Eurozone Ernst & Young Eurozone Forecast June 2013 Austria Belgium Cyprus Estonia Finland France Germany Greece Ireland Italy Luxembourg Malta Netherlands Portugal Slovakia Slovenia Spain
Ernst & Young Eurozone Forecast June 2013 Outlook for Germany 17 Eurozone countries Finland Estonia Ireland Netherlands Belgium France Germany Luxembourg Austria Slovenia Slovakia Italy Spain Portugal Greece Malta Cyprus Published in collaboration with
Highlights Temporary weakness, but strong mediumterm economic fundamentals Germany s exports and GDP have been hit by emerging market growth weaker than we previously expected and stiffer competition from the depreciating Japanese yen. We now expect to see GDP growth at 0.3% for 2013 somewhat lower than forecast in our March report. However, a number of factors point to sound fundamentals, giving us confidence that Germany will remain one of the better-performing Eurozone economies. We continue to expect a robust recovery from 2014, with GDP growth seen at 1.6% in 2014 and with similar rates in 2015 17. We attribute the recent weakness in emerging markets mainly to temporary factors. We continue to expect a significant pickup in global trade and, as a result, we forecast German export volumes will grow by 3.3% in 2014 and 4.8% a year in 2015 17, after only 0.5% in 2013. Moreover, the global economy is shifting to a more normal risk environment, as illustrated by favorable financial markets developments. A more stable environment for business planning and prospective returns on new investment mean that we expect German business investment to swing from a decline of 2.4% in 2012, to stability this year and then growth of nearly 6% in 2014. In this context, we think that unemployment will remain at very low levels this year and next. Together with low inflation, in particular thanks to lower energy price pressures, this will help sustain household incomes and consumer spending. Unlike their counterparts in many Eurozone countries, German firms and households are not particularly highly leveraged. Non-financial companies have liabilities equal to 95% of GDP, well below the Eurozone average of 138%, and households have been deleveraging since the early 2000s. Indeed, should they wish to, they have the scope to increase borrowing to fund more investment and spending. There is also room for further public sector spending. Easier fiscal policy would be the single most effective measure to foster growth in Germany and the Eurozone. But so far, this option has been rejected by the Government. We assume that the budget will be kept broadly balanced from 2013 onwards. Ernst & Young Eurozone Forecast June 2013 Germany 1
Temporary weakness, but strong medium-term economic fundamentals Triple hit to Germany s resilience Germany has suffered a triple blow: a weak Eurozone on its doorstep, a downgrade in the outlook for China (a major market for the country s capital goods) and much increased competition from Japanese companies, which are benefiting from the significant depreciation of the yen. These factors have led to a contraction in economic activity at the end of 2012 and early 2013. Exports have been particularly weak. Business confidence has fallen as a result and this is being reflected in lower investment. These factors have led us to revise our 2013 forecast down to 0.3% from 0.7% in our previous report. but strong fundamentals continue to point to recovery Nevertheless, there are several indicators of Germany s sound fundamentals, which make us confident that the country will remain one of the better-performing Eurozone economies. We continue to expect a solid recovery from 2014. GDP growth should rise to 1.6% next year and then remain at about this pace in 2015 17. Global trade in a soft patch in early 2013 We attribute the recent weakness in emerging markets mainly to temporary factors and expect a recovery in the second half of 2013. The US economy should also accelerate during the year and contribute to rising growth in global trade. After climbing by only 3% in 2013, we forecast growth in global imports to increase by around 6% a year between 2014 and 2017. Germany may not be able to maintain its share of global trade (it accounted for nearly 10% of world exports in 2012) in the face of increasing competition from Japanese companies in particular. We forecast a further depreciation of the yen as the Bank of Japan proceeds with its significant monetary easing. The weaker yen will give Japanese exporters an advantage over their German counterparts (Japan is a key competitor for Germany, especially in the hi-tech investment goods and car markets). As a result, we expect Germany s share in global exports to fall gradually to around 9% by 2017. Table 1 Germany (annual percentage changes unless specified) Source: Oxford Economics. 2012 2013 2014 2015 2016 2017 GDP 0.8 0.3 1.6 1.7 1.6 1.5 Private consumption 0.6 0.8 1.2 1.2 1.2 1.2 Fixed investment -1.9-0.4 4.0 3.9 3.2 2.8 Stockbuilding (% of GDP) 0.2 0.0 0.0-0.1-0.2-0.4 Government consumption 1.4 0.9 0.7 0.7 0.7 0.8 Exports of goods and services 4.3 0.5 3.3 4.8 5.0 4.6 Imports of goods and services 2.2 0.9 3.7 4.9 5.1 4.5 Consumer prices 2.1 1.5 1.6 1.7 1.7 1.7 Unemployment rate (level) 5.5 5.5 5.5 5.3 5.0 4.9 Current account balance (% of GDP) 7.1 7.1 6.6 6.3 6.3 6.4 Government budget (% of GDP) -0.1 0.0 0.0 0.0 0.0 0.0 Government debt (% of GDP) 79.1 78.9 78.6 78.8 79.0 79.1 ECB main refinancing rate (%) 0.9 0.6 0.5 0.5 0.5 0.7 Euro effective exchange rate (1995 = 100) 115.5 118.5 115.6 112.0 111.1 110.9 Exchange rate ($ per ) 1.28 1.29 1.21 1.17 1.17 1.17 2 Ernst & Young Eurozone Forecast June 2013 Germany
