Forecast assumptions — international environment and commodity prices
The 9 December agreement to tighten fiscal policy and monitoring is a significant further step towards the integration of the European Union.
While there are now hopes of progress in Greece, Italy and Spain, it is imperative that all Eurozone countries implement structural reforms rapidly, to reduce public debt and to enable them to tap into strong growth in nascent consumer markets in emerging economies.
"Businesses have been among the loudest voices arguing for the single market and currency to enable them to compete in the global economy."
- Mark Otty
The debt crisis still not at an end, pressures are building in a number of countries. The October 2011 deal tried to address three aspects of the Eurozone crisis, but did not go far enough to ensure a permanent resolution. New governments are now in place and it is hoped that the agreement can be implemented.
The Eurozone reforms agreed on 9 December 2011 that institute tighter fiscal rules and provide additional funding are a step in the right direction. It is essential that these reforms are implemented swiftly and in a credible manner.
Our baseline forecast shows that the Eurozone economy will probably fall back into recession in Q4 2011 and Q1 2012. If restructuring of Greek debt occurs in an “orderly” fashion, moderate growth should resume toward the end of next year, rising to 1.5%-2% in 2013-15, after just 0.2% for 2012. The unemployment rate is not expected to fall below 10% until 2015.
The European Central Bank (ECB) has started to reverse its premature interest rate rises of earlier in 2011. Ongoing doubts about the ability of some countries to implement necessary reforms may mean that the ECB will need to keep buying government bonds, now widely seen as one of its essential roles in this crisis. With bond markets extremely volatile, and weak growth prospects and high borrowing needs in 2012, the ECB may have to consider acting as the lender of last resort if even deeper problems arise.
Time for the Eurozone reforms to tap into emerging market growth
The changing composition of growth in the RGM economies as they mature over the medium-term will offer major opportunities for Eurozone companies.
Growth of their middle classes will offer a rapidly expanding new market for consumer-based manufactured goods and food – as well as in distribution, tourism, hotels and restaurants – sectors that are all suffering in European countries. Other sectors that will also grow strongly in the major emerging markets include financial and business services, areas in which western businesses have a strong advantage.
