EY Eurozone Forecast: September 2013
The Eurozone is out of recession but is slow recovery in sight?
At last, the Eurozone’s longest recession is over.
GDP growth of 0.3% in Q2 ended six consecutive quarters of economic contraction. However, the region’s longest recession in at least three decades has taken its toll. In the 18 months prior to Q2, GDP in the currency zone fell 1.5%, to stand 3.5% below the pre financial crisis peak in 2008, while unemployment has climbed to over 12%.
The road to recovery will be long and difficult. Along the way, there will be plenty of twists and turns for policy-makers to negotiate. The lengthy recession has changed the Eurozone economy, and the political context in which it operates, in a number of important ways.
Despite growth in Q2, we still expect the Eurozone economy overall to shrink 0.5% this year, ahead of growth of almost 1% in 2014. Looking to the medium term, we anticipate growth of 1.5% a year in 2015–17. The easing of the drag from austerity and a recovery in world trade led by stronger activity in the US will underpin this gradual recovery.
Warnings from emerging markets
While demand for exports will play a large role in the recovery, policy-makers would do well to heed the warnings from emerging markets. Their weak recent performance demonstrates the risk of relying on external demand to maintain the recovery: sustainable growth also requires a healthy domestic economy.
However, various factors are making this difficult:
- Governments, businesses and households continue to deleverage, while a thinly capitalized banking sector remains under pressure to keep a lid on lending.
- At the same time, the steady rise of unemployment is set to continue. We expect the jobless figure to peak at nearly 20 million in 2014, equal to over 12.5% of the labor force, before falling gradually.
- Peripheral countries in particular are suffering from a lack of affordable finance. This is constraining business investment and limiting the scope for output growth.
The financing problems in the periphery point to a wider development over recent years. Divergence within the Eurozone is more marked than it has been since the early 2000s. As well as sharp differences between the core and the periphery in terms of lending, labor market conditions are also diverging. In addition, business across the Eurozone can face very different interest rates.
As performance among Eurozone members becomes more divergent, it is more difficult for policy-makers to make decisions that are in the best interests of the economy as a whole. As stability and coherence are tested, the logic of further integration will come under even greater scrutiny.
As the Eurozone enters a period of relative calm, the time is right to speed up restructuring, especially in the banking sector. Policy-makers should also take the opportunity to address the difficult credit conditions in peripheral countries and press ahead with moves to develop a banking union.
A new Eurozone economy is emerging from the recession
Some familiar challenges remain and countries will need to clear some new obstacles as the continent moves down the path to sustainable growth. As Europe recovers, new opportunities will come into view. More than ever, it is crucial for businesses to understand the economic developments in the Eurozone and the environment in which policy-makers make their decisions.
Area Managing Partner, Europe,
Middle East, India and Africa