external demand will allow it to meet its full potential. Figure 3 Unemployment % Forecast Figure 4 Government balance and debt % of GDP % of GDP 2 Forecast 1 Government balance (left-hand side) Government debt (right-hand side) EY Eurozone Forecast September 213 Germany

7 EY Forecasts in focus: macroeconomic data and analysis at your fingertips App EY Forecasts in focus gives you swift access to the data and analysis from EY s Eurozone Forecast and Rapid-Growth Markets Forecast on your tablet and smartphone. Download the EY Forecasts in focus app at ey.com/eurozone Compare economic indicators for the 17 Eurozone countries and 25 rapid-growth markets. Create tailored charts and tables for a broad range of economic indicators based on data from 2 to the present and make forecasts up to 217. Use the app to improve your own business planning and share customized information with clients. Web Highlights, data and other information from the Eurozone Forecast. Eurozone EY Eurozone Forecast & Outlook for financial services Other EY publications Rapid-Growth Markets Forecast EY Eurozone Forecast: Outlook for financial services Eurozone EY Eurozone Forecast September 213 Outlook for financial services

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