Country focus

Austria

Conditions remain relatively difficult, despite Austria being better placed than other economies to tackle current and future adversities and likely to outperform Eurozone peers.

But the reduced threat of an imminent Eurozone breakup means that the risks to our forecast have become more balanced. And there is a chance that these lower risks, along with investment conditions that are still favorable on the supply side, will encourage businesses to activate investment plans they had shelved earlier. This would boost growth beyond our current forecast.

Subdued GDP growth of 0.8% in 2013 will mainly come from private consumption, despite the fact that the latter is set to grow only moderately. From 2014, as the Eurozone stabilizes further and external demand picks up more strongly, exports will also start to boost growth, and the GDP growth rate could rise to around 1.5% a year.

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Austria
(annual percentage changes unless specified)

Source: Oxford Economics.

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Belgium

Belgium is set for another small 0.2% GDP decline in 2013. Deleveraging in key markets means that exports are set to grow by just 1.5%. And consumers are increasingly concerned about labor market prospects and will only increase their spending moderately. At the same time, cuts to government spending and falling business investment will weigh on growth.

The recovery will be slower than after previous recessions, as the pace of fiscal consolidation in Belgium quickens in 2014–15. And although export growth will pick up, the loss of competitiveness will mean a slower pickup than in the pre-crisis years. We expect GDP growth to be just 1% in 2014 and 1.2% in 2015.

Much more could be done to boost the pace of growth by accelerating the reform process, in particular by reorienting the burden of tax to encourage labor force participation and job creation.

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Belgium
(annual percentage changes unless specified)

Source: Oxford Economics.

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Cyprus

The banking crisis in Cyprus triggered by the restructuring of Greek sovereign debt is taking a heavy toll. The latest GDP data confirms that Cyprus is sliding deeper into recession.

The strains that tipped the economy into recession show no sign of abating. Against this backdrop the shape of our forecast is broadly unchanged. We expect GDP to contract by just over 2% in 2013, similar to the outturn in 2012, and then by a further 1.1% in 2014.

The result of the recent election means an agreement on a bailout is likely in the next couple of months. New President Nicos Anastasiades now has a mandate to seek the quick agreement with the EU and the IMF on the terms of a bailout that was part of his campaign agenda. It is estimated that Cyprus needs €10b to recapitalize its hobbled banking sector and a further €7.5b to support public sector finances.

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Cyprus
(annual percentage changes unless specified)

Source: Oxford Economics.

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Estonia

Initial estimates show that Estonia’s GDP grew by 3.2% in 2012. And the economy is set to continue to outgrow the Eurozone this year as exports start to recover and continued fiscal stimulus triggers more private sector investment. Growth is forecast to quicken to about 4% a year in 2014–17, with the economy gradually rebalancing towards domestic demand.

Private consumption and investment will gradually replace exports as the main growth driver. As a result, imported inputs as well as higher inflation than the rest of Eurozone will lead to a widening of the trade deficit in 2013–15.

Downside risks to our growth forecast remain, based on specialization within industrial and service sectors and reliance on a comparatively small number of large export orders. However, these risks are diminishing as production becomes more diversified, service-oriented and quality-competitive.

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Estonia
(annual percentage changes unless specified)

Source: Oxford Economics.

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Finland

After contracting for two consecutive years, with GDP forecast to decline 0.2% in 2013, the same as in 2012, the Finnish economy is expected to gain momentum gradually over the medium term, helped by a recovery in the Eurozone. We forecast GDP will grow by about 2.2% a year in 2014–17, supported by stronger exports and fixed investment.

The risks to our growth forecasts are no longer skewed to the downside, as fears of an imminent Eurozone breakup have reduced significantly, world trade is now picking up and activity in emerging markets appears to be accelerating again.

Despite its AAA credit rating, the Finnish Government will implement a €2.7b cut (equal to 1.3% of GDP) to its budget in the medium term. While this will not dent growth much, it may be a missed opportunity to foster activity via some fiscal stimulus, given that Finland has one of the healthiest public finances within the Eurozone.

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Finland
(annual percentage changes unless specified)

Source: Oxford Economics.

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France

Reduced downside risk from the global environment means that the outlook for the French economy is beginning to improve. But positive effects on growth and employment will take some time to emerge, and so we forecast a second year of stagnation in 2013. As conditions stabilize and confidence returns, we then forecast GDP growth of about 1.3% a year on average in 2014–17.

A further rise in unemployment will constrain income growth this year, which implies that consumer spending will remain very subdued in 2013. As employment eventually starts to pick up and inflation subsides, we expect consumer demand to rise gradually in 2014–17, averaging 1.1% for the period.

Fiscal measures announced so far suggest that fiscal policy will be tightened by around 1.2% of GDP in 2013, somewhat more than in 2012. The pace of fiscal tightening will probably lessen from 2014 onwards, which should cut the deficit from 4.7% of GDP in 2012 to 1.4% in 2017.

