EY Eurozone Forecast: September 2014

Investment to drive growth

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Economic recovery will gain strength only slowly

  • The Eurozone recovery is expected to gain momentum gradually after disappointing near-stagnation in H1 2014. Despite the easing of interest rates by the European Central Bank (ECB) in June and September, growth is expected to remain lackluster and fragile. We forecast GDP growth of 0.9% this year, down from the 1.1% projected in our June report, 1.5% in 2015 and 1.7% in 2016. This is substantially lower than the pre-crisis average of 2.3% in 1997-2007.
  • However, the pace of the economic upturn will remain uneven across Eurozone countries. In particular, a faster upswing is expected in economies that have been prompt to implement structural reforms. The divergence between France and Italy on the one hand and Germany and Spain on the other is becoming more apparent. However, the recent depreciation of the euro is likely to bring more benefit to France and Italy, which are most sensitive to price competitiveness. 
  • Encouragingly, for the region as a whole, the economic revival is expected to be more balanced across the main GDP components, with investment and consumption overtaking net exports as the main drivers of growth from 2015.

 Investment emerges as a growth driver

  • A new driver of the upturn will be investment, sustained by gradually improving external demand and enhanced competitiveness from a weaker euro. Further easing in bank credit conditions, together with stronger final demand, may give a lift to business lending. We expect investment to grow by 2.4% in 2015 and 2.8% in 2016.

 Consumer spending builds momentum

  • Unemployment has stopped rising and this is having a material effect on consumer confidence and consumption more generally.
  • This gradual improvement in the labor market, together with better lending conditions and the reduced drag from fiscal consolidation, is expected to support consumer spending. We see consumption growth accelerating to 1.4% in 2015 and 1.5% in 2016, up from 0.8% this year.

Deflation has been avoided so far

  • Together with the continued healing of the financial sector and modestly strengthening activity, more supportive policy (with less emphasis on austerity and a more accommodative monetary policy) means that deflation is likely to be avoided. However, the Eurozone may still struggle with very low levels of inflation over an extended period of time, given continued significant spare capacity in the labor market and the need for further deleveraging.

Risks to our growth forecast are balanced

  • Risks to our GDP forecasts are balanced. Downside risks include the impact of US and European Union (EU) sanctions on the Russian economy and Russia’s retaliatory measures. Upside risks encompass stronger-than-expected earnings growth in Germany and a positive shock to exports boosted by the weaker euro and stronger world demand.