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In the aftermath of the financial crisis, the Eurozone relied on Germany to push up its economic growth rate. However, in the absence of a pick-up of growth in France, Italy and the periphery, this over-reliance on Germany is starting to become an issue, according to the PwC monthly Global Economy Watch.
The November GEW report arises from two main issues:
• Even with reasonably strong growth rates in Germany in recent years, the Eurozone hasn’t managed to grow faster than 1% since 2011 and as a result its GDP remains smaller than immediately before the financial crisis;
• Germany has itself slowed recently and faces longer term demographic and economic challenges that could drag down its potential growth rate starting from around 2020.
Focusing on Germany, the PwC GEW analysts downgraded their main scenario GDP growth projection from 1.5% to 1.2% for 2014 as there are tangible signs that external shocks (notably the Ukraine-Russia situation) have affected its shortterm outlook. In October, for example, the ZEW Indicator of Economic Sentiment slumped into negative territory for the
the concern first time since November 2012. This is expected to have wider implications on the Q3 Eurozone GDP figure which will be announced on Friday, November 14.
The GEW authors think that, in the long-run, Germany has three main challenges it needs to overcome to maintain robust economic growth rates. These are: 1. Unfavourable demographics: Germany’s working-age population is expected to shrink by around 8 mln people between 2010 and 2030; 2. Low investment to GDP ratio investment rates below those of countries; and, 3. Poor labour productivity in the services sector compared to France and the UK (which is, however, offset by Germany’s international excellence in the manufacturing sector).
So, where is growth in the Eurozone going to come from? In the short-term, the outlook for the other core economies, which make up close to 40% of Eurozone GDP, is looking weak.
Italy has fallen into its third recession since 2008, although with its public the other core the PwC analysts expect it to grow modestly in 2015 in their main scenario. France has stagnated for the first two quarters of 2014 and, in the absence of substantial reforms to its product and labour markets, its outlook remains poor.
“In fact, we calculate that, in a downside scenario where France and Italy fail to grow next year, Eurozone growth could average just 0.8% as compared to our current main scenario projection of just over 1%,” the PwC report said.