EY Eurozone Forecast: October 2015
Stability returns and systemic risks fade
- The Eurozone remains in a “sweet spot”, benefiting from lower energy prices, a more competitive exchange rate and solid demand in the UK and US. It seems likely that GDP will have grown by 0.5% in Q3 2015, up from 0.4% in Q2, and we expect 1.6% expansion for 2015 as a whole. With business confidence improving, investment spending will pick up in 2016, lifting growth to 1.8%. But this will mark the high point of recovery, as growth is then seen stable at 1.7% in 2017 and easing to 1.5% in the following couple of years, as the boosts from lower energy prices and a weaker euro fade.
- Consumer demand remains a key driver of Eurozone recovery in H2 2015. Renewed weakness in oil prices is providing a second (albeit less substantial) boost to household incomes, while household views of labor market prospects are tentatively improving. We expect consumer spending growth of 1.7% in 2015, the strongest since 2007. However, from 2016 onwards, with energy prices recovering, the pace of spending will ease to 1.4%, and 1.3% on average in 2017-19.
- Eurozone exporters posted the strongest year-on-year rate of export growth for four years in Q2 2015, benefiting from both the weaker euro and faster growth in the US and UK. We forecast export growth of 4.8% for the year. Weaker demand in a number of emerging economies will undermine trade prospects in the coming years however, restraining export growth to 4% in 2016, and around 3.4% a year in 2017-19. In addition, forecasts for export growth are subject to greater risk than for some time in the light of mounting uncertainty about the slowdown in China and associated recent financial market turbulence.
- As a result of firmer consumer and export demand, profitability is improving for Eurozone firms, with signs this is feeding through to capital spending. Looking ahead, as capacity utilization continues to rise, we expect business investment to accelerate from 2016 onwards. Tentative recoveries in housebuilding and public investment will also drive investment growth. Fixed investment growth will become an increasingly important driver of recovery from 2016, picking up from 1.8% in 2015 to 2.4% in 2016, and around 2.6% on average in 2017-19.
- The recovery will mean an increasing share of the work in closing budget deficits will be done by rising tax revenues. But given the extent to which the Eurozone’s debt burden has risen through the crisis years, government spending will remain constrained for some time. We expect only modest growth in current government spending through our forecast – around 1% a year from 2015-19.
- The systemic risks facing the Eurozone – widespread fiscal crisis and deflation – are fading, while the recent agreement between the Eurozone and Greece suggests renewed appetite to compromise on both sides. But the legacy of debt will mean the recovery will be slower than households and firms have been accustomed to. The “new normal” of slower growth need not be regarded as inevitable though – as some Eurozone economies have demonstrated, ambitious reform can boost job creation, spur investment and accelerate the pace of recovery.