Eurozone EY Eurozone Forecast March 2015 Austria Belgium Cyprus Estonia Finland France Germany Greece Ireland Italy Latvia Lithuania Luxembourg Malta Netherlands Slovakia Slovenia Spain
Outlook for Modest growth continues, but GDP still below pre-crisis peak Finland Estonia Latvia Lithuania Ireland Netherlands Germany Belgium Luxembourg France Italy Austria Slovenia Slovakia Spain Greece Malta Cyprus Published in collaboration with
Highlights The recovery in that started in early 2013 is continuing. GDP grew by 0.5% on the quarter in Q4 2014, following outturns of 0.3% in Q2 and Q3, giving overall 2014 growth of 0.9%. We forecast growth of 1.7% in 2015 and 1.4% in 2016, and then about 1.2% a year in 2017 19. The economy will benefit from lower oil prices and low inflation supporting real wages. But private consumption will remain subdued as a consequence of a fragile labor market. Indeed, the unemployment rate stabilized at 13.5% in Q4 after six consecutive quarters of improvement, nearly double the rate prior to the crisis. Exports will be strong in 2015, increasing by 5.5%. As well as support from stronger growth in Spain, which takes around 20% of its merchandise exports, will benefit from a lower euro, down by over 20% since June last year. Moreover, the Government could gain some fiscal room from low government bond yields and the planned quantitative easing by the European Central Bank. GDP growth 2015 1. 7% GDP growth 1. 4% However, the pace of the recovery in the years ahead will remain dependent on the deleveraging process. The household sector has made good progress in reducing debt. But public and corporate indebtedness remain high. This means that investment growth will remain low. After a cumulative fall of 37% in 2009 13, investment rose by just over 2% in 2014. We expect it to grow 3% in 2015 and then just over 2.5% a year in 2016 19, underperforming most Eurozone peers. experienced deflation in 2014, and prices in January were 0.4% down on a year earlier. The breakdown shows that the latest fall reflected a decline in energy inflation, while core inflation remained in positive territory. Assuming that oil prices remain at around the current levels, will see a second year of deflation in 2015. 2016 2015 Unemployment 13. 1% Consumer prices 2015 0. 4% EY Eurozone Forecast March 2015 1
Modest growth continues, but GDP still below pre-crisis peak Modest growth is set to continue is set to continue the recovery that started in early 2013. GDP grew by 0.9% in 2014, after three consecutive years of decline. The pace is expected to accelerate at the start of 2015 thanks to the impact of lower oil prices and the weaker euro boosting exports. We forecast that GDP will rise by 1.7% in 2015 and 1.4% in 2016. But with domestic demand likely to remain constrained for some years by fiscal austerity, high corporate indebtedness and a fragile labor market, growth is expected to be about 1.2% a year in 2017 19. Consumption to show some improvement Consumption posted a very strong increase of 1.3% on the quarter in Q3 2014, but it is likely to have seen a setback in the final months of 2014. The central bank s coincident indicator for consumption fell slightly in Q4, and Eurostat figures show that Q4 retail sales, in volume terms, fell 2.4% from the Q3 average. However, consumers are expected to benefit in H1 2015 from the sharp fall in oil prices, with private consumption likely to increase by 0.3% in both Q1 and Q2. Moreover, the consumer confidence measure published by the central bank remains at a three-year high. Although the low level of inflation will be a positive factor for private consumption, the latter will be subdued as a consequence of the fragile labor market. The jobless rate fell during 2014, but the improvement leveled off in H2, with the harmonized unemployment rate sticking close to 13.5%. This is almost double the pre-crisis level and around 2 percentage points above the Eurozone average. And although the decline in the jobless rate in Q1 Q3 2014 was mostly driven by increases in employment, the biggest improvement was in the tourism-related industries, usually associated with below-average salaries. Furthermore, an expected increase in the participation rate in the future means that the improvement in the unemployment rate will be very gradual. Lower inflation will mean higher real personal disposable incomes. But consumers will probably try to continue to strengthen their financial conditions and restore their stock of savings, which were run down during the crisis, before they start to spend more robustly. Moreover, this year s budget still sees a reduction in the public sector wage bill, with possible negative effects on private consumption. We still expect private consumption to continue its recovery, growing by an albeit slower 1.2% this year, after a 2% increase in 2014. Looking ahead, private consumption will grow at a slower pace, stabilizing at just below 1% a year over the forecast period. Table 1 (annual percentage changes unless specified) 2014 2015 2016 2017 2018 2019 GDP 0.9 1.7 1.4 1.3 1.2 1.2 Private consumption 2.0 1.2 0.9 0.9 1.0 0.9 Fixed investment 2.1 3.0 2.9 2.5 2.4 2.4 Stockbuilding (% of GDP) 0.8 0.7 0.5 0.5 0.5 0.4 Government consumption 0.6 0.9 0.9 1.3 1.2 1.2 Exports of goods and services 2.6 5.5 5.2 4.0 3.4 3.0 Imports of goods and services 5.6 3.4 4.3 3.9 3.3 2.9 Consumer prices 0.2 0.4 0.9 1.2 1.4 1.7 Unemployment rate (level) 14.1 13.1 12.0 11.1 10.6 10.3 Current account balance (% of GDP) 0.5 1.9 2.4 2.4 2.4 2.1 Government budget (% of GDP) 4.6 3.0 2.4 1.9 1.4 1.0 Government debt (% of GDP) 130.2 130.1 129.1 127.8 126.1 124.1 ECB main refinancing rate (%) 0.1 0.1 0.1 0.1 0.1 0.3 Euro effective exchange rate (1995 = 100) 123.6 108.6 104.7 105.4 106.6 108.0 Exchange rate (US$ per ) 1.33 1.07 1.01 1.01 1.02 1.04 Source: Oxford Economics. 2 EY Eurozone Forecast March 2015
