Eurozone sees strongest period of growth since 2011
Consumer spending and exports to lift growth to 1.6% this year and 1.9% in 2016 Corporate investment to accelerate to 3% in 2016-17
The Eurozone’s positive start to 2015 — with Q1 GDP growing by 0.4% on the quarter, stronger than the US or the UK — suggests that consumers are responding to lower energy prices, according to the June 2015 issue of the EY Eurozone Forecast (EEF). The forecast also predicts that the recovery will become more broad-based, with growth forecast at 1.6% in 2015 and then 1.9% for 2016.
Businesses are preparing to invest, with increasingly positive business surveys and loans data in recent months. The EEF expects total investment to grow 1.1% in 2015, before accelerating to almost 3% in 2016–17 but then easing to 2.5% in 2018–19. This is well short of pre-crisis rates of investment growth, but since much of the latter was accounted for by housing, a slower pace of capital accumulation need not necessarily imply lower future output growth.
Quantitative easing will help keep borrowing costs low for businesses, governments and individuals in the Eurozone this year and next. However, the possibility of a Greek exit from the euro may continue to overshadow financial markets.
“Greece aside, many of the clouds that have hung over the Eurozone have dispersed over the past 6 to 12 months, and the economy has responded with faster growth and job creation,” said Tom Rogers, Senior Economic Adviser to the EEF.
“Risks remain of course, but cheap finance, a weak euro, and a steadily improving sense of household confidence, are all factors that suggest business investment can start to rebound in the quarters ahead.”
“Lower energy prices, higher consumer spending, a stronger labour market and a weaker euro are all contributing to a broadbased recovery,” added Mark Otty, EY’s Area Managing Partner for Europe, Middle East, India and Africa.
“But despite the positive movement in consumer spending, unemployment is high in much of the currency bloc. The Eurozone business and political community have to work together to address this major challenge with the top priority of creating a better environment for young people.”
In the second half of 2015, households will start to feel energy bills rising by 5% in 2016 in line with world oil prices, taking a little steam out of consumer spending.
Nevertheless, with more reliable labour market prospects, EEF expects consumer spending to rise by 1.7% in 2015 and by 1.6% in 2016, up from just 1% in 2014 and well above the average of recent years. In some countries, such as Germany, this is being driven by wage growth in tightening labour markets. In others, such as Italy, consumers are spending their energy windfall on bigticket items such as cars and white goods, encouraged by stabilizing employment markets.
Depreciation has left the euro 7% weaker than at the start of 2015 and weaker still against the Sterling. This has reinforced Eurozone competitiveness in key export markets as the dollar soars. The EEF expects the euro to weaken to US$1.10 by the end of this year and about US$1.05 by the end of 2016.
Exporters will also continue to benefit from the recovery in other advanced economies like the UK and the US. The EEF expects Eurozone exports to grow by 3.7% in 2015, while imports remain strong despite becoming more expensive. However with some emerging economies — in particular China — set for a managed slowdown in the coming years, demand for European capital goods could grow modestly with export growth easing back from a peak of 4.2% in 2016 to 4.1% in 2017 and 3.6% in each of 2018 and 2019.
The EEF expects a gradual pickup in the pace of investment spending through the second half of this year and in 2016. Credit conditions have continued to improve, as have measures of business confidence. However, with ongoing uncertainty over Greece’s future in the Eurozone, and the consequences of its possible exit, this is not yet materialising into higher investment spending.
“The economic outlook is certainly much improved, but it is important for policymakers to sustain efforts across the board. It is particularly important for governments to push ahead with sometimes difficult economic reforms that i mprove competitiveness, and to use whatever fiscal space opens to prioritize spending in areas that boost future potential growth,” said Tom Rogers.
Otty added: “Business leaders with interests in the Eurozone need to prepare themselves for this return to more stable growth. The fate of Greece remains a major stumbling block for the single currency. But as uncertainty over Greece’s future is addressed, we expect investment growth to become more apparent in the near future.”