Eurozone EY Eurozone Forecast March 2015 Austria Belgium Cyprus Estonia Finland France Germany Greece Ireland Italy Latvia Lithuania Luxembourg Netherlands Portugal Slovakia Slovenia Spain
Outlook for Lower energy costs to fuel consumer spending in 2015 Finland Estonia Latvia Lithuania Ireland Netherlands Germany Belgium Luxembourg France Italy Austria Slovenia Slovakia Portugal Spain Greece Cyprus Published in collaboration with
Highlights After a stronger-than-expected Q3, we now estimate that GDP growth was 3.4% in 2014. Low interest rates are encouraging higher investment, and a cable was completed last year connecting to the mainland European energy network. Investment should continue to grow strongly in 2015. The construction of a large liquefied natural gas (LNG) plant is also under way. We expect GDP growth of 2.7% in 2015 and 2.3% in 2016. Household spending rose steadily through 2014, aided by lower electricity prices. In March this year, charges for businesses are expected to be reduced, and both households and businesses will benefit from lower oil prices, which will possibly give scope for more fuel price cuts. We now expect inflation to average just 0.6% in 2015. As a result, consumer spending will grow by at least 2% both this year and next, helped by lower unemployment (pushed by an improved female participation rate) and positive real wage growth. GDP growth 2015 2. 7% GDP growth 2. 3% is a substantial fuel importer, and lower oil prices will ease the import bill. Goods exports fell last year, but firmer activity in the Eurozone should boost trade this year and encourage stronger manufacturing output. Strong services exports should also support the current account surplus, which we now expect to remain above 2% of GDP in 2015. Tourist arrivals rose by 6.8% in 2014 and should continue to grow robustly this year, helped by faster EU growth. Online gaming is also growing strongly. Around % of s GDP now comes from gaming. We expect the fiscal deficit to narrow to 2% of GDP in 2015 as revenues (up almost 13% in January-November 2014) remain strong. But government debt has been rising in recent years, some of which has funded the recent strength in capital spending. High repayments may slightly constrain the Government s policy flexibility, but we expect the debt burden to ease from 69% of GDP now to under 64% in 2019. 2016 2015 Unemployment 5. 7% Consumer prices 2015 0. 6% EY Eurozone Forecast March 2015 1
Lower energy costs to fuel consumer spending in 2015 GDP growth for 2014 upgraded on strong domestic activity After a strong Q3, we estimate GDP growth at 3.4% for 2014. Investment grew by around 5% on the year in both Q2 and Q3 last year, supported by the low interest rate environment and boosted by the construction of a cable connecting to the mainland European energy network. Private spending also has solid momentum, growing by some 2.5% 3% on the year in the first three quarters of 2014, up from 1.7% in 2013. Growth has been aided by lower electricity costs, which were reduced in April 2014. Lower unemployment also supported 2014 growth, with the jobless rate dropping to 5.8% from 6.4% in 2013. This supported steady, if fairly modest, growth in wages and salaries. After the stronger-than-expected outturn in 2014, we forecast that growth will slow a little to 2.7% in 2015 and 2.3% in 2016. Domestic activity will remain solid, supported by expansionary fiscal policy, the firm labor market and lower fuel costs and exports of services should remain strong. and lower energy costs will boost spending growth this year We expect investment to continue growing strongly in 2015 16 because a large LNG plant is to be constructed and the existing power plant is to be converted to LNG. Lower fuel costs will also help. We now expect the oil price to average just US$55 a barrel in 2015, benefiting both households and businesses. Indeed, energy carries a weight of nearly a third in the producer price index. The index fell by 2.5% in 2014 and may drop even more in 2015. Consumer price inflation slowed to 0.4% in December 2014, and we expect it to average just 0.6% this year. However, robust services activity and the expansionary fiscal stance should keep non-energy prices growing at a reasonable pace. Indeed, core prices, excluding food and energy, were still 1.4% up on the year in December, compared with 0.8% in the Eurozone. The firm labor market, with services employment rising strongly, should support steady growth in real wages, supporting consumer spending of at least 2% in 2015 and 2016. Table 1 (annual percentage changes unless specified) 2014 2015 2016 2017 2018 2019 GDP 3.4 2.7 2.3 2.0 1.8 1.8 Private consumption 2.3 2.3 2.0 1.9 1.8 1.8 Fixed investment 5.1 3.0 2.7 2.5 2.3 2.2 Stockbuilding (% of GDP) 1.6 0.8 0.1 0.4 0.7 0.9 Government consumption 5.8 3.0 2.0 1.6 1.7 1.6 Exports of goods and services 0.5 2.5 2.9 2.9 2.8 2.8 Imports of goods and services 0.7 3.0 3.3 3.2 3.1 3.0 Consumer prices 0.8 0.6 1.9 2.3 2.3 2.3 Unemployment rate (level) 5.8 5.7 5.6 5.6 5.6 5.6 Current account balance (% of GDP) 0.2 2.3 0.9 0.9 0.3 0.7 Government budget (% of GDP) 2.1 2.0 1.7 1.4 1.2 1.0 Government debt (% of GDP) 69.5 69.4 68.3 66.8 65.3 63.7 ECB main refinancing rate (%) 0.1 0.1 0.1 0.1 0.1 0.3 Euro effective exchange rate (1995 = 0) 123.6 8.6 4.7 5.4 6.6 8.0 Exchange rate (US$ per ) 1.33 1.07 1.01 1.01 1.02 1.04 2 EY Eurozone Forecast March 2015
