Further contraction in the Eurozone is predicted while businesses avoid risk.
For economies and companies operating in the Eurozone, uncertainty about the future of the single currency has become an exhausting enemy. The EY Eurozone Forecast shows that companies exposed to the euro, especially those operating in the peripheral economies, are seeking to protect themselves from sudden shocks.
Dealing with shifting demand in once-familiar markets, they are preparing for a business environment that will present different challenges and opportunities from those seen in the past.
Although Germany and France performed better than expected, the Eurozone gross domestic product (GDP) fell 0.2% in the second quarter of 2012, after a standstill in the first. The Eurozone Forecast predicts a further decline, with a 0.5% contraction predicted during 2012 as a whole.
For most companies in the Eurozone, there seems little prospect of any rapid recovery in overall demand. Further austerity will hit consumers and companies, perhaps triggering a spiral of retrenchment. Looking further ahead, a reduction in consumer spending due to the number of baby boomers reaching retirement will suppress growth.
EY foresees economic expansion of just 0.2% in 2013 for the Eurozone. Recovery may follow in 2014, but it’s likely to remain anemic. The best hope is that structural changes in peripheral countries will start to bear fruit and result in lower unemployment and greater confidence.
According to Eurostat, the statistical office of the European Union, 18 million Eurozone workers are unemployed. The Eurozone’s unemployment rate of 11.3% shows a widening gap between it and the EU as a whole, where the rate is 10.4%. Worst hit is Spain, with 25.1% unemployment, followed by Greece at 23.1%.
Yet in Austria, the unemployment rate is only 4.5% and in the Netherlands it is just 5.3%.
Managing risk: liquidity, leverage and finance
For companies, financial and operational challenges are intensifying. As growth softens in Asia and Latin America, there is less insulation from troubles in the Eurozone. Today, revenues, margins and profits are being squeezed, making companies more vulnerable to external risks.
According to a European Central Bank (ECB) July 2012 survey, Eurozone banks said demand for loans from enterprises fell 25% in the second quarter, and would fall again in the third. The biggest reason was a steep fall in companies’ need to finance fixed investment, which has turned the spotlight away from banks’ still-sluggish business lending.
European companies’ cautious behavior has led to this decrease in demand for funding. Some are deleveraging, and others are reinforcing their liquidity by raising extra funds. Many European blue chips are taking advantage of market strength to swap short-term debt for longer-term bonds, often at lower interest rates.
During the first half of 2012, bond issuance by European companies matched the value of syndicated loans from banks, with French corporate leading the way. In bond markets, respected companies can often borrow more cheaply than banks.
Today, within the Eurozone’s single market, we see a striking diversity of demand patterns and operating environments emerging.
Astute financial and corporate investors from outside the EU have also learned how to navigate the business climate and are applying this lesson, buying loan portfolios and assets in a targeted way to ensure their continued growth.
Yes, tough times lie ahead. But whatever happens to the Eurozone and the single currency, Europeans, and the companies that serve them, are here to stay. Companies that find the best solutions to their customers’ needs will ultimately win. That ground rule for business success, at least, remains unchanged.
To download a copy of EY’s Eurozone Forecast, visit ey.com/eurozone.