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France
(annual percentage changes unless specified)

Source: Oxford Economics.

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Germany

The German economy ended 2012 on a weak note, with a contraction of 0.6% in Q4. However, the combination of sound domestic fundamentals, a normalizing risk environment and an improving global backdrop mean that a return to growth is expected in the first half of 2013. But the weak end to last year means that we forecast growth of just 0.7% in 2013 before a pickup to 1.9% in 2014.

A more predictable environment for business planning means that business investment will move from a contraction of 2.7% in 2012 to close to zero this year and then growth of almost 6% in 2014.

We expect the export situation to improve during the next few years as world trade picks up and the European economy returns to growth. After an expected slowdown to 2% in 2013, export growth is forecast to rise to 4.7% in 2014.

A resilient labor market, strong household balance sheets and above-inflation wage growth mean that we expect consumer spending growth to rise slowly to 0.8% in 2013 and then 1.2% in 2014.

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Germany
(annual percentage changes unless specified)

Source: Oxford Economics.

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Greece

A much-needed overhaul of Greece’s bailout has relaxed the conditions attached to its continued receipt of funds, implying a commitment by creditors to keeping the country in the Eurozone. As a result, we now think the risk of Greek euro exit in 2013 is very low.

However, even the revised program could easily be knocked off track. One issue is implementation risk — the program still requires stringent fiscal tightening, which will heighten social costs. The other major risk is that GDP continues to decline for longer than the Government projects; we expect this will cause Greece to continue to miss even the revised targets.

The next two years will be difficult as more austerity measures take effect. Unemployment is expected to peak at over 28% and a return to growth is not expected until 2014–15. The speed of the recovery will depend critically on progress in structural reform beyond the labor market, which has so far been uneven.

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Greece
(annual percentage changes unless specified)

Source: Oxford Economics.

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Ireland

Despite improving financial market conditions and sharply lower bond yields, Ireland’s growth prospects remain weak in the short term. In the light of the latest budget, which included further fiscal tightening, we have lowered our growth forecast for 2013. GDP is now expected to rise just 0.1% compared with our previous forecast of 1%.

A weak labor market, high levels of household debt and fiscal tightening have meant that the fundamentals underpinning consumer spending are unsupportive. We expect consumption to fall by almost 2% in 2013, followed by very marginal growth in 2014.

Meanwhile, investment, which is already 55% below its level in 2007, is expected to continue to fall until the end of 2013. This is due to a combination of tight credit conditions, weak domestic demand and a lack of appetite among firms to borrow for investment. Investment is forecast to fall by 9.5% in 2013, before starting to rise again in 2014.

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Ireland
(annual percentage changes unless specified)

Source: Oxford Economics.

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Italy

The Italian economy has been in recession since Q3 2011, with the contraction in 2012 now estimated at 2.2%. GDP is expected to decline further in 2013, by 2%. However, several indicators point to an improvement in business conditions and a stabilization of activity in the near future. We expect GDP to rise by 0.2% in 2014, with growth then seen averaging about 1.3% a year in 2015–17.

Household consumption is expected to lag behind the recovery. Household income has been trimmed by fiscal austerity and credit constraints remain tight. We expect consumption to decline some 3% in 2013 and then to be stagnant in 2014.

The budget deficit appears under control, but the fiscal situation remains a source of downside risks. Public debt is expected to reach 129% of GDP in 2014 and a weak government after the inconclusive election in February could exacerbate financial tensions again. As a result, fiscal rigor, although negative for growth, will remain imperative.

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Italy
(annual percentage changes unless specified)

Source: Oxford Economics.

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Luxembourg

Greatly diminished risks of an imminent Eurozone breakup are likely to underpin the recovery of the financial sector as a whole in 2013, although the banking segment is still in a phase of consolidation.

Business and related services will show only muted growth this year and, as they have been the main drivers of job creation since the crisis, employment growth is to slow or probably reverse. Fear of job losses will add to the uncertain outlook and keep consumer confidence low, with a dampening effect on spending.

The weak external environment will restrain GDP growth to about 1% this year. Only in 2014, with a more marked pickup in external demand, not least for financial services, will exports contribute positively to GDP growth of 3% — a relatively strong rate as a result of the financial sector in the Eurozone recovering earlier than the real economy.

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Luxembourg
(annual percentage changes unless specified)

Source: Oxford Economics.

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Malta

The Maltese economy remains relatively resilient. The tourism sector continues to attract visitors and the financial and industrial sectors have scope to develop further. We forecast GDP growth at 1.3% in 2013, similar to 2012, accelerating to about 1.6% a year on average in 2014–17, somewhat above the Eurozone average, but not fast enough to maintain employment growth.

Despite the economy typically being favorably perceived by investors, investment has been weak in the recovery so far and will need to be lifted to ensure continued growth of tourism and exports. The 2013 budget includes measures to enhance Malta’s attractiveness to domestic and foreign investors.