Investment still constrained by high debt Investment started to recover in 2014 after five years of decline that saw the aggregate level fall by over 35% compared with 2008. This improvement was associated with an increase in business investment rather than housing investment, which is expected to have declined for the sixth consecutive year in 2014. The recovery in fixed investment has been much more moderate in the current cycle than in previous ones. The reason for this is associated with the high level of corporate indebtedness. In fact, while the household sector has made good progress in reducing debt, public and corporate indebtedness remains critical. The debt-to-gdp ratio of non-financial corporations has eased only slightly and, at 146% in Q3, remains very close to the 150% peak seen in 2012. s corporate debt as a ratio of GDP is one of the highest in the Eurozone. It is around 25% above the Eurozone average. Furthermore, according to the Organisation for Economic Co-operation and Development, over 40% of companies with bank loans are unable to cover their debt service costs from operating income. This means that the deleveraging process will only be gradual. But recovery in corporate investment should continue in the coming years, supported by firms improving demand expectations and better financing conditions. After the steep drop in 2009 13, total fixed investment is estimated to have risen 2.1% in 2014. We expect it to rise 3% in 2015 and then just over 2.5% a year in 2016 19, underperforming most Eurozone peers. Furthermore, ongoing fiscal consolidation is expected to affect public investment. We expect the public investment-to-gdp ratio to stabilize in the 2015 budget. Exports to remain supportive As with other peripheral countries, has undergone a huge external adjustment. Its current account deficit, equal to about 12% of GDP in 2008, swung into a small surplus in 2013. After a return to temporary deficit in Q1 2014, the current account was back in surplus in Q2 and Q3. Data for October and November suggests that this trend continued in Q4. Helped by the impact of sharply lower oil prices on the import bill, we expect the current account surplus to rise to 1.9% of GDP this year from an estimated 0.5% in 2014. We see this positive trend continuing in 2016, helped by the weaker euro, which has fallen by more than 20% against the US dollar since June last year. This should help s competitiveness with non-eurozone economies, which account for around 40% of its merchandise exports. Figure 1 Corporate sector deleveraging Figure 2 Government balance and debt % of GDP 150 140 Forecast % of GDP 2 0 Government balance (left-hand side) % of GDP Forecast 140 130 120 2 110 130 Eurozone 4 100 90 120 6 80 110 8 10 Government debt (right-hand side) 70 60 50 100 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 Source: Oxford Economics; Haver Analytics. 12 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018 Source: Oxford Economics. 40 Table 2 Forecast for by sector (annual percentage changes in gross added value) 2014 2015 2016 2017 2018 2019 GDP 0.9 1.7 1.4 1.3 1.2 1.2 Manufacturing 1.3 3.1 1.4 1.0 1.1 1.1 Agriculture 4.0 0.3 0.3 0.3 0.2 0.1 Construction 4.0 1.3 1.1 0.6 0.6 0.7 Utilities 0.7 2.7 1.6 1.6 1.5 1.5 Trade 1.5 2.4 1.6 1.2 1.2 1.2 Financial and business services 0.4 2.2 1.7 1.5 1.4 1.4 Communications 1.6 2.3 2.2 2.2 2.2 2.2 Non-market services 0.1 0.5 1.0 1.3 1.2 1.2 Source: Oxford Economics. EY Eurozone Forecast March 2015 3
Modest growth continues, but GDP still below pre-crisis peak Another positive factor underpinning the growth in exports is strengthening demand coming from Spain, which is s top export destination, taking around 20% of its merchandise exports. In addition, tourism should continue to provide a boost to services exports. The number of visitors to rose by 11% in the first 11 months of 2014. On the downside, it should be noted that Angola, which takes more than 5% of s merchandise exports, is likely to cut its imports as a result of the impact on its economy of sharply lower oil prices. After a fragile start to last year, exports are estimated to have grown by only 2.6% in 2014. However, we expect export growth of over 5% in both 2015 and 2016, before it stabilizes at around 3.5% a year in 2017 19. Deflation set to last the year as energy prices stay low The annual