Some signs of life…
Forecast GDP growth of 1.2% for 2015 is the somewhat surprisingly upbeat message from the December EY Eurozone Forecast. This goes some way to offsetting the latest reduction in the 2014 outlook from 0.9% in September to 0.8% now. The new 2015 estimate incorporates the upside effect of the recent decline in the oil price, adding potentially 0.3% to the growth in consumer disposable incomes and mitigating the impact of slowing global growth and Russian sanctions.
But it would be wise not to send out the party invitations just yet. There remain significant downside risks related to the external environment and it is far from certain that Eurozone policy will be able to launch stimulus measures of the scale required to head off the deflationary pressures that have been building.
…but can they be maintained?
Beyond the obvious risks though is a more fundamental question: does this forecast represent a realistic, achievable scenario for the Eurozone economy? An upturn in GDP to 1.2% in 2015 and then 1.6% annually to 2018 is very welcome but will this be sufficient to keep stakeholders behind the programme?
If this forecast is accurate, then by 2018 Unemployment in the Eurozone will have only fallen from 11.6% in 2014 to 10.5% in 2018 and Government debt as a share of GDP will have increased from 96.2% today to 97.1%. Unemployment will be over 20% in Spain, above 19% in Greece and almost unchanged in Italy from today’s 12.6%. Government debt will be just under 150%of GDP in , will be higher than today’s ratio in both France and Spain, and largely unchanged in Italy and Portugal.
A decade on from the financial crisis, after years of misery and significant reductions in the standard of living in the countries in the south of the Eurozone, it is questionable how much there will be to show for the efforts of each country. Even Germany will only grow by an average of 1.6% a year between 2014 and 2018, although this is higher than the equivalent figures for France of 1.1%, Italy 0.5% and Portugal 1.3%.
This is a recovery but only in a very marginal way and it is certainly unlike the recovery from any recession in living memory. There is a significant risk that a slow and small improvement will not prove acceptable to the populations in some countries.
And what about the long-term cost?
But there is a potentially more significant issue. The forecast growth in investment is very low given the scale of the slump: only 0.9% in 2015 and then averaging 2.6% a year to 2018. In the UK in 2014, an increase of up to 8% is likely. Low investment together with the high rate of unemployment, especially the high rate of youth unemployment, means that the risk that the Eurozone is permanently reducing its productive capacity is a real one. The Eurozone may be irreversibly damaging its potential but even it is not, the consensus forecasts for the UK and USA imply that the Eurozone will be falling further behind these two economies for the rest of the decade. The politics of envy could well become a factor shaping the public mood in the Eurozone.
Time to face facts
Globally, the slowing economy and the increased awareness of political risks have drawn the Eurozone back into the spotlight. The export led recovery has slowed and the focus has switched back to the challenging fundamentals. The reality is that the crisis never went away and a long process of reform still lies ahead with many potential bumps on the road.
For business, now is the time to take another long hard look at prospects within the Eurozone and the relative attractiveness of operating in the region compared to other capital deployment opportunities. Current policies are not going to restore the economy to rude health anytime soon and so business cannot rely on economic growth to drive improved performance. A few sectors may outperform, the communications sector which includes mobile phones, consumer technology and social media has strong prospects across the currency zone, and Manufacturing and Business Services are on an upward curve but generally sector growth is at best in line with GDP growth.
Nothing should be ruled out. The full range of options from exit to accelerated investment and using M&A to acquire capacity or to drive synergies should be evaluated. It may be that sitting tight is the way forward but this should be the result of a positive choice not through apathy.
It is also time for business to engage with policy-makers. The low growth estimates set out in our forecast imply consumer price inflation of 1.6% in 2018, still below the ECB’s target. It is reasonable for business to question why more stimulus is not being applied urgently to move the economy back on a stronger growth trajectory. When a key indicator lags so badly for 5 years, policy has to be challenged. The Eurozone is falling further and further behind its peers and needs to move faster.