Country focus

Austria

Conditions for an export-driven recovery remain difficult against the background of the depressing effect of the Eurozone crisis on demand for Austrian exports. Growth prospects, in particular in 2013 will largely rest on the resilience of domestic demand to an only gradually improving environment.

Private consumption stagnated in the first nine months of 2012, but real incomes have increased for the first time in four years. This should stimulate spending in 2013-14 despite rising unemployment and low confidence.

Despite recent progress, our forecast remains subject to considerable downside risks stemming from the Eurozone crisis. Should these materialize, Austria should still have leeway to ease fiscal policy, as the fiscal position remains relatively benign, despite likely deficit overshooting in 2012–13.

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Austria
(annual percentage changes unless specified)

Source: Oxford Economics.

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Belgium

The Belgian economy has slowed as the Eurozone crisis has undermined export activity as well as domestic demand; with GDP flat in Q3, but with a fall expected in Q4 an overall 2012 GDP contraction of 0.2% is expected. We forecast little improvement in 2013 as concerns about the Eurozone persist.

And while business confidence remains well above the low seen in 2009, it has been edging down through most of 2012, driven by the slowdown in Eurozone trade and investment and a persistent risk of Eurozone breakup.

Although the sluggish recovery should allow inflation to ease, there remains a lack of progress on reforms to tackle declining competitiveness, low employment and heavy tax burden on labor and capital income. The 2013 budget includes some measures, but falls short of what is required.

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Belgium
(annual percentage changes unless specified)

Source: Oxford Economics.

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Cyprus

The Cypriot government is in negotiations with the EC, ECB and IMF over a bailout package totaling up to €16 billion, with up to €10 billion of the package likely to be allocated to the banking sector.

The financial crisis is having profound economic impacts, with GDP expected to drop 2.3% in 2013. Financial crises take a long time to resolve and growth will also be hit by fiscal austerity measures under the bailout package. We also expect GDP to fall by around 2.3% in 2013 with a further 1.2% drop in 2014.

The outlook for investment is bleak; public investment will be hit by austerity measures, construction activity is sliding and, despite some projects such as a new oil storage facility, private investment will also shrink sharply this year and next. Conditions are just as tough for consumers as public sector wages are frozen and unemployment is surging, while purchasing power is squeezed by the VAT rise implemented in March.

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Cyprus
(annual percentage changes unless specified)

Source: Oxford Economics.

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Estonia

After slowing in Q2, year-on-year GDP growth accelerated to 3.4% in Q3. The threat of recession has been averted due to stronger domestic demand and, with the pace expected to be maintained in Q4, we have raised our full-year 2012 growth forecast to 2.8%, before a pick-up to over 3% in 2013.

The outlook is for substantially stronger growth, of a little over 4% a year in 2014–16, as larger export markets recover and stronger domestic investment offsets the expected reduction in fiscal deficit spending. Export growth will strengthen despite rising relative costs, caused by persistent wage and price inflation differentials over Eurozone partners.

A rising state wage bill and infrastructure projects prioritized to avert the risk of recession will raise the fiscal deficit to 1-2% of GDP in 2012–13 and may keep it open longer than the government intends. However, minimal public debt (still below 7% of GDP) makes a 2-3 year deficit easily financeable.

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Estonia
(annual percentage changes unless specified)

Source: Oxford Economics.

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Finland

We still expect Finland to avoid recession thanks to its strong fiscal position and well-capitalized banking system, outperforming most of its Eurozone peers. We forecast that the economy will grow a modest 0.4% in 2012 and 0.5% in 2013.

The risks to growth remain skewed to the downside, as domestic demand will offer only limited support to the economy. That said, the performance of the economy will also depend significantly on a very fragile external environment, and Finland could slip back into recession if a scenario of persistent global slowdown materializes.

With a budget deficit as low as 0.7% of GDP in 2012, Finland continues to display a healthier fiscal position than most Eurozone countries, which has enabled it to retain its AAA credit ratings. We forecast the fiscal deficit will remain below 1% of GDP throughout the next decade, with public debt falling to around 45% of GDP by 2016.

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Finland
(annual percentage changes unless specified)

Source: Oxford Economics.

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France

France is rightly focusing on enhancing competitiveness over the next few years. Making the country’s products, services and production locations more attractive is essential to achieve sustained robust growth.

The challenge is significant and the positive impact of enhanced competitiveness is likely to materialize only slowly. We forecast GDP growth of just over zero in both 2012 and 2013, followed by 1.2% a year on average in 2014–16.

The Government’s competitiveness policies could provide a boost to investment, especially if they are followed by similar measures. This comes on the heels of a set back in the 2013 budget, which raised the tax burden on companies. So it will probably be some time before businesses can be confident that the policy environment is indeed turning more favorable to investment and recruitment in France.

