EY Eurozone Forecast: September 2013
The Eurozone is emerging from its longest recession in at least three decades
- Quarterly GDP growth of 0.3% in Q2 saw the Eurozone emerge from its longest recession in at least 30 years, in line with our expectations.
- After falling by an expected 0.5% this year, we forecast GDP will grow by almost 1% in 2014 and then by around 1.5% a year in 2015–17.
- The main triggers for the recovery will be an easing in the drag from austerity and a recovery in world trade, led by a strong pickup in the US.
Recovery will be slow, with access to finance still a major problem
- The recovery will be constrained by deleveraging in the public and private sectors.
- The thinly capitalized and over-leveraged banking sector is a concern. Until they address this, banks will remain under pressure to rein in lending.
- A lack of affordable finance, particularly in the periphery, will limit the degree to which business investment recovers and will constrain potential output growth in many economies.
- Unemployment will continue to rise, to peak at close to 20 million in early 2014, and will only fall gradually thereafter.
Widest economic divergence in the Eurozone since the early 2000s
- Sharp differences in financing conditions and labor market developments will maintain stark divergence between Eurozone countries.
- This poses a threat to efficient decision-making and further economic integration — both of which are necessary to ensure the Eurozone’s stability.
Policy-makers still have plenty of work to do
- The European Central Bank needs to be ready to counter any tightening in market interest rates emanating from the US.
- Policy-makers should take advantage of the relative economic and financial calm to accelerate restructuring, particularly in the banking sector.
- There should also be clearer assessment of banks’ balance sheets and recapitalization needs, as well as measures to ease credit conditions in the periphery and a revival of the banking union project.
- In addition, we estimate that fiscal tightening will amount to more than 1% of GDP again this year. This will cut around one percentage point from GDP growth.