EY Eurozone Forecast: December 2014

Crisis turning to recovery – but the Eurozone remains vulnerable

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Growth to pick up again in 2015 after recent slowdown …

  • After a relatively encouraging first three quarters, the final months of 2014 have seen the pace of recovery slow and a revival of fears about the Eurozone’s long-term future. We agree that substantial risks to the recovery remain, and that major obstacles to growth need to be tackled if Eurozone economies are to prosper in the medium term.
  • But 2015 should see several headwinds turn to tailwinds — including the lagged effect of a weakening euro, easing fiscal austerity and more certainty in the banking sector. These factors, together with sharply lower oil prices, will support a strengthening Eurozone recovery.
  • We expect GDP growth to pick up from 0.8% in 2014 to 1.2% in 2015, and then 1.6% a year in 2016–18.

... as exports grow and business confidence is restored

  • Despite slower growth in the emerging markets, the Eurozone will enjoy stronger export demand in 2015, as the US and UK recoveries continue and a weaker euro offers relief to less competitive economies. Export growth should rise to 3.7% in 2015 and over 4% the year after.
  • Furthermore, with the European Central Bank (ECB) asset quality review (AQR) helping to restore confidence in the banking sector, as well as complementary measures to boost liquidity, rising business confidence should be met with more readily available finance from 2015 onwards.

Rising domestic demand and an improving labor market should support growth …

  • Barring further economic shocks, the Eurozone’s recovery should become more domestically driven. Households are set to receive a substantial boost from energy prices that are lower than anticipated — the weaker outlook for oil prices should boost net household income by at least 0.3 percentage points in 2015 relative to our September forecast.
  • Moreover, although unemployment remains near record levels in a number of countries — over 24% in Spain and 26% in Greece — the labor market has been improving tentatively throughout 2014. With businesses investing and hiring more confidently in the years ahead, the labor market should continue to improve. These factors will support a more robust pace of household spending growth — up from 0.7% in 2014 to 1.3% in 2015 and then 1.4% a year in 2016–18.

… but the Eurozone is still vulnerable

  • The recovery that started across the Eurozone in mid-2013, but which has faltered several times since then, is therefore expected to continue in the coming years. But the legacy of the crisis means that the recovery will be slower than previous rebounds. Member states, households, businesses and governments will all need to restrain spending growth in order to reduce debt levels. The pace of Eurozone growth in 2016–18 will be more than half a percentage point slower than in the decade up to 2007, when GDP growth averaged 2.3% a year.
  • More worryingly, policy-makers have much-diminished weaponry to tackle further shocks. With seven Eurozone member states’ public debt above 90% of GDP and five above 100%, governments have minimal room for fiscal stimulus. And in the event that inflation fails to pick up as anticipated in the coming years, it is unclear whether a large-scale sovereign bond purchase program would be as powerful as it might have been a year or two ago.
  • Although the Eurozone looks set to continue its recovery from the last crisis, there are worrying question marks about its ability to deal with future shocks..