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France
(annual percentage changes unless specified)

Source: Oxford Economics.

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Germany

Although German GDP growth has slowed in response to the Eurozone crisis, it has not actually contracted yet unlike most other countries in the region. But this looks set to change; weakness in business confidence, industrial orders and tightening credit conditions point to a 0.2% quarterly contraction in GDP in Q4.

But Q4 is unlikely to mark the start of a sustained period of falling output. We expect quarterly growth to pick up during 2013 as recovery in world trade boosts export growth and a gradual improvement in business confidence lifts investment. Consequently, we forecast GDP growth of 0.8% in 2013, a little below the expected outturn for 2012, and then 1.7% in 2014.

The slowdown in the economy has hit the labor market, but any further rise in unemployment should be modest. We expect the unemployment rate to rise from 5.4% in Q3 2012 to 5.8% by Q4 2013 before starting to fall back in 2014.

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Germany
(annual percentage changes unless specified)

Source: Oxford Economics.

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Greece

Fresh austerity measures will continue to weaken an already battered economy. We expect output to decline by over 4% in 2013 after an estimated 6% contraction in 2012, leading to a deterioration in the debt ratio in the medium term. On Greece’s current path, we forecast this will remain far above the 120% target by 2020.

As a result, official creditors have agreed to changes in Greece’s bailout program, enabling release of the delayed tranche of funding. But there is still disagreement over how much debt relief Athens needs. It seems likely that a credible and decisive resolution to Greece’s debt sustainability problem will continue to be postponed, prolonging the uncertainty surrounding it future in the Eurozone and hence delaying the economy’s recovery.

Given the weakness of domestic demand, the export sector is Greece’s avenue for growth. Recent export performance has been disappointing, but developments on this front will be crucial in the future.

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Greece
(annual percentage changes unless specified)

Source: Oxford Economics.

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Ireland

According to the latest review by the EU and IMF, economic reforms in Ireland remain on track, with the government expected to regain full market access by the beginning of 2014, when the bailout money runs out. Indeed, 10-year government bond yields have fallen drastically in recent months and are trading at less than 5% – well below their peak of over 14% in July last year and lower than their Spanish equivalents.

But economic reforms, though necessary for putting Ireland on a stable long-term growth path, are contributing to tough operating conditions in the near term and the outlook for domestic demand is weak. Indeed the economy is still in recession and GDP growth is expected to remain flat in 2012 overall, before picking up to grow 1% in 2013 and 1.9% in 2014, driven almost entirely by exports. Therefore, severe challenges for economic policy remain.

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Ireland
(annual percentage changes unless specified)

Source: Oxford Economics.

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Italy

Italy’s GDP contracted for the fifth successive quarter in Q3 2012, and was down 2.4% on the year, as companies struggle in the wake of tighter credit conditions and plunging demand. The recession is expected to last into 2013, with GDP now forecast to fall 2.1% in 2012 and 1.1% in 2013.

The Government revised its austerity plan for 2013 in an attempt to boost growth. But rising public debt – seen peaking at 127% of GDP in 2013 – will raise pressure from the EU to implement further consolidation, which in turn would risk keeping the economy in a vicious circle of austerity and recession and make intervention by the ECB more likely.

The banking sector will remain under strain, as banks piled up troubled Italian government bonds and face a surge of bad debts. This will restrain credit to companies and households and weigh on the recovery. We now forecast GDP growth will average just 1% in 2014–16.

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Italy
(annual percentage changes unless specified)

Source: Oxford Economics.

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Luxembourg

Net trade has remained a drag on growth in 2012, and will not contribute more noticeably until 2014. Until then, domestic demand will continue to drive rather weak growth, albeit still outperforming the Eurozone despite a weak performance by the banking sector.

With the gradual stabilization of the Eurozone, growth in the banking sector should add impetus to growth from 2014, generated by non-banking financial services, which have been more resilient, and a boost services exports.

The draft budget for 2013 contains savings measures able to consolidate the fiscal position in the medium term, despite very benign debt levels at below 20% of GDP. In order to consolidate long-term finances, Luxembourg will also need to move ahead with adjustments in the health and pension system.

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Luxembourg
(annual percentage changes unless specified)

Source: Oxford Economics.

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Malta

The contrast between contraction in the domestic economy and robust growth in exports seen at the Eurozone level is particularly stark in Malta. But while export oriented sectors like tourism and financial services are major contributors to economic activity, growth will need to be broader based to be sustained.

Growth will also remain constrained by the need to tighten fiscal policy and subdued activity in the Eurozone, and to a lesser extent the UK. After a year of near-stagnation in 2012, we expect GDP growth of 0.8% in 2013 and 1.5% a year on average in 2014–16.

