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1 EY Forecast June 215 rebalancing recovery

2 Outlook for Activity to remain solid this year, after growing 2.4% in 214 Published in collaboration with

3 Highlights n GDP grew by 2.4% in 214 and 3% in Q1 215, outpacing the the country (which narrowly avoided an international bailout in 213) has picked up markedly, encouraged by the return to growth and by progress made on the privatization program. Of the 15 state companies earmarked for sale, 4 have been sold, and the Government hopes to raise revenues, and we expect it to fall below the 3% ceiling in 217. We forecast GDP will grow by 2.2% this year, as exports again rise strongly and domestic activity improves steadily. Export volumes rose 5.7% in 214, and we expect them to grow 4.8% this year, aided by stronger competitiveness due to the weaker euro. Stronger export demand, combined with an increase in European investment to recover last year, growing by 4.7%. The lower oil price and the expanded quantitative easing (QE) program are upside risks to our forecast, but there are also downside risks. Unemployment remains high, at 9.4% in Q1 215, only a little lower than the 213 average of 1.1%. And household spending labor market and modest consumer recover than the export-oriented sectors. We expect private spending to grow just 1.2% in 215, despite the boost to real incomes from an expected.1% fall in consumer prices. s exports to the accounted for 38% of GDP last year, highlighting the country s dependence on European demand. Because of this dependence, any further adverse developments in would pose a threat to overall economic activity. GDP growth % GDP growth % activity gathers momentum, we expect the economy to accelerate steadily, growing by 2.4% in 216, 2.8% in 217 and then over 3% a year in Unemployment 9. 7% Consumer prices % EY Forecast June 215 1

4 Activity to remain solid this year, after growing 2.4% in 214 Strong exports to keep growing at over 2% this year GDP grew by 2.4% in 214, outpacing the as a whole. We expect solid 2.2% expansion this year, driven by continued strong export recovery and a steady improvement in domestic activity. Export volumes rose 5.7% in 214 and 5.5% in Q And we see exports continuing to grow robustly this year (by close to 5%), aided by greater competitiveness as a result of the weaker euro and by stronger demand from the rest of the, led by (which is forecast to grow by 2% for the first time since 211). Across Europe, the sharp drop in the oil price has boosted the purchasing power of both firms and consumers headline inflation in was in negative territory in Q1 215 and we expect oil prices to rise only gradually in the coming years. In addition, the fresh round of QE conducted by the European Central Bank (ECB) should boost investment, as the compression of government bond yields has helped to lower bank lending costs. Stronger export demand, combined with an increase in EU-funded projects, helped fixed investment to recover last year, growing by 4.7%, and we expect it to continue to expand robustly this year, by 5.7%. helped by steady progress on reforms Investor confidence in which narrowly avoided an international bailout in 213 picked up markedly last year, encouraged by the return to growth and by progress on the privatization program. Of the 15 state companies earmarked for sale, 4 have been sold. And the Government hopes to raise 1b from privatization this year, which will help to improve the public finances. The fiscal deficit narrowed to 4.9% of GDP in 214, helped by a 5.2% increase in revenues. And the Government is targeting a reduction to 2.9% of GDP this year, bringing the deficit below the ceiling. However, we do not expect the deficit to fall below 3% until 217. Solid current account surplus and tourism We expect the current account surplus which we see peaking at 6.6% of GDP this year to persist over the longer term, thanks to s strong export position. Table 1 (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) Euro effective exchange rate (1995 = 1) Exchange rate (US$ per ) EY Forecast June 215

5 The surplus is likely to decline gradually, as imports of capital goods pick up in line with stronger investment activity. But an increase in tourism, as the economy improves, should offer support. Exports of services grew steadily in 214, largely thanks to the firm recovery of the transport sector exports of transport services grew by 9.5%, accounting for more than a quarter of the total growth. A larger share of services exports, almost 4%, derives from tourism, and there is scope for further growth in this sector over the longer term, particularly when infrastructure investment starts to recover more strongly. activity to pick up Household spending has been much slower to recover than the export-oriented sectors, growing by just.3% in 214 and by.2% in Q It has been constrained by fiscal austerity, the weak labor market and modest consumer confidence, which is still well below 26 7 levels. Unemployment remains high, at 9.4% in Q1 215, only a little lower than the 213 average of 1.1%. As a result, we expect private consumption to grow by just 1.2% in 215. Government consumption has fallen for the last four years, and we expect another small decline this year. But as the fiscal deficit narrows, we see the constraints easing, supporting slightly stronger government spending in As the budgetary pressures dissipate and domestic activity gathers momentum, we expect GDP to grow by 2.4% in 216, 2.8% in 217 and then over 3% in both 218 and 219. Provided domestic activity recovers steadily over the medium term as we expect, the unemployment rate should fall to under 7% by 219. this year The sharp drop in fuel prices since Q3 214 has boosted consumers purchasing power energy costs carry a 15% weight in s inflation basket. Consumer prices fell.5% in Q1 215, and then by.7% in April, so we have lowered our 215 inflation forecast to.1% from the.4% seen in our March report. But core Figure 1 Real GDP growth Figure 2 Government budget balance % year 8 Forecast b 1 Forecast % of GDP b (left-hand side) % of GDP (right-hand side) Table 2 Forecast for by sector (annual percentage changes in gross added value) GDP Manufacturing Agriculture Construction Utilities Trade Financial and business services Communications Non-market services EY Forecast June 215 3

