The recovery continues…
EY’s end of year Eurozone forecast confirms that the economic recovery remains on track and is indeed strengthening. The first half of the year was very strong in terms of GDP growth and while there was some easing in the third quarter as a result of uncertainty from the Greek crisis and the challenge of migration over the summer, recent indicators are more positive and we expect growth in GDP of 1.5% for 2015, accelerating to 1.8% in the next two years. While this remains below the pre-crisis trend, in a slowing global economy this is a significant step forward for the currency zone given the challenges of the last few years.
… With the consumer leading the way…
Boosted by lower commodity and energy prices, Eurozone consumers have found themselves with higher spending power and have been quick to utilise this with all forms of spending including discretionary picking up. An improving labour market with unemployment falling in 7 of the last 10 months is now driving consumer confidence higher and boosting the amount of disposable income in the economy. We expect consumer spending to continue to play its part in driving growth as healthy levels of consumer confidence, largely as a result of the improving labour market conditions, encourage households to keep spending. Growth will slow slightly from a 1.8% increase this year to 1.6% next as the boost from lower energy prices fades. But for consumer facing businesses this is a much more positive outlook than they could have imagined only a year or so ago.
…but rebalancing is now starting…
The consumer has been the driving force behind the recovery so far but there are clear signs that the other key components of the economy, government, business and trade will all contribute to growth going forward. This gives us more confidence that this is a sustainable recovery.
The really good news, especially for the medium-term health of the economy, is that business investment is picking up. Increased business confidence, higher consumer spending and access to credit on favourable terms are all supporting positive decision-making by corporates. We expect fixed investment to grow by 2.5% in 2016, the fastest rate since 2007, and then increase further by 3% in 2017 and continue at around 2.6% per annum for the rest of the decade.
The IMF and other forecasters have downgraded their outlook for the global economy in recent months, primarily because of the slowdown in emerging markets. In part, Eurozone consumers have benefitted from lower input prices, but exporters have found demand slowing. This slowing demand effect has been offset by increased competitiveness in countries such as Spain that have implemented reforms, by a weaker currency as a result of quantitative easing by the ECB, and by faster growth for some products and services as a result of the recovery in developed markets such as the USA and UK. We project export growth of over 3.5% in 2016 and 2017.
…and even the public sector will contribute to growth.
Emergency austerity is now in the past and the pressure on fiscal reform appears to have eased. We expect public investment to grow for the first time in seven years in 2016, increasing by 1.2% on the way to the heady heights of 3% growth by 2018. Current government spending will also recover although not to the levels of growth we saw pre-crisis.
There is more for governments to do…
The Eurozone is not at the level of competitiveness necessary to achieve a long-term rate of growth that will support the debt deleveraging and increase in employment that are still required to return the economy to good health. Countries such as Spain and Ireland show what can be achieved but more work is required at both the individual country level and at the Eurozone level to continue to drive structural reform. The world economy is rebalancing and this is creating opportunities across all sectors for the Eurozone but policy-makers must continue with the reform agenda that has been already developed.
…but businesses need to act now.
It is not just fixed investment that is increasing in the region. In the year to September, around a third of global M&A by both value and volume was directed at targets in the Eurozone. A competitive currency and signs of a revival have attracted the interest of capital from outside of the currency union. This activity will start to improve the competitive landscape and businesses within the Eurozone should consider how to respond. There is now a platform of reasonable growth against which to consider investment options and with a slowing in the emerging markets, the Eurozone now offers relatively low risk access to a significant number of higher value consumers. On a risk adjusted basis the Eurozone is more attractive than for some time and corporates should ensure they have the right level of presence in the region.
There will still be differences by country as the analysis of labour markets highlights. Germany and Austria have very tight labour markets currently which contrasts with many of the countries in the south of the area which continue to have high levels of unemployment. There is high structural employment in France and Italy that will only be reduced by structural reform. Plans must be tailored to individual country circumstances and in the tight labour markets, unless migration feeds through into increased labour supply, it may be time to consider accelerating investment in labour saving technology.