The lower oil bill will cut imports and boost the current account surplus Almost 40% of s 2013 goods imports were mineral fuels, lubricants and related materials. As a result, the lower oil price will substantially reduce the import bill. We now expect the current account surplus to remain above 2% of GDP in 2015. Goods exports fell last year, but firmer activity in the rest of the Eurozone and the weaker euro should boost exports this year, in turn encouraging stronger manufacturing output. Further, in January 2015, the European Central Bank (ECB) announced it would expand its balance sheet by over 1t over a two-year period, and we expect this to lead to lower Eurozone bond yields and push the euro down further. Around 24% of s exports went to the rest of the Eurozone in 2013 and, prompted by stronger external demand, we expect industrial output to grow by 0.9% in 2015 after declines in 2013 and 2014. Strong services exports should also support the current account surplus. Employment in the service sector has grown very robustly in recent years and now accounts for almost 80% of the workforce. Tourist arrivals rose by 6.8% in 2014 and should continue to grow robustly in 2015 19, helped by stronger growth across the EU. The strength also reflects efforts in recent years to improve the quality of the tourism product, and to attract tourists outside the traditional summer peak season and from a wider range of countries. In the longer term, investment into other cultural and creative industries is expected to boost tourism, particularly as Valletta will be one of the two European Capitals of Culture in 2018. Online gaming is also growing strongly, and around % of s GDP now comes from gaming. The number of licenses issued to gaming firms rose by 25% last year, and s SmartCity, which first opened in 20, is due to be fully completed by 2021. SmartCity is being developed as a hub for gaming firms. Strong revenue performance has helped narrow fiscal deficit, but debt still high We expect the fiscal deficit to narrow to 2% of GDP in 2015, as revenues (which rose by almost 13% in January-November 2014) continue to grow strongly. Government debt has been rising in recent years, although this has funded the recent strength in capital spending. Indeed, debt interest payments accounted for almost % Figure 1 Real GDP growth Figure 2 Inflation % year 5 Forecast % year 5 Forecast 4 3 4 2 3 1 0 2 1 2 1 Eurozone 3 4 Eurozone 0 5 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 1 1992 1995 1998 2001 2004 2007 20 2013 2016 2019 Source: Oxford Economics; World Bank. Table 2 Forecast for by sector (annual percentage changes in gross added value) 2014 2015 2016 2017 2018 2019 GDP 3.4 2.7 2.3 2.0 1.8 1.8 Manufacturing 1.3 1.4 1.5 1.5 1.2 1.2 Agriculture 1.4 1.4 0.9 0.7 0.5 0.5 Construction 2.4 1.9 1.9 1.8 2.0 2.0 Utilities 3.7 2.7 2.1 1.6 1.2 1.2 Trade 1.9 1.7 1.5 1.1 0.9 0.8 Financial and business services 4.6 3.7 3.2 2.7 2.4 2.4 Communications 6.1 5.0 4.3 3.8 3.4 3.4 Non-market services 4.3 2.6 2.2 1.9 1.9 1.8 EY Eurozone Forecast March 2015 3
Lower energy costs to fuel consumer spending in 2015 of total government spending in 2013. This burden slightly reduces flexibility over policy, limiting the scope to increase spending in other areas. However, we expect the debt burden to ease gradually in the coming years, from 69% of GDP now to below 64% by 2019. Longer-term prospects would benefit from reforms to raise competitiveness s expertise in tourism and financial services is well established and will underpin steady longer-term growth. However, as a small and very open economy, it is crucial that maintains competitiveness in these sectors and continues to introduce reforms in pensions and health care. 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% between 2005 and Q2 2014, compared with almost 14% in Spain over the same period. In the 2014 budget, wages were increased by 3.49 a week (this is commonly known as the cost of living adjustment), but in the 2015 budget they will be increased by just 0.58 a week. However, an increasing number of employers believe that wage rises should be linked to productivity rather than inflation, because this would encourage productivity gains. The outlook is reasonably bright, and the risks are balanced We expect s GDP to grow by an average of about 1.9% a year in 2017 19, underpinned by solid domestic activity, expansionary fiscal and monetary policy and strong services exports. The strength of the services sector and the healthy public finances should mean that is less at risk of deflation than other Eurozone members (although it would quickly suffer if the rest of the Eurozone were to experience a prolonged spell of deflation). But higher productivity must be encouraged, to ensure is not left behind by some Eurozone countries in terms of competitiveness. There is also a risk of delay to some investment projects. Although, encouraged by the strength of investment in 2014, this risk is low. And the risks are not all on the downside. With the size of the ECB s quantitative easing program surprising on the upside, the boost to growth in may be larger than expected. At the same time, lower oil prices and lower interest rates are boosting consumers spending power and business confidence. Figure 3 Private consumption and total fixed investment 40 % year Forecast Figure 4 Unemployment rate % 13 Forecast 30 12 20 Private consumption 11 Eurozone 9 0 8 7 20 Total fixed investment 6 30 1997 2000 2003 2006 2009 2012 2015 2018 5 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 4 EY Eurozone Forecast March 2015
Eurozone Forecast December 2014 4.0 0 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...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 2.4 5.2 4.4 3.2 7.6 7.2 4.0 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 Portugal 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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