EY Eurozone Forecast: March 2014
Exports will drive a gradual recovery in 2014
The Eurozone’s recovery will gradually gather momentum in 2014 …
- Economic recovery in the Eurozone is expected to continue in 2014. It should gather pace slowly, as exports strengthen in response to rising global demand and a pickup in domestic demand triggers a return to modest investment growth.
- After two years of decline, we forecast Eurozone GDP growth of 1% in 2014, followed by a pickup to 1.4% in 2015, which is still very modest, and then only slightly faster growth of about 1.6% a year in 2016–18.
… and there are reasons for cautious optimism
- One source of upside risk to growth is on the government side. With less pressure from financial markets and the European Commission, governments may allow some fiscal slippage. The possibility of higher spending could mean that the drag on growth from fiscal austerity will be lower than we currently expect. In turn, this would enable stronger private sector demand to emerge.
- We might also see Eurozone monetary policy diverging markedly from US policy in 2014. While the US Federal Reserve is reducing its level of monetary stimulus, the European Central Bank (ECB) could ease monetary policy further, especially given the growing threat of deflation: inflation was just 0.8% in February. This should see the euro start to weaken, which in turn would give a further boost to exports.
But threats from divergence and deflation remain …
- However, the pace of recovery will vary across different member states. Divergence is nothing new, but the divide is no longer simply between the core and peripheral countries. While the outlook is now relatively positive for Germany, Ireland and, to a lesser extent, Spain, countries that have been slow to respond to the need for change — including France, Belgium and the Netherlands — are losing competitiveness and face more sluggish growth.
- There is also a threat of deflation, which would add to the problems of slow growth by raising the real levels of debt. At the same time, businesses face continued tight credit conditions as banks try to repair their finances ahead of the ECB’s asset quality review in November. Meanwhile, doubts persist about prospects for some leading emerging markets in the wake of recent market turmoil, and further escalation of the crisis in Ukraine could have a significant impact.
… and high unemployment is still a major concern
- While unemployment is expected to stabilize this year, it will remain high at about 12%. GDP growth of only 1% leaves little room for net job creation. And divergence among countries is marked, with some of the periphery facing much higher jobless levels, despite improving growth prospects.
- The level of youth unemployment is particularly worrying — in some peripheral countries it is now over 50%. This raises concerns about loss of skills and job opportunities for a generation of young people, and also poses questions about the effectiveness of education, the availability of training, and labor mobility.