EY Eurozone Forecast: June 2015

Eurozone rebalancing toward broad-based recovery

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A sustained spell of solid growth in prospect

  • A positive start to 2015 — with Q1 GDP growing by 0.4% on the quarter, slightly stronger than the US or the UK — suggests that Eurozone consumers are responding to lower energy prices. As a result, we have raised our forecast for growth in 2015 to 1.6% from 1.5% seen in March with 1.9% now seen for 2016.
  • Although growth may then slow a little, the recovery will become more broad-based. Investment spending should become a key growth driver from next year and government spending will make an increasing contribution. We forecast GDP growth of 1.7% in 2017 and an average of about 1.5% a year in 2018–19.

Labor market recovery to support consumer spending

  • Latest data suggests consumers are spending their energy windfall, despite stubbornly high unemployment and weak wage growth, and we have lifted our forecast for consumer spending growth in 2015 from 1.6% to 1.7%. But as oil prices continue to recover gradually in the coming year, this energy windfall will slowly reverse. The modest drag on household income will offset gains from an improving labor market, meaning consumer spending will grow at a similar rate in 2016, around 1.6%. But as firms step up recruitment and labor market slack falls, wage growth will start to gather pace. As such, consumer spending can sustain growth of a little over 1.3% a year in 2017–19.
  • Consumer recovery is likely to lead to stronger import growth this year, so even with export growth picking up we have lowered our forecast for the Eurozone current account surplus in 2015 to 2.3% of GDP. But with consumer spending growth easing in the years ahead, and export prospects largely unchanged from our March forecast, we still expect the current account deficit to ease only gradually in the coming years.

Investment will gradually recover as uncertainty fades

  • There is evidence that businesses are preparing to invest, with increasingly positive business surveys and loans data in recent months. For now, this is only tentatively feeding into capital spending itself. But as uncertainty over Greece’s future is addressed, and with lower borrowing costs than in previous years, we expect this to become more apparent moving into 2016.
  • We expect total investment to grow 1.1% in 2015, before accelerating to almost 3% in 2016–17, before easing to 2.5% in 2018–19. This is well short of pre-crisis rates of investment growth, but, since much of this was accounted for by housing, a slower pace of capital accumulation need not necessarily imply lower future output growth.

Fiscal squeeze will gradually lift

  • As recovery takes hold, tax revenues will do more of the work in reducing budget deficits. Government spending growth should accelerate modestly through the rest of the decade, from 0.5% in 2015 to 0.7% in 2017 and then 0.9% in 2019. But it will be important for governments to ensure new resources are targeted at restoring public investment, which remains 25% below its 2009 level.