Eurozone. EY Eurozone Forecast September 2014

Transcription

1 Eurozone EY Eurozone Forecast September 214 Austria Belgium Cyprus Estonia Finland France Germany Greece Ireland Italy Latvia Luxembourg Malta Netherlands Portugal Slovakia Slovenia Spain

2 Outlook for Slovenia Investment should strengthen recovery, but public sector reform needed Finland Estonia Latvia Ireland Netherlands Germany Belgium Luxembourg France Italy Austria Slovenia Slovakia Portugal Spain Greece Malta Cyprus Published in collaboration with

3 Highlights Output in H1 continued to grow in line with our full-year GDP forecast of.6%, driven by a strong rise in exports as the main Eurozone markets picked up. The outlook is for steady acceleration of growth to 3.3% by 218, with domestic demand especially from private investment taking over from exports as the principal growth driver. Fixed investment recovery will be promoted from 215 by the easing of credit constraints after the 3.3b bank recapitalization, and rising demand reflected in faster inflation. However, comparatively high private sector saving and moderate rates of inward investment mean the recovery also relies on a revival of public consumption and the financing of an ongoing public sector deficit. GDP growth % GDP growth 1. 2% Consumer price inflation fell to zero in August, but we expect Slovenia to avoid deflation. In fact, we expect inflation to move above the Eurozone average in as a consequence of higher public debt and reduction of budget subsidies. But the continued fall in producer prices, down more than 1% on the year in H1, underlines the sustained cost reduction and productivity improvement in the private sector, helping export growth to maintain strong momentum. Reliance on Eurozone exports for an initial recovery, high public and private sector debt and an untested new coalition, mean that risks to the forecast remain high. But the return to growth improves conditions for further debt reduction, and for cross-party consensus on public sector reform. 215 The fiscal deficit is forecast to drop back to the pre-recapitalization level of just under 4% this year and narrow to less than 3% of GDP by 218. But the significant addition to public debt will force the newly elected Government to adhere to already planned privatizations and to continue reducing the fiscal deficit, mainly through spending cuts. 214 Unemployment 1. 6% Consumer prices % EY Eurozone Forecast September 214 Slovenia 1

4 Investment should strengthen recovery, but public sector reform needed Recovery will be slow and dependent on exports Slovenia s economy moved out of recession in Q4 213 and the bank recapitalization launched last December will promote sustainable recovery. However, we forecast relatively slow growth of.6% this year and then close to 2% a year in , before it rises to 3.3% by the end of the forecast period. The ongoing problem is one of low private investment, which leaves the recovery heavily dependent on exports, mostly within Europe 75% of Slovenia s exports went to the rest of the European Union (EU) in 213. The persistent current account surplus, seen rising to around 7% of GDP this year and falling only gradually over the next couple of years, is also symptomatic of subdued domestic consumption and continued difficulty in attracting inward investment. The household saving rate will remain high, even after balance-sheets have been repaired from the 28 1 asset price reduction, because of the erosion of social provisions as the Government tackles its persistent fiscal deficit. Foreign direct investment continues to be held back by relatively high labor costs and perceived labor-market inflexibility, which successive governments have found difficult to address. forcing the new Government to tackle long-delayed reforms The July election produced an ostensibly decisive change, with Miro Cerar s new party Stranka Mira Cerarja (SMC) capturing 35% of the vote. Cerar has promised to follow up the outgoing government s bank recapitalization and privatization programs with reforms of the financial system, corporate governance, labor law, health care and other public services, which are designed to attract more foreign investment. But even with 36 of the 9 parliamentary seats (the largest ever for a single party) Cerar will have to form a coalition with parties that are wary of public sector and welfare reform. Bank recapitalization costs add urgency to privatization The recapitalization of state-owned banks, to which the outgoing government committed 3.3b, and the 3m 5m that may have to be repaid to depositors of one bank after a European Court order, will Table 1 Slovenia (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 (US$ per ) EY Eurozone Forecast September 214 Slovenia

