Austria We forecast GDP growth of 0.4% in 2012, with a mild recession likely at the start of the year, primarily due to the further weakening of external demand. The recovery in 2013 will be moderate, as the impact of the Eurozone debt crisis on the real economy will last beyond 2012. Uncertainties about further developments in the debt crisis, in particular an increased likelihood of a disorderly Greek default, skew the forecast risks to the downside. The exposure of Austrian banks to Eastern Europe represents a further, albeit more moderate, risk. The Government’s substantial austerity package aims at balancing the budget by 2016. If fully implemented, it could have a detrimental effect on growth. But given its comparatively sound fiscal position, Austria should be able to accommodate a larger deficit to support growth if the external environment worsens further.  Download Eurozone Outlook for Austria
::: Back Belgium The Eurozone crisis has taken a heavy toll, initially through the impact on exports, but now feeding through to business and household confidence. The economy contracted 0.2% in Q4 2011. 2012 is likely to see contraction in GDP of around 0.3%. Consumers are braced for rising unemployment and firms are reluctant to invest and hire. We forecast a modest recovery in 2013, picking up a little pace to 1.5%–2% in 2014–15. In the short to medium term, the government is reinforcing its effort to lower the fiscal deficit towards 3% of GDP. However, beyond the medium term, Belgium has substantial challenges — to tackle its high debt stock and implement growth-boosting economic reforms. Download Eurozone Outlook for Belgium 
::: Back Cyprus Cyprus is very vulnerable to adverse developments in the Eurozone via its exports and the banking system. In light of the deepening debt crisis in Greece, the outlook for the economy has worsened considerably and GDP is now forecast to decline by 0.5% in 2012, after growth of just 0.2% in 2011. Cypriot banks are estimated to have €4.2 billion of exposure to Greek sovereign debt. Therefore, a Greek default will have serious repercussions for Cyprus’ banking sector. The intractable fiscal deficit casts major doubt over the sustainability of public finances. Cyprus’ sovereign debt has now been cut to the lowest investment grade status and borrowing costs have been rising. The budget deficit is forecast to fall slightly to 5.3% of GDP in 2012, but this will be far short of the Government’s target of 2.8%. Download Eurozone Outlook for Cyprus 
::: Back Estonia After posting the Eurozone’s fastest GDP growth in 2011, the pace of expansion will slow sharply in 2012 as the escalation of the Eurozone crisis and associated austerity dampens demand in Estonian export markets. The Government will partly offset the weakening of external demand by running small deficits in 2012–13, after moving the budget into surplus in 2011, but we still expect GDP growth to slow from 7.5% in 2011 to 2.0% in 2012. Prospects further ahead are better, with export demand expected to rebound strongly as the Eurozone recovers and the key markets of Sweden and Finland strengthen. GDP growth is expected to recover to almost 4% in 2013 and to average 4.7% in 2014–16, comfortably the fastest in the Eurozone. Download Eurozone Outlook for Estonia 
::: Back Finland We have lowered our forecast for Finland’s GDP growth in 2012 from 1.6% to 0.7% as the economy is hit by the ongoing Eurozone crisis. Nevertheless, we still expect Finland to outgrow its peers. Short-term indicators suggest that economic activity has already begun to slow and we expect this trend to continue for the foreseeable future. The manufacturing sector is particularly exposed to the slowdown in the Eurozone, which is one of its main customer bases. The unfavorable external environment will also dampen domestic activity, by hampering businesses’ ability and willingness to invest and hire. Beyond 2012, the prospects are more encouraging. As the Eurozone economy starts to recover, Finland will reap the benefits of having a healthy financial sector, low levels of indebtedness, a productive workforce and relatively low labor costs. Download Eurozone Outlook for Finland 
::: Back France We expect zero growth in French GDP in 2012, as demand is dampened by fiscal austerity and tight credit conditions. In this environment, companies are likely to need to reduce headcount further in order to maintain productivity and profitability. This will dent households’ incomes. However, we expect inflation to slow this year as energy price inflation abates. This means that households’ purchasing power should not fall. Assuming that confidence in policy-makers’ ability to resolve the Eurozone debt crisis is restored, France should recover from 2013 onward. The strength of the recovery will, in part, depend on the ability to pass reforms aimed at enhancing France’s attractiveness as a business location. The crisis offers an opportunity to enact changes that would otherwise have been hard to implement, especially making the labor market more flexible. Download Eurozone Outlook for France 
