Eurozone EY Eurozone Forecast September 2014 Austria Belgium Cyprus Estonia Finland France Germany Greece Ireland Italy Latvia Luxembourg Netherlands Portugal Slovakia Slovenia Spain
Outlook for Stronger domestic activity lifts growth forecast Finland Estonia Latvia Ireland Netherlands Germany Belgium Luxembourg France Italy Austria Slovenia Slovakia Portugal Spain Greece Cyprus Published in collaboration with
Highlights Our forecast for growth in this year has been raised to 2.2% from the 1.8% we projected in June. Domestic activity is building stronger momentum and fixed investment picked up sharply in H1 2014. Continued robust domestic activity, combined with strong exports of services should support growth of close to 2% a year over the medium term. Unemployment fell to 5.7% in July. This is the third-lowest rate in the Eurozone behind Austria and Germany and around half the average for the Eurozone as a whole. The firm labor market should help to support solid growth in private spending over the medium term. Additionally, other favorable factors supporting consumer demand include strong tourist spending and lower utility prices. As part of the European Union (EU) Energy 2020 program, is committed to reducing its dependence on fossil fuels and lowering its energy costs. Construction has begun on a new gas-fired power plant, due to open next year, which will provide with 200 megawatts of energy capacity. The sale of a 33% stake in the main provider of energy generation and distribution earlier this year will help to reduce the debt held by state-owned enterprises. GDP growth 2014 2. 2% GDP growth 2. 3% The services sector will continue to outgrow industry, led by tourism and financial services. In addition, services exports have strong momentum and this is expected to drive a modest current account surplus over the forecast period. Tourist arrivals rose by close to 10% in H1 2014, reflecting recent efforts by the authorities to attract tourists all year round and from a wider range of countries. Banking, alternative investment funds and online gaming will continue to be important contributors to growth in. s competitiveness is a key factor that needs to be further strengthened over the longer term, to ensure that the key tourism and financial sectors are able to sustain solid growth. Having peaked in 2010, the working-age population is already falling, although steady longer-term growth should underpin stable pension spending. Though it has picked up this year, fixed investment remains around a third below its 2007 high. Both of these factors are likely to constrain output in the medium term, preventing the economy from growing by more than 2%. 2015 2014 Unemployment 5. 9% Consumer prices 2014 1. 0% EY Eurozone Forecast September 2014 1
Stronger domestic activity lifts growth forecast should outpace the Eurozone this year and next We have raised our growth projection for this year to 2.2% from the 1.8% we forecast in June. Domestic activity is gathering momentum and fixed investment picked up sharply in the first half of 2014, growing by 18.6% from a year earlier in Q1 and by 13.3% in Q2, driven by nonresidential construction and machinery. While investment growth will moderate to a more sustainable pace in coming quarters, we expect it to maintain reasonable momentum, growing by about 2.5% a year over the medium term. Robust domestic activity, combined with strong services exports, should support GDP growth of close to 2% a year in the medium term. Table 1 Firm labor market to support robust private spending Unemployment fell to 5.7% in July 2014, the third-lowest rate in the Eurozone behind Austria and Germany and around half the average for the Eurozone as a whole. Over the medium term, this should help to support solid growth in private spending of close to 2% a year. We expect unemployment to remain below 6% over the forecast period, which compares favorably with the Eurozone overall, where unemployment will remain above 10% over the same time. This should support robust growth in real wages over the medium term. Additionally, other factors supporting consumer demand include tourism (spending by tourists rose by close to 10% in the first half of 2014) and lower utility prices, which were cut earlier in the year. Investment is rising, particularly in energy As part of the EU Energy 2020 program, is committed to reducing its dependence on fossil fuels, cutting its energy costs and increasing its usage of renewable energy sources. Construction has begun on a new gas-fired power plant, due to open in 2015, which will provide with 200 megawatts of energy capacity (and associated liquefied natural gas facilities). A high-voltage cable link to Sicily connecting to mainland Europe s electricity network is also being completed. Other new ventures will turn energy into an export sector, supplying alternative energy facilities to other EU locations. Increasing use of gas and renewable power helped s carbon emissions drop by 6.8% in 2013, better than the EU average reduction of 2.5%. (annual percentage changes unless specified) 2013 2014 2015 2016 2017 2018 GDP 2.4 2.2 2.3 1.9 1.9 1.8 Private consumption 1.8 1.9 2.3 2.2 2.0 1.9 Fixed investment 3.9 2.8 2.9 2.7 2.5 2.3 Stockbuilding (% of GDP) 0.8 1.4 1.3 1.2 1.1 1.0 Government consumption 0.2 0.6 1.3 1.4 1.5 1.7 Exports of goods and services 5.5 1.0 4.2 3.3 3.0 3.0 Imports of goods and services 5.1 1.1 4.1 3.3 3.0 3.0 Consumer prices 1.0 1.0 1.5 1.9 2.3 2.3 Unemployment rate (level) 6.4 5.9 5.8 5.7 5.6 5.6 Current account balance (% of GDP) 0.9 2.8 2.4 2.2 1.7 1.3 Government budget (% of GDP) 2.8 2.8 2.7 2.6 2.4 2.0 Government debt (% of GDP) 72.6 74.0 73.9 73.7 73.1 72.2 ECB main refinancing rate (%) 0.5 0.1 0.1 0.1 0.2 0.8 Euro effective exchange rate (1995 = 100) 120.8 123.6 119.9 118.8 118.8 118.4 Exchange rate (US$ per ) 1.33 1.34 1.27 1.24 1.24 1.23 2 EY Eurozone Forecast September 2014