5 increase pressure on the new Government to reduce the fiscal deficit and privatize state-owned enterprises to pay down public debt. Cerar has confirmed that privatization is a priority, and pledged detailed plans by the end of the year. The new plan is expected to build on the list of 15 enterprises drawn up previously, though this leaves at least 6 other state-owned companies across a range of sectors. Cerar has suggested that some state enterprises might be subcontracted to private management, rather than sold outright. His opposition to privatization of strategic enterprises, voiced during the election campaign, has already been moderated in certain cases. but slow growth rules out fiscal deficit reduction at the EU s preferred pace One-off transfers to banks raised the fiscal deficit to 14.7% of GDP last year. Current growth prospects and budget plans suggest the deficit will fall back this year to around the 213 level, before the bank scheme was launched. Financing for the deficit is already in place until mid-215. But at 4.2% of GDP, the deficit will still be too high to be brought below the normal Eurozone ceiling (3%) through growth alone. We expect it to take until 218 for the deficit to narrow to less than 3% of GDP. Public debt rose to 79% of GDP in Q1 this year, up from 55% in Q1 213, largely because of bank recapitalizations. While still below the Eurozone average of 94%, public debt is substantially above the level likely to be viewed as sustainable for a small open economy, especially in view of the relatively high private sector debt. As the forecast shows little scope for bringing the public deficit below 3% of GDP within the forecast period, there is a risk that the EU will use an excessive deficit procedure to force faster reduction, focused on spending cuts. This poses a downside risk to the medium-term growth forecast, and could also lead to higher inflation if consumer subsidies fall more rapidly. Investment climate remains subdued Indexes of business and consumer confidence and capacity utilization all rose following the election, and annual industrial output growth quickened in Q2, to reach 4.1% in June. However, private investment is not expected to pick up until the new coalition is finalized in September and makes more detailed policy Figure 1 Real GDP growth Figure 2 Government budget balance % year 15 Forecast b 1 Forecast % of GDP Slovenia % of GDP (right-hand side) b (left-hand side) Eurozone Table 2 Forecast for Slovenia by sector (annual percentage changes in gross added value) GDP Manufacturing Agriculture Construction Utilities Trade Financial and business services Communications Non-market services EY Eurozone Forecast September 214 Slovenia 3

6 Investment should strengthen recovery, but public sector reform needed announcements. Even if these satisfy the currently high expectations, and the SMC s unprecedented strength allows it to force the necessary changes through parliament, the present spare capacity will delay a significant upturn of investment until later next year. Although the Eurozone growth outlook suggests that European Central Bank policy will remain very accommodative, Slovenia s own monetary conditions are set to remain tight next year, with caution over lending as balance sheets are strengthened further, and depositors are still attracted toward public debt. Slovenia s central bank governor has indicated that non-performing loans were still rising after the recapitalization, and that further growth was possible even after the transfer of troubled assets to a state-owned bad bank was completed in May. Even if the return to growth arrests the rise in banks bad debts, the forecast recovery is likely to be too slow to reduce them substantially in , or to induce a significant pickup in new lending. Doubts on the durability of competitiveness gains The constraints on household consumption and business investment in leave recovery largely dependent on exports, which are forecast to continue to grow faster than imports until 215. The trade boost is being strengthened by reductions in relative costs, with industrial producer prices falling by an average of 1.2% on the year in the first seven months of 214. Risks remain on the downside, however, because of the disappointing short-term outlook for major trading partners, with negative growth now seen in Russia this year and Italy slipping back into recession in Q2. Recent export-boosting cost improvements may be difficult to sustain, with producer and consumer subsidies falling as the fiscal deficit is tackled, and the economy vulnerable to energy price increases that may be exacerbated by the conflict in Ukraine. Consumer price inflation eased to.3% in July, but we expect Slovenia to avoid deflation. Indeed, we expect inflation to move above the Eurozone average in as a consequence of higher public debt and cuts in budget subsidies. Annual hourly wage growth of 3% in Q1 was twice the Eurozone average, partially reversing the downward trend achieved in the early part of 213. And the still-slow growth of output raises the risk of pay rising ahead of productivity. The early acceleration of wage growth, although supportive for consumption and industrial sales if exports remain subdued, highlights the importance of the labor market reforms the new prime minister has proposed. But these may be difficult to deliver given the lack of similarly committed coalition partners. Figure 3 Private consumption and total fixed investment Figure 4 Current account balance % year 3 Forecast US$b 4 Forecast % of GDP Total fixed investment % of GDP (right-hand side) Private consumption US$b (left-hand side) EY Eurozone Forecast September 214 Slovenia

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