Fiscal policy remains focused on gradual deficit reduction and inflation control. We forecast the public deficit will narrow from an estimated 2.3% of GDP in 2012 to 1.4% in 2017, falling short of EU calls to cut the deficit to 0.3% of GDP in 2015 because of the need for more spending on new energy sources and social welfare.

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Malta
(annual percentage changes unless specified)

Source: Oxford Economics.

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Netherlands

Though the economy is likely to remain in recession in early 2013, an improving external outlook should see a return to growth later in the year. Stronger external demand, plus diminishing external risks, should also encourage firms to begin releasing funds for investment.

But the pace of the recovery will be constrained by the weakness of consumer spending, which is expected to continue falling for the remainder of 2013, and the austerity program, which will exert a further drag. Our forecast shows GDP falling by 0.5% this year, before a weak recovery yields growth of 0.9% in 2014 and about 1.2% a year in 2015–17.

Although external risks are more balanced than they were for much of 2012, the risks to the forecast are still skewed to the downside and revolve around the highly indebted consumer sector. Deeper retrenchment would cause the consumer sector to weigh on the recovery to an even greater extent, while the possibility of higher unemployment or further falls in house prices threaten more stress in the banking sector.

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Netherlands
(annual percentage changes unless specified)

Source: Oxford Economics.

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Portugal

Despite yields on Portuguese bonds falling sharply since September 2012, the outlook for the economy is still very weak due to severe austerity measures and poor prospects for the rest of the Eurozone. Portuguese GDP contracted by 3.2% in 2012 and we expect a similar decline in 2013, followed by weak growth in 2014 and then expansion of just over 1% a year in 2015–17.

The severe austerity measures adopted in the 2013 budget are likely to have more of an impact on domestic economic activity than the Government anticipates. We expect consumption to decline by 4% in 2013 and then post zero growth in 2014. The outlook for investment is also grim, with declines of about 9% seen in 2013 and 0.5% in 2014.

Given weak demand in the Eurozone, and particularly in Spain, we forecast export growth of only about 2% in 2013 and then around 3.5% a year in 2014–15.

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Portugal
(annual percentage changes unless specified)

Source: Oxford Economics.

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Slovakia

Growth in 2013 is expected to slow to just over 1%, from a relatively strong 2% in 2012, as one-off factors that boosted car production unwind, key export partners experience sluggish growth, and domestic demand is held back by fiscal austerity and high unemployment.

The first phase of a cyclical upswing is seen in 2014, with growth forecast to pick up to 2.4%, as domestic demand returns to normal and the Eurozone starts to grow again. But given Slovakia’s reliance on exports, this outlook would be vulnerable to more prolonged Eurozone weakness, and it is also possible that domestic demand will remain weak if supply-side problems in the labor market persist.

Slovakia is forecast to grow at about 3.5% a year over the medium term, supported by high-value manufacturing exports. But this prospect could be optimistic if the Government’s reforms — including ending the flat tax and the new labor code, which reregulates the labor market — hold back new investment in these key sectors more than anticipated.

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Slovakia
(annual percentage changes unless specified)

Source: Oxford Economics.

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Slovenia

The Slovenian economy remained in recession in 2012 and we expect it to continue to decline through most of 2013. We see GDP falling 1.5%, with only gradual improvement in 2014 driven by stronger activity in the rest of the Eurozone. But growth is seen picking up to 3% in 2015 on stronger public finances and global growth.

Political tensions remain high following the collapse of the coalition Government, adding substantial downside risk to our forecast. The formation of a new coalition may take time and the uncertain political outlook reduces the chances of key fiscal and bureaucratic reforms being implemented.

Weaker domestic demand than the rest of the Eurozone led to imports falling at a faster pace than exports in 2012, meaning that the current account moved into surplus. The external surplus is set to rise in the coming years, as exports will drive the recovery once Eurozone demand improves.

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Slovenia
(annual percentage changes unless specified)

Source: Oxford Economics.

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Spain

The Spanish recession deepened at the end of last year, but we believe that the pace of contraction in the economy will ease in coming quarters — as signaled by the recent improvement in leading indicators. Even so, GDP is forecast to fall by 1.6% in 2013, similar to the drop in 2012.

We remain hopeful that positive growth in economic activity will finally resume from 2014. The prospect of ECB intervention is keeping bond yields low, which should provide room for the restrictive fiscal policy stance to be eased next year, allowing the economy to recover gradually.

Although the ECB’s moves have reduced the risk of a near-term systemic crisis, investor confidence remains dependent on the ability of the Government to control public finances. We estimate that the budget deficit for 2012 was 7.5% of GDP, well above the official target of 6.3%. With the economy still in recession, the risk of continued fiscal slippage is significant, adding to the risk of an adverse reaction in the financial market.

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Spain
(annual percentage changes unless specified)

Source: Oxford Economics.

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