Outside of Greece things are looking up as consumers start spending…
All of the recent economic commentary in the Eurozone has centred on Greece, but elsewhere in the Eurozone, a positive start to 2015 suggests that consumers are responding to lower energy prices according to the latest EY Eurozone Economic Forecast. Unlike consumers in the UK and USA, consumers are spending a major share of their energy windfall; this is despite stubbornly high unemployment and weak wage growth.
As a result, we now expect an increase in forecast consumer spending growth in 2015 from 1.6% to 1.7% compared to our Winter estimate. As firms step up recruitment and labour market slack falls, wage growth will start to gather pace. As such, consumer spending will be able to sustain growth of a little over 1.3% a year through 2017–19.
…exports respond to a falling currency…
Depreciation has left the euro 7% weaker than at the start of 2015, despite recent appreciation, and weaker still against the sterling. This has reinforced Eurozone competitiveness in key export markets as the dollar soars. We expect the euro to weaken to US$1.10 by the end of this year and about US$1.05 by the end of 2016.
As a result, Eurozone exports should grow by 3.7% in 2015, while imports remain strong despite becoming more expensive.
…and business investment returns…
As uncertainty fades, so total investment should begin to grow as corporate confidence strengthens. We expect investment growth of 1.1% in 2015, before accelerating to almost 3% in 2016-17, before easing to 2.5% in 2018-19. M&A is also picking up as the weak currency, relatively low multiples and nascent economic growth make European assets look more attractive.
…creating a more positive outlook for government finances…
The nascent recovery in consumer spending is welcome news for governments, as sales tax receipts will rise too. And as consumer demand drives firms to hire more staff, employment tax revenues and national insurance receipts should be starting to rise while unemployment benefits fall. Together, these factors should help improve public finances.
…and the economy overall.
There is still a long way to go until unemployment falls to more acceptable levels and risks to stability remain. But at midway through 2015, prospects for the Eurozone economy seem brighter than for quite some time. As a result, we have raised our forecast for growth in 2015 to 1.6% from the 1.5% seen in March with 1.9% now forecast for 2016.
But is the consumer recovery real?
After several false starts, is this a real consumer recovery in the Eurozone? The early signs are positive. Household energy bills fell by around 5% in the second half of 2014 and this has translated into a 0.6% increase in consumer spending in the first quarter of 2015, a significant rise given how slow spending has been growing in recent times.
Even more encouraging is the breakdown of spending with an increase in discretionary spending. Fuel and food sales did grow in the first quarter of 2015 but expenditure on discretionary categories such as clothing, household goods and recreational equipment have grown at their fastest annual rate since 2007.
Households are also increasingly willing to purchase “big ticket” items. New car registrations rose 4.7% in Q1 2015 from Q4 2014 and 9.5% on a year earlier. Car sales remain 20% below 2006 levels, but the improvement in demand is welcome both from a spending perspective and a production/investment one – 12.7m Europeans work in the automotive sector, so recovering demand will aid the recovery in Eurozone investment and employment.
The improvement in “big ticket” demand is encouraging, as it suggests households are not only feeling the benefit from lower energy bills, but are also more positive about underlying financial prospects. Labour market conditions are key in this respect. It is perhaps surprising therefore that such a recovery in underlying consumer confidence has occurred with the headline unemployment rate having fallen by just 0.4 percentage points over the year to Q1 2015.
But this would be too simplified an assessment of the Eurozone labour market. Firstly, unemployment data refer to the stock of people seeking work. This might remain higher than it otherwise would if previously inactive people start to look for work again. This is indeed occurring in the Eurozone, with the working-age labour participation rate rising by 0.2 percentage points in both Q3 and Q4 2014. So the headline unemployment rate partly disguises the strength of job creation in the Eurozone.
Secondly, the headline unemployment rate disguises a more impressive fall in the youth unemployment rate, 1.4 percentage points in the year to Q1 2015. Youth unemployment remains high – 22.8% at the Eurozone level – but nevertheless the improvement in access to employment for the most badly-hit cohort of the workforce is a real cause for optimism.
Still a long way to go, but it is time to reassess the Eurozone opportunity.
It is good news and a balanced recovery is beginning. There are still clear risks especially longer-term around the willingness and ability of all countries to deliver structural reform. Nevertheless, businesses do need to look alone at the Eurozone and ensure they are taking the appropriate steps to respond to an improving economy.