::: Back Germany We forecast GDP growth at 0.6% in 2012, down from 3% in 2011, with a mild and short recession. A significant part of the slowdown from 2011 is a direct result of the adverse external environment. The ongoing Eurozone crisis will also have an indirect impact on domestic activity, notably by encouraging a “wait-and-see” attitude among businesses. Assuming that policies are implemented at the Eurozone level to help the region emerge from the sovereign debt crisis, Germany should bounce back relatively strongly starting next year. The main challenge is to build on past reforms to ensure that the country has enough skilled staff to sustain strong growth. Download Eurozone Outlook for Germany 
::: Back Greece It has become increasingly clear in recent months that the 50% write-down of privately held Greek government debt agreed in October 2011 will not be sufficient. This reflects doubts about Greece’s long-term debt sustainability, its chronically weak economy and budget deficits that have continually overshot agreed targets. Greece has had further difficult rounds of negotiations with both official and private sector lenders aimed at securing new external finance and increased private sector debt relief. In return for new financing, Greece is implementing a number of new fiscal measures and a debt write-down of 53.5% has been agreed by private sector creditors. But the austerity program has grown extremely unpopular as it has plunged the economy into a deep recession. This raises the risk of “austerity fatigue,” whereby Greece could lose the political will to keep implementing harsh measures. Download Eurozone Outlook for Greece 
::: Back Ireland Of the five peripheral Eurozone countries, Ireland has been the most successful in addressing its economic issues. Ten-year bond yields are less than one-half of their peak level in July 2011 reflecting a gradual restoration of investors’ faith. The Government lowered its budget deficit to 10% of GDP in 2011 (beating the EU and IMF’s target of 10.6%) and is on track to cut it further to 8.6% of GDP in 2012 by means of further austerity measures. But tight fiscal policy is taking its toll on domestic demand, and the short-term outlook is not very favorable. GDP is expected to decline by 0.1% in 2012 before growing by 0.6% in 2013. Ireland remains vulnerable to developments in the Eurozone and downside risks dominate its economic outlook. The Government is on track to return to financial markets by mid 2013, when the international money is due to run out, but this depends heavily on how events in the Eurozone unfold. Download Eurozone Outlook for Ireland 
::: Back Italy Italy now faces two years of GDP decline as fiscal tightening hits domestic demand and the faltering Eurozone weakens support from trade; we expect GDP to fall 1.6% in 2012 and then by another 0.3% in 2013. Assuming financial stability in the region is restored and the economy starts to benefit from structural reforms in the medium term, we expect growth to resume, averaging 1.4% in 2014–16. Additional fiscal tightening and a tough stance in favor of structural reforms appear to have helped reduce long-term interest rates. However, the risk that the situation worsens again is high as GDP shrinks and short-term refinancing needs remain large. Moreover, credit conditions were tightened significantly at the start of 2012, exacerbating the effect of the fiscal adjustment on domestic demand. Download Eurozone Outlook for Italy 
::: Back Luxembourg We expect growth to slow to 0.7% this year as the external sector remains a drag on activity and financial services are expected to suffer from the impact of the sovereign debt crisis on the European financial system as a whole. The restoration of confidence and stability within the Eurozone in 2013 should further boost the orientation of Luxembourg’s economy toward business services, which will become an important growth driver in the medium term. New EU financial regulation is generally favorable for Luxembourg, promoting renewed onshoring of investment funds and pan-European distribution, but the financial sector would be adversely affected by the proposed financial transaction tax. Download Eurozone Outlook for Luxembourg 
::: Back Malta Subdued Eurozone export markets make a slowdown in GDP growth unavoidable in 2012, with modest expansion of 0.9% forecast to follow an estimated 1.8% rise in 2011. We expect a gradual quickening of growth toward 3% between 2013 and 2015, in line with the expected improvement in the external outlook. This year’s slowdown leaves the Government with a difficult task in achieving fiscal deficit reduction and we expect the budget deficit to remain stable at close to 3% of GDP in 2012, before falling below 2% of GDP by 2015. Fiscal consolidation, together with credit tightening, will weigh on domestic demand. Investment and consumption are both expected to expand by a modest 0.5% in 2012, after declining in 2011. Download Eurozone Outlook for Malta 
