The Eurozone recovery continues…
The Eurozone remains in a “sweet spot”, benefiting from lower energy prices, expansionary monetary policy by the ECB, a more competitive exchange rate and a softening of austerity. It seems likely GDP will have grown by 0.5% in Q3 2015, up from 0.3% in Q2, and we expect 1.5% expansion for 2015 as a whole. With business confidence improving, investment spending will pick up in 2016, lifting growth to 1.8%.
Consumer demand remains the key driver of Eurozone recovery. Renewed weakness in oil prices is providing a second (albeit less substantial) boost to household incomes, while household views of labour market prospects are tentatively improving. We expect consumer spending growth in 2015 of 1.7%, the strongest since 2007. But the good news is that the recovery is broadening out.
…and is becoming more balanced…
As a result of firmer consumer and export demand, profitability is improving for Eurozone firms, with signs this is feeding through to capital spending. Looking ahead, as capacity utilization continues to rise, we expect business investment to accelerate from 2016 onwards. Tentative recoveries in house building and public investment will also drive investment growth. Fixed investment growth will become an increasingly important driver of recovery from 2016 onwards, picking up from just 1.2% in 2015 to 2.5% in 2016, and around 2.6% on average in 2017-19.
The recovery will mean an increasing share of the work in closing budget deficits will be done by rising tax revenues. But given the extent to which the Eurozone’s debt burden has risen through the crisis years, government spending will remain constrained for some time. We expect only modest growth in current government spending through our forecast – around 1% a year from 2015-19.
…with spending on labour and capital increasing…
The European Commission’s monthly business survey shows employment intentions in the service and construction sectors continuing to improve through the summer of 2015. The survey evidence is more mixed for manufacturing firms. We expect the Eurozone to continue creating jobs in the quarters ahead. We forecast the Eurozone unemployment rate will fall from 11.1% in June to 10.9% by end-2015 and 10.6% by the end of 2016. The country breakdown will continue to show a very wide range, from below 5% in Germany to over 26% in Greece.
Similarly, capital spending (by firms, households and government) should strengthen in the coming couple of years, providing a stimulus to the pace of recovery. Total capital investment is forecast to grow by 2.5% in 2016 (around twice as fast as this year), before picking up to 2.8% in 2017 and then averaging 2.5% in 2018-19.
…although more needs to be done…
At 1.5% in 2015, 1.8% in 2016, and an average of 1.6% in 2017-19, the rate of GDP growth during this Eurozone recovery will be substantially lower than the decade running up to 2007, when GDP grew by an average of 2.4% per annum.
This new level of weaker growth is by no means inevitable though. The Eurozone crisis has forced governments to take bold action both at the regional level and nationally, and sustenance of this ambition could materially change the medium-term outlook for the Eurozone. If policy makers could accelerate the introduction of growth enhancing measures, such as the internal liberalization of services markets and a greater willingness to open goods markets to economies outside the Eurozone, this would boost long-term trade prospects, and with it firms’ incentives to invest and create jobs in the coming years.
…business is already repositioning….
Businesses are already responding to changes in the Eurozone. Both EY’s European Attractiveness Survey for 2015 and the April 2015 Capital Confidence Barometer identified a pivot back to developed markets including the Eurozone, and away from the emergers. With growth slowing in the previously fastest growing markets and risks and volatility perceived to be increasing, the Eurozone now looks like a more attractive proposition.
In the year to end of June 2015, we also saw M&A activity continue to pick up in Europe. Deal volumes in particular were very strong and grew faster than any region outside of North America. Momentum is building in the Eurozone and some businesses are clearly moving to restructure their operations and strengthen their presence. While there are still risks to the recovery and more action is needed from policy makers, it is still the case that businesses need to consider the balance of their portfolios.