In August, and China signed a five-year medium-term cooperation plan, the first agreement of this type that China has made with a European country. The plan will encourage greater foreign direct investment and trade between the two countries, particularly in energy, financial services and tourism. Earlier this year, the sale of a 33% stake in the major provider of energy generation and distribution will help to reduce substantially the debt held by state-owned enterprises. Services will continue to perform better than industry In 2000, around 25% of s GDP came from industry and another quarter from finance, insurance, information technology, real estate, and professional, scientific and technical activities. By 2013, the share of industry in GDP had dropped to 13%, while the share from finance and other professional service sectors had risen to about 33%. We expect the services sector to continue to outgrow the industrial sector in 2014 18. Meanwhile, manufacturing remains very weak, falling by 5.8% on the year in Q1 2014 after a large decline in 2013. And although stronger global demand should start to encourage higher output, services have become the key driver of growth in, led by tourism and financial services. Tourism and finance lead services growth Tourist arrivals to rose by close to 10% on the year in the first half of 2014, similar to the pace seen in 2013. This strength reflects efforts by the authorities in recent years to attract tourists outside the traditional summer peak period (in order to reduce congestion and boost employment) and to attract people from a wider range of countries. Tourist arrivals from outside the EU rose by more than 20% in 2013 and the first six months of 2014, outstripping growth in tourists coming from within the EU. Last year, 83% of tourists still came from the EU, but the share is gradually falling. In the longer term, complementary investments in cultural and creative industries are expected to feed into tourism from Europe and the Middle East and North Africa, especially as Valletta will be one of the two European Capitals of Culture in 2018. Figure 1 Real GDP growth Figure 2 Inflation % year 8 Forecast % year 6 Forecast 6 5 4 4 2 3 0 2 2 4 Eurozone 1 Eurozone 6 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 0 1990 1994 1998 2002 2006 2010 2014 Source: Oxford Economics; World Bank. Table 2 Forecast for by sector (annual percentage changes in gross added value) 2013 2014 2015 2016 2017 2018 GDP 2.4 2.2 2.3 1.9 1.9 1.8 Manufacturing 9.6 1.1 1.0 1.1 1.4 1.3 Agriculture 2.4 0.9 0.6 0.5 0.5 0.5 Construction 2.9 2.1 2.4 2.1 1.9 2.0 Utilities 238.5 2.6 2.2 1.6 1.5 1.4 Trade 0.6 1.9 1.7 1.0 0.7 0.5 Financial and business services 5.9 3.6 3.2 2.7 2.6 2.5 Communications 10.8 4.7 4.2 3.7 3.6 3.4 Non-market services 2.7 1.9 2.0 1.9 1.9 1.9 EY Eurozone Forecast September 2014 3
Stronger domestic activity lifts growth forecast Banking, alternative investment funds and online gaming will continue to be important contributors to service exports, and to the overall external surplus, because of their comparatively low import requirements. The banking sector has been largely unaffected by problems elsewhere (including Cyprus) because its domestic role is mainly confined to intermediation (with loans largely financed by deposits). Banks total assets and corresponding liabilities are also chiefly external, representing a fee-based service whose revenue is not viewed as vulnerable to shocks such as interest rate rises. Strong services growth is set to boost inflation from 1% last year, and just 0.6% in July this year, to 1.5% in 2015 and 1.9% in 2016. After falling by 0.2% in 2013, prices of services have risen this year, pushed by stronger demand, growing by 1.9% in July. We expect price pressures to persist in services, driven by solid activity. A modest current account surplus Service exports, particularly tourism and financial services, have strong momentum and we expect these to underpin the current account surplus. The ongoing improvement in the country s net external position that has resulted from this will help medium-term GDP growth to remain steady, at close to 2% a year, by ensuring is not reliant on capital inflows to provide external financing. It also means that the forecast growth of private consumption is linked to increased real incomes and not to a reduction of household saving rates. However, net portfolio outflows 2.3b in 2013 are expected to continue. This may constrain the pace of medium-term growth by channeling a significant proportion of household saving away from domestic investment. Fiscal consolidation to continue The fiscal deficit narrowed to 2.8% of GDP last year, helped by tax revenues growing by 10.2% on the year (led by stronger valueadded tax receipts) compared with a rise of just 2.7% in 2012. s central bank expects the deficit to shrink to 2.7% this year. Measures proposed in the 2014 budget are expected to boost indirect tax revenues through higher excise duties and the introduction of a new tax regime on rental income. We forecast that the deficit will shrink to 2% of GDP by 2018, driven by higher revenue growth. Outlook is positive, but risks remain Near-term risks mainly relate to investment, with possible delays in the construction of the new power plant posing a downside risk to growth prospects. The medium-term outlook for tourism and financial services is bright, but competitiveness in such sectors needs to be ensured. According to Eurostat, s average hourly labor costs of 12.8 in 2013 are only around 60% of those in Spain ( 21.1). But real labor productivity per person employed rose by just 1.2% from 2005 to Q2 2014. In contrast, productivity in Spain rose by almost 14% over the same period. In the 2014 budget, wages were increased by 3.49 a week to follow inflation. However, many employers believe increases should be linked to performance rather than inflation, as this might encourage greater productivity. The aging population is another risk. Having peaked in 2010, the working-age population is already falling and fixed investment remains around a third below its 2007 high. Both factors are likely to constrain s output in the medium term, keeping growth just below 2%. Figure 3 Private consumption and total fixed investment % year 40 Forecast Figure 4 Unemployment rate % 13 Forecast 30 20 Private consumption 12 11 10 Eurozone 10 9 8 0 10 7 6 20 Total fixed investment 5 4 30 1996 2000 2004 2008 2012 2016 3 2000 2003 2006 2009 2012 2015 2018 4 EY Eurozone Forecast September 2014
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