EY Forecast June 215 rebalancing recovery
Outlook for Renewed external funding to support growth, but is a worry Published in collaboration with
Highlights The ending of capital controls and the approval of key insolvency laws should clear the way for a resumption of funding under b international bailout agreed in March 213. This will bolster prospects for a return to growth. Despite short-term headwinds from the recession in Russia and fresh uncertainty about a possible Greek exit, GDP grew 1.6% on the quarter and.2% on the year in Q1 this year. As a result, after three years of decline, GDP is now forecast to grow.3% in 215. The latest policy developments, expected to trigger a resumption of International Monetary Fund (IMF) and European Commission (EC) funding, which had been suspended since October 214, may be an important milestone, as moves toward an exit from its bailout and a return its successful 1b international bond issue at the end of April. Growth prospects for 216 will be assisted by ongoing recovery in Europe and an expected return to growth in Russia, after the recession there slows growth of tourism and other services this year. There are already signs of stronger tourism after a sharp setback in Q4 214, with the number of Russian visitors (25% of total visitors) now picking up again. (with prices falling 1.7% on the year in April), due to lower oil prices and constraints on consumer spending from high unemployment, could hold back investment recovery in 215. But a return 1% in 216 and then climbing to about 2% a year in 217 19, should help by reducing real interest rates and the burden of debt. GDP growth 215. 3% GDP growth 216 1. 3% The Government has also announced some modest economic stimulus measures, including infrastructure spending, aimed at creating new jobs (the unemployment rate remains high at about 16%) and stimulating domestic demand. Together with the resumption of external funding, we now forecast stronger GDP growth of 1.3% in 216, followed by a steady pickup to 2.2% in 219. 215 Unemployment 16. 2% Consumer prices 215. 3% EY Forecast June 215 1
Renewed external funding to support growth, but is a worry Return to GDP growth seen during 215 With the move to end capital controls in April and parliamentary approval of key legislation covering insolvency and foreclosure, has taken a big step toward normalizing the banking sector and a return to market-based financing, while at the same time probably enabling resumption of funding under the b international bailout agreed in March 213. As a result, the economy is expected to return to expansion during 215, with GDP growth for the year as a whole at.3%, after a 2.3% contraction in 214 and an even larger 5.4% drop in 213. Figures for first quarter GDP were reasonably encouraging, showing a 1.6% rise from the last quarter of 214 and.2% growth from a year earlier, despite the expected impact of the move into recession in Russia on tourism and on other services such as banking. However, the tourism data in the first quarter was better than expected after a very weak final three months in 214, so there are hopes that the continuing gradual recovery in the European Union (EU) will feed through into better tourism results as the year progresses. Continuing problems in Russia will slow the improvement in exports of goods and services, which cut the current account deficit to 5.1% of GDP in 214, a sharp improvement on over 6% in 212 and double-digit deficits in 28. And another factor weighing on the economy will be restraint on public spending as the bailout conditions imposed by the IMF and the EU require the Government to achieve a primary budget surplus in 216. As a result, and despite the expected resumption of bailout funding from the IMF and EU, investment growth will remain subdued in 215, falling by 4% after an 18.8% fall in 214 (and declines in the five years prior to that). At the same time, consumer demand will remain subdued, held down by the need for fiscal austerity and the high unemployment rate, which is expected to remain around 16% in 215. Private consumption is forecast to rise by about.3% for a second successive year in 215. Table 1 (annual percentage changes unless specified) 214 215 216 217 218 219 GDP 2.3.3 1.3 1.4 1.8 2.2 Private consumption.4.3.9 1.1 1.6 1.9 Fixed investment 18.8 4. 3. 4.3 5.5 6.5 Stockbuilding (% of GDP) 1.4 2.2 2.3 2.1 1.8 1.5 Government consumption 8.7.8.6.5 1. 1.5 Exports of goods and services 5.7.4 1.5 3.2 3.6 4. Imports of goods and services 8.1.4.9 2.9 3.5 3.9 Consumer prices.3.3 1. 1.8 2. 2.2 Unemployment rate (level) 16.1 16.2 15.3 13.8 11.9.1 Current account balance (% of GDP) 5.1.5.3.3.4.6 Government budget (% of GDP) 8.8 2.9 2.4 2.2 2.1 1.2 Government debt (% of GDP) 7.5 9.8 9.7 8.4 6.5 3.1.1.1.1.1.2.5 Euro effective exchange rate (1995 = ) 123.9 114.4 113.1 113.3 114.7 116.2 Exchange rate (US$ per ) 1.33 1.11 1.7 1.6 1.9 1.11 2 EY Forecast June 215
A pickup to growth of about 1.8% year expected in 217 19 But an easing of budgetary pressures from 216 will encourage a pickup in domestic demand. At the same time, exports and tourism should begin to improve more strongly as demand continues to rise and the Russian economy returns to growth. These factors should lead to a fall in unemployment and a rise in personal incomes, helped also by lower world oil prices, in turn leading to stronger private consumption growth. As a result, GDP growth is now seen at 1.3% in 216, picking up to 1.8% a year on average in 217 19. But the growth forecast remains fairly subdued, despite the severity of the 28 9 recession and the further three-year downturn in 212 14. GDP in real terms in 214 was still some % below the pre-crisis 28 level, and the latter is not expected to be regained until 22. And in the short term at least, the risks to our forecast remain on the downside, chiefly due to the impact of the recent rise in uncertainty