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

Financial Mirror (Cyprus) - - FRONT PAGE -

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.”

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