But large parts of the economy are in recession. We estimate that investment has shrunk by 9% in 2012, to 40% below pre-crisis peaks. Given the weak external prospects, we expect only a slow recovery with investment still around 30% below its pre-crisis peak by 2016. This will constrain employment in sectors other than tourism, which has performed well so far in 2012 despite weak Eurozone demand.

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Malta
(annual percentage changes unless specified)

Source: Oxford Economics.

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Netherlands

The short-term outlook remains very challenging, with the economy on the verge of sinking back into recession. GDP collapsed in Q3 2012 as export demand declined and added to the drag from the domestic economy. Recovery from next year is likely to be slow; though the squeeze on consumers should steadily ease, the pick-up in external demand will be slow with the Eurozone set for a very weak and protracted recovery, while the domestic austerity program will be a further drag. Our forecast shows GDP falling by 0.9% in 2012 and 0.4% in 2013, before a weak recovery sees expansion of just 1% a year from 2014–16.

The rapid formation of a two-party coalition promises greater political stability. However, its plan for further austerity is a retrograde step. There is room to pursue a slower pace of deficit reduction without compromising market sentiment or the AAA rating and the current plan will weigh heavily on growth and may ultimately compromise the ability of the Government to balance the budget.

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Netherlands
(annual percentage changes unless specified)

Source: Oxford Economics.

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Portugal

In its 2013 budget, the Government unveiled some of the harshest austerity measures seen in the past few years in order to try to meet the fiscal deficit target of 4.5% of GDP set by the EU and the IMF. Although the IMF has expressed strong support for the latest package of measures, we feel that these pose the risk of plunging the economy in a vicious downward spiral. We have downgraded our growth forecast in 2013 and now expect GDP to decline by 2.6%, compared with a fall of 2% projected in our Autumn report.

Additional austerity is likely to dent domestic demand. Higher taxes and job cuts in the pubic sector will damage individuals’ disposable incomes and lead to higher unemployment, while lower consumer demand will dampen companies’ propensity to invest. As such, both consumer spending and investment are likely to fall over the coming year.

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Portugal
(annual percentage changes unless specified)

Source: Oxford Economics.

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Slovakia

Slovakia’s recent model of export-led growth will be tested in 2013 by a number of challenges. Weak Eurozone demand means the external environment will remain difficult, and capacity constraints will begin to bind in key export sectors. So export growth is expected to slow from an estimated 7.6% in 2012 to 4.2% in 2013.

There is likely to be a mild rebalancing of demand towards domestic sources in 2013 as consumption and fixed investment recover from their estimated contraction in 2012. However, the economy will remain fundamentally reliant on foreign demand, meaning Slovakia will struggle to improve on its 2012 performance. GDP growth is forecast to remain at 2.3% in 2013, the same as in 2012.

Persistent structural problems in the labor market are unlikely to alleviate much in 2013. Inflation is forecast to only come down slowly, from 3.7% in 2012 to 3% in 2013. In addition, growth will not be fast enough to bring unemployment down much below 14%.

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Slovakia
(annual percentage changes unless specified)

Source: Oxford Economics.

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Slovenia

The outlook for Slovenia continues to deteriorate. With the Eurozone mired in recession, economic activity has weakened further as demand for Slovenian exports is faltering. In addition, domestic demand is not expected to support growth, as historically low levels of confidence among consumers and businesses as pressures from investors for more austerity measures will depress consumption and investment.

In view of this, we forecast a more severe recession than envisaged earlier, with GDP expected to fall 2.4% this year followed by a further 1.5% drop in 2013.
As most of the austerity measures will not be effective before next year, the government is almost certain to miss its deficit target of 3.5% of GDP for this year. We expect a deficit of 5.2% this year and 4.7% of GDP in 2013. As a result, public debt should peak at 60% of GDP in 2015 before it starts to fall gradually as economic activity finally gains momentum.

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Slovenia
(annual percentage changes unless specified)

Source: Oxford Economics.

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Spain

The continuing improvement in Spain’s competitiveness has made us more optimistic about export prospects, resulting in a modest upward revision to our near-term GDP forecasts. Following an expected decline of 1.3% in 2012, we now expect GDP to decline by 1.4% in 2013, with positive, albeit sluggish, growth of 0.3% forecast for 2014.

But at the same time we have raised our forecasts for the budget deficit, to 8.2% of GDP in 2012 and 6.5% in 2013. We believe that attempting to correct these overshoots with even more austerity measures would likely prove self-defeating, as they would merely deepen and prolong the recession.

The upward revisions to our headline GDP growth forecasts belie the deep uncertainty that continues to shroud the outlook. Although the immediate threat to Spain of a forced exit from the Eurozone has been reduced, more still needs to be done to address the interplay between sovereign and banking sector risks.

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Spain
(annual percentage changes unless specified)

Source: Oxford Economics.

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