about Greek membership and the recession in Russia. Pressure on banking and tourism now easing The end of capital controls and the passage of new insolvency laws, enabling foreclosure legislations demanded by Coreign creditors to come into force, mean that the banking sector is in a much stronger position to raise capital and to handle the problem of bad debts (which surged to over 5% of all private sector loans due to the recession and the climb in the jobless rate to over 16%). Indeed, successfully placed a 1b international bond issue at the end of April, a clear sign of a continuing return to normal financing conditions. As a result, and coupled with the expected resumption of official lending, which in turn will encourage more private sector capital inflows, improvement in the balance of payments position will encourage faster growth. In addition, after a very weak performance in the final three months of 214 due to the downturn in Russia, tourism has shown some unexpected strength in the opening months of this year. The steady recovery in the EU economy appears to be offsetting lower visitor numbers from Russia, so we now expect less weakness in exports of goods and services in 215. Together with continued weak imports due to subdued domestic demand, this in turn may lead to a stronger current account position than previously expected and hence net exports imposing less of a drag on growth. Figure 1 Real GDP growth % year 8 Forecast Figure 2 Misery index* % 18 6 4 16 14 12 2 2 4 8 6 4 2 6 2 22 24 26 28 2 212 214 216 218 21 23 25 27 29 211 213 215 Source: Eurostat; Haver Analytics. Table 2 Forecast for by sector (annual percentage changes in gross added value) 214 215 216 217 218 219 GDP 2.3.3 1.3 1.4 1.8 2.2 Manufacturing 1.5 9.7 3.2 4.7 4. 3.6 Agriculture 6.3 5.1 2.6 2.7 1.8 1.2 Construction 22.4.6 2. 2.2 2.1 3.4 Utilities..8 2. 1.7 2. 2.1 Trade.2.6 1.7 1.3 1.6 1.9 Financial and business services 1.8 1.7 2.6 2.3 2.5 2.8 Communications 6.2 3. 3.3 2.7 3. 3.2 Non-market services.8 1.6 1.2.4.5 1.3 EY Forecast June 215 3
Renewed external funding to support growth, but is a worry Recent policy improvements and international funding developments mean that Cypriot bonds will become eligible for the European Central Bank s quantitative easing program and will lead to improving international creditworthiness. Rating agency Standard and Poor s has raised the outlook on B+ sovereign credit rating to positive, holding out the hope of an upgrade in the next year if the planned budget consolidation process remains on track. However, the situation in still presents some uncertainty about the budgetary outlook. Any further serious weakness in the Greek economy would hit via the close traditional trade and financial links between the two nations. In turn this would dent market confidence and could delay the expected improvement in public finances. Despite the resumption of funding under the b IMF and EU support program, the Government has to continue to meet its agreed fiscal deficit reduction targets. The budget deficit narrowed to 4.9% of GDP in 213, before widening to 8.8% in 214, well above the target ceiling of 4.3% of GDP. The primary deficit which excludes debt repayments is officially projected at just 1.6% of GDP in 215, before it swings into a surplus of 1.2% of GDP in 216. Initial talk of a primary surplus this year has faded as the Government recognizes that austerity fatigue is mounting. As a result, the Government has announced some modest economic stimulus measures, including infrastructure spending, aimed at creating new jobs and stimulating domestic demand, while at the same time maintaining social programs and ensuring full use of EU co-funding for various projects. And the urban development incentives, granted two years ago to support the construction and tourism sectors, are being extended. membership means that still needs internal wage and cost reduction to maintain export competitiveness. Average hourly wages fell 2.8% in 214, extending the reduction seen since the fourth quarter of 212, compared with a rise of just over 1% for the as a whole. Together with the high unemployment rate, expected to remain at around 16% in 215, this will maintain the squeeze on household spending. Consumer spending is expected to start growing again from 216 onwards, as the jobless rate falls back toward % by 219 and the decline in wages comes to an end. Falling labor costs and weak consumer demand brought inflation down sharply in 213 and then resulted in an average decline of.3% in 214 (on the EU-harmonized basis). The annual inflation rate picked up in the third quarter last year due to indirect tax increases, but then fell back as oil prices plunged. Given the trend in the and the impact of lower oil prices, there was further weakness in the early months of 215, with prices falling 1.7% on the year in April. Reflecting the latest declines, our forecast for inflation in 215 is still only a little above zero. But we still expect a gradual pickup to about 2% in 218 19, above the average, lifted by value-added tax increases this year and then by gradually rising oil prices and strengthening domestic demand. This expected rise should promote investment and consumption recovery without provoking higher wage pressures because of the continued threat from high unemployment. Figure 3 Unemployment rate % 18 16 Forecast Figure 4 b % of GDP.5 Forecast 5 % of GDP 14 12.5 5 1. 8-1.5 15 6 2. 2 4 2 2.5 b 25 2 22 24 26 28 2 212 214 216 218 3. 21 23 25 27 29 211 213 215 217 219 3 4 EY Forecast June 215
in ia 4. 4. 3.2 8 3. 2.4.4 6 2. 4. -.5 1.5 2. 4 1. -1.4. -2.2 2.7. -2. -3.1-4. 7.6 5.2 2.8.4 -.1.2.4.7 1. 2..1 4..31.72..6 6. 1..7 4. 8. 3.8 1.5 1.2 6. 2. 5.8 1.6 8. 7.9 2. 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: 213 214 215 216 217 218 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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