::: Back Netherlands The Dutch economy has been particularly badly affected by the Eurozone crisis, because of its openness and its heavy reliance on trade with other Eurozone countries. The softening in export prospects has coincided with a period of sustained weakness in the domestic economy, plunging the Netherlands into recession. We expect recovery to follow in H2 2012, providing that policy-makers are able to prevent financial contagion spreading. In this case, export growth should improve, particularly given the more positive outlooks for Germany and Scandinavia, the key export markets for Netherlands. Recovery should also be supported by the boost to consumer spending power caused by a sharp slowdown in inflation. We expect GDP to fall by 0.8% in 2012 before recovering to grow by 1.5% in 2013. Download Eurozone Outlook for Netherlands 
::: Back Portugal Being able to return to financial markets by mid-2013 now looks very unlikely, and the need for more financial assistance from the EU and the IMF is almost certain. Stringent fiscal and structural conditions will weigh heavily and GDP is now forecast to decline by 4% in 2012 and a further 2.1% in 2013. The deficit target of 5.9% of GDP in 2011 was only met because of a one-off transfer from banks’ pension funds to the state. To enable it to lower the deficit to 4.5% of GDP in 2012, the Government has unveiled a very tough budget. This will hit both consumer spending and investment. Encouraging structural reforms agreed with the EU and the IMF — particularly in the labor market — are under way. These are likely to benefit the Portuguese economy in the long-term. Download Eurozone Outlook for Portugal 
::: Back Slovakia Heavy dependence on exports to the Eurozone means that GDP growth will be weak in the short term. After growth of about 3% in 2011, we forecast that the pace will slow to just 0.6% in 2012. The downturn will be even more severe in the manufacturing sector, with the key automotive industry particularly badly hit. The outlook is also complicated by the looming credit crunch in Europe. Liquidity concerns in the Eurozone, coupled with the need to comply with tougher EU capital requirements, will force many banks to reduce the flow of funds to their subsidiaries in Eastern Europe. With heavy foreign participation in its banking system, Slovakia would be severely hit by a credit crunch. But growth will pick up over the medium term on the back of the country’s high productivity, the need to enhance capacity and the fact that the economy is well integrated with European supply chains. Download Eurozone Outlook for Slovakia 
::: Back Slovenia The already weak economy ground to a halt in H2 2011, despite strong tourism. GDP is forecast to stagnate in 2012 as exports and investment remain subdued and fiscal tightening weakens domestic demand. Growth is forecast to recover to about 1% in 2013 as external demand strengthens, boosting exports, with a gradual pickup to around 3% in 2015–16. Public debt in Slovenia has doubled in under four years. Furthermore, the new coalition Government’s proposals for spending cuts are expected to fall short of what the central bank regards as necessary. The deficit is forecast to remain above 3% of GDP throughout the forecast period and public debt will continue to rise. The short-term risks to the economy are on the downside. A further deterioration in the Eurozone would cut demand from Slovenia’s largest export markets, stalling any export-led growth. The financial tensions created would also lead to a tightening of credit conditions. Download Eurozone Outlook for Slovenia 
::: Back Spain With the 2011 fiscal deficit even higher than expected, the Government has announced yet more austerity measures to try to retain investor confidence and allay fears of deeper deficit and debt problems. But with domestic demand likely to be further depressed as a result, we now forecast GDP will decline by 1.2% in 2012 and by a further 0.6% in 2013, after growth of just 0.7% in 2011. With consumer demand expected to decline by over 1% in each of the next two years, companies will make further cutbacks in investment and personnel, so unemployment is now expected to rise to over 25% by the end of 2012. But the process of fiscal consolidation and structural reform is expected to bear fruit over the medium term, with GDP growth forecast to return in 2014 and then rise to over 2% a year in 2015–16. Download Eurozone Outlook for Spain 
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