6 Activity to remain solid this year, after growing 2.4% in 214 inflation was higher in Q1 215, at.8%, easing fears about second-round effects from lower energy costs in the coming months. And because businesses will benefit from lower input costs, we expect industrial output to grow by close to 5% this year. The outlook has brightened, but risks remain The impact of sharply lower oil prices on consumer demand, and the expanded QE program are upside risks to our forecast for spending and investment. And the weaker euro could boost export-oriented manufacturing more than expected. But there are also downside risks. The privatization program may proceed at a slower pace than scheduled. Indeed, the three-party ruling coalition has only a slim parliamentary majority, and this could hamper progress on the reform agenda. Consumer spending, which accounts for more than 5% of s GDP, has grown by less than 1% a year since 29. And it may prove weaker than expected, with unemployment still high and consumer confidence much weaker than before the 28 9 global financial crisis. Although the QE program and lower oil prices should boost confidence and encourage higher spending this year and we expect a rise of around 3% a year in the risks are on the downside. There are also downside risks to our export forecast. Exports to the accounted for 38% of s GDP last year, highlighting the dependence on steady demand growth in the rest of the region. The impact on market confidence of any further adverse developments in could threaten overall activity. Labor market and public service reforms are also important Relative to some other members, has high labor costs, so an improvement in labor market flexibility would boost productivity. In addition, reforms to public services, particularly pensions, would boost long-term growth prospects and relieve some fiscal pressure. The Government has pledged to make progress in these areas. Wages and salaries in rose 3.2% in 214, compared with a 2.1% rise in the overall. Although this increase should help consumption in the near term, the differential highlights the importance of labor market reforms for maintaining s competitiveness. There have been some signs that the trade unions, which have traditionally resisted structural change in the past, may now be more willing to accept changes to wage bargaining and pensions, given the weak economic situation. In addition, the Government has plans to set up a demographic reserve fund to cover pension funding, once the indexation freeze on pensions expires at the end of this year. The working-age population is falling. So raising the participation rate among older workers is a priority. The labor force participation rate for those over 65 was 6.5% in Q4 214, a figure that has changed little in recent years. And further progress on reducing youth unemployment, which fell from 21.2% in Q1 214 to 18% in Q1 215, remains important. Figure 3 Figure 4 Current account balance % year investment Forecast US$b US$b (left-hand side) % of GDP (right-hand side) Forecast % of GDP Private consumption EY Forecast June 215

7 in ia l Macroeconomic data and analysis Learn more about the EY Forecast at ey.com/eurozone: Download the latest EY Forecast and individual forecasts for the 19 member states. Use our dynamic Eurochart to compare country Use the trend analysis tool to compare forecasts 19 nations. EY Forecast June 215 rebalancing recovery EY Forecast June 215 rebalancing recovery ry Forecast March 215 You can select multiple countries to display on the chart. Country EY Forecast June 215 rebalancing recovery y Current Account Balance Government Budget Unemployment rate Government Debt GDP rebalancing ng recovery ry Private Consumption EY Forecast June 215 Trend analysis Fixed Investment Stockbuilding Government Consumption C Clear selection Consumer Prices Exports of Goods and Services Imports of Goods and Services Select a year to compare: EY Forecast Spring 215 EY s attractiveness survey Europe 215 Comeback time Outlook for EY Forecast: outlook for Spring 215 EY s attractiveness survey: Europe 215 The explores the implications of the latest economic forecasts for banks, asset managers and insurers. Our latest forecast sees improving GDP, growth in consumer spending and falling unemployment across the. Learn more and download the report at ey.com/ fseurozone. are annual reports that examine the attractiveness of selected nations and regions to foreign investors. Europe remains the world s top destination for foreign direct investment. Learn more and download the report at ey.com/ attractiveness.

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