... but businesses are well placed to seize opportunity of risk normalization After years of heightened uncertainty, the global economy is shifting to a more normal risk environment as illustrated by favorable developments in the financial markets. For instance, the European Central Bank s index of systemic risk in financial markets suggests that risk is at its lowest since before the global financial crisis. Unlike their counterparts in many Eurozone countries, German firms are not particularly highly leveraged and therefore do not need to pay down debt. Non-financial companies have liabilities equal to 95% of GDP, well below the Eurozone average of 138%. German companies are also benefiting from favorable financing conditions. As of March 2013, interest rates charged on new loans to businesses were around 3.5%, the lowest levels since at least the early 2000s. Against this backdrop, German companies are among the best placed to take advantage of a more stable environment for business planning. We expect this to lead to a rise in business investment after a decline of 2.4% in 2012. We forecast business investment to grow by nearly 6% in 2014 and around 5% a year in 2015 17. Strong labor market to allow real wage increases In this context, we think that German unemployment will remain at very low levels this year and next. The unemployment rate has been at 5.4% (International Labour Organization measure) since mid-2012. And although the number of vacancies has fallen from a peak above 500,000 to 430,000 in April 2013, businesses do not seem worried about the recent slowdown in economic activity to the point that they would consider reducing staff levels. On the contrary, after remaining broadly flat this year and next, we forecast the unemployment rate to start falling again as economic activity strengthens and generates the need for extra workers. The low unemployment rates and relatively strong profitability have allowed for higher wage settlements than had been typical in recent years. In May 2013, the manufacturing union IG Metall negotiated a 3.4% pay increase for this year. In the context of low consumer price inflation (1.5% in May 2013), these pay deals generate robust increases in real wages and hence purchasing power. We forecast a slight increase in inflation from the current low rates, which are partly accounted for by falls in energy price inflation as oil prices have fallen back from the last summer s peaks. Spare capacity at home and abroad will also contribute to keeping inflation low. As a result, we forecast inflation at around 1.6% 1.7% from 2014 to 2017. This will allow robust increases in real incomes. Figure 1 GDP Figure 2 Non-financial corporate debt % year % quarter % GDP 6 Forecast 3 106 Forecast 4 GDP % year (left-hand side) 2 102 2 1 98 0 0 94-2 -1 90-4 -2-6 -3 86-8 -10 Source: Oxford Economics. GDP % quarter (left-hand side) 2000 2002 2004 2006 2008 2010 2012 2014 2016-4 -5 82 78 1990 1994 1998 2002 2006 2010 2014 Source: Oxford Economics. Ernst & Young Eurozone Forecast June 2013 Germany 3
Temporary weakness, but strong medium-term economic fundamentals Together with relatively low debt levels households have been deleveraging since the early 2000s robust income growth will foster consumer spending. After a 0.8% rise in 2013, we forecast private consumption will grow by 1.2% a year in 2014 17. Risks to the forecast for consumer spending are on the upside. The rise in real incomes and the low unemployment environment could encourage households to save less and spend more. Savings currently amount to around 10% of disposable income, not particularly high by historical standards, but high enough to leave some room for a slight decrease to finance extra consumption. Government should use fiscal room Room for further spending also exists in the public sector. The Government s budget was already in balance in 2012, and we expect it to remain balanced throughout the forecast horizon. Budget-neutral reforms could also help enhance growth. In particular, at 106th, Germany ranks very low on the World Bank s indicators for the ease of starting a business. There is also room for improvement on the ease of paying of taxes Germany ranks 76th in the world in the World Bank s survey. Recovery creates opportunity for businessfriendly reform Overall, we think that some of the recent weakness is temporary. We expect the strong fundamentals underpinning the economy to allow for a robust recovery from 2014 onwards. This recovery could create an opportunity to implement reforms that would help foster growth in the medium term, such as budget-neutral reforms aimed at making it easier to carry out business in Germany. More relaxed fiscal policy would be the single most effective measure to foster growth in Germany and the Eurozone. But so far, this option has been rejected by the Government. Spending on investment that would encourage growth in the medium term would be particularly effective and have only a small impact on the budget. Figure 3 Effect of increase in government consumption Figure 4 Fiscal balance Impact on GDP level % differences from baseline 0.8 % of GDP 2 Germany Forecast 0.7 0 0.6 0.5-2 0.4-4 0.3-6 0.2 0.1-8 Rest of Eurozone 0 2014 2015 2016 2017 2018-10 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Source: Oxford Economics. Source: Oxford Economics; Haver Analytics. 4 Ernst & Young Eurozone Forecast June 2013 Germany
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