inflation rate (on the harmonized measure) fell to 0.4% in January. The breakdown showed that the latest fall reflects a decline in energy inflation, while core inflation remained in positive territory. Assuming that oil prices remain around US$55 a barrel, will experience a second year of deflation, with prices falling by an expected 0.4%. However, core inflation will remain positive, preventing a move into a deflationary spiral. Even so, inflation is expected to average just 0.9% in 2016 and will remain well below the ECB s target level of 2% throughout the forecast period. Banking system still fragile, but healthier than before Last year, the financial system recovered from the first ever application of the EU s resolution mechanism to a leading commercial bank. The publication of the ECB s asset quality review late in 2014 indicated that the banking system was healthier than in 2013. Meanwhile, the latest ECB lending survey shows some, albeit small, improvement in credit standards for non-financial corporations. Credit to non-financial companies is showing signs of bottoming out, but it remains more than 5% lower than last year. Bank interest rates, for both mortgages and company loans, are down by more than 20 basis points since the start of 2014, but remain high compared with the Eurozone average. Furthermore, the financial system will benefit from the very low level of long-term government bond yields, currently around 2.4%, about 250 basis points lower than in January 2014. This trend will probably be reinforced by the ECB s quantitative easing program, which will buy government bonds equal to more than 10% of s outstanding debt over the next 18 months. However, the improvement will come through very slowly, with credit constrained by weak profitability and an increasing level of bad loans. Currently, the bad loans ratio is 11.2%, up from 9.2% in 2012. Subdued prospects in the medium term, with some risks Even though the economy is forecast to grow modestly, still faces some significant risks, including the threat of more prolonged deflation. With regard to the public sector, has made a very strong adjustment, and it seems that the Government attained its 4% deficit target (excluding one-off expenses) for 2014. For 2015, a deficit below 3% is planned, with the main contribution coming from cuts in expenditure, in particular in the compensation of employees. Meanwhile, there is an upside risk that consumer spending growth could be above our current forecast if the labor market continues to firm-up more quickly than expected. This would reinforce the favorable impact of sharply lower oil prices on real personal disposable incomes. Figure 3 Typical interest rates on loans to businesses % 9 8 Figure 4 Consumer price inflation % year 4 3 Forecast 7 Greece 2 6 5 4 Spain 1 0 Germany 3 France 2 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: European Central Bank. 1 2 2007 2009 2011 2013 2015 2017 2019 Source: Oxford Economics. 4 EY Eurozone Forecast March 2015
Eurozone Forecast December 2014 10 4.0 100 2.0 2.8 80 1.4 1.6 0.2 60 0.8-0.6 0.4 2.0 40 0.2-1.5 0.0-2.3 20-0.8-0.4-2.0-3.2-4.0 7.2 4.4 1.6-1.2-0.6-0.4-0.10.10.4 2.0 0.4 4.0 0.8-1.20.4 0.8 6.0 1.3 1.6 2.8 8.0 1.6 1.7 10 2.4 5.2 4.4 3.2 7.6 7.2 4.0 10 10 4.0 2.2 Macroeconomic data and analysis at your fingertips Learn more about the EY Eurozone Forecast at ey.com/eurozone: Download the latest EY Eurozone Forecast and individual forecasts for the 19 member states. Use our dynamic Eurochart to compare country data for the next five years. Use the trend analysis tool to compare forecasts for specific economic indicators across the 19 Eurozone nations. You can select multiple countries to display on the chart. Trend analysis Country Germany Government Debt France Italy Spain Government Budget Netherlands Belgium Austria Current Account Balance Greece Finland Ireland Unemployment rate Slovakia GDP Private Consumption Fixed Investment Stockbuilding Government Consumption Luxembourg Slovenia C Clear selection Consumer Prices Exports of Goods and Services Imports of Goods and Services Select a year to compare: 2013 2014 2015 2016 2017 2018 EY Eurozone Forecast: outlook for financial services Winter 2014 The EY Eurozone Forecast: outlook for financial services explores the implications of the latest Eurozone economic forecasts for banks, asset managers and insurers. Our latest forecast sees improving GDP, growth in consumer spending and falling unemployment across the Eurozone. Learn more and download the report at ey.com/fseurozone. EY s attractiveness survey: Europe 2014 EY Rapid-Growth Markets Forecast: July 2014 EY s Rapid-Growth Markets Forecast provides analysis of 25 emerging economies. Our latest report explores the role of urbanization in the rapid-growth markets. Learn more and download the report at ey.com/rapidgrowth. EY s attractiveness surveys are annual reports that examine the attractiveness of selected nations and regions to foreign investors. EY s attractiveness survey: Europe 2014 finds that 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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