A tough 2012 but is there light at the end of the tunnel for the Eurozone?

Although the Eurozone faces a challenging year with large amounts of public and private sector debt yet to be refinanced, tight credit conditions, further fiscal austerity and more job losses, Ernst & Young’s Eurozone Spring Forecast (EEF) is predicting a slow return to growth in 2013. But the European Central Bank (ECB) has to continue to play a central role by being prepared to cut interest rates further and purchasing government bonds in peripheral countries.

Mild recession this year with gradual return to growth from 2013
With a default on Greek sovereign debt negotiated and a second bailout agreed, and assuming that policy-makers continue to keep up the momentum by putting a credible firewall around Spain and Italy, EEF is forecasting a mild recessionary fall in Eurozone GDP of 0.5% this year, with nine of the seventeen Eurozone members economies set to contract. However EEF expects Eurozone GDP to grow by about 1% in 2013 before picking up to 2% a year in 2015-16.

Marie Diron, senior economic adviser to the Ernst & Young Eurozone Forecast comments, “Although the recovery from recession is likely to be the slowest in Europe in the last 40 years the actions taken by the authorities over the last few months, particularly the introduction of the long-term refinancing operations by the ECB, have created conditions where it is possible to now see light at the end of the tunnel even if actual recovery is still some way off. These policy efforts have to be rigorously maintained and even reinforced at a Eurozone and national level to ensure we don’t lose momentum.”

Mark Otty, Ernst & Young Area Managing Partner for Europe, Middle East, India and Africa comments; “Despite the turmoil, the majority of large businesses across Europe remain in relatively good financial shape as the past two years have seen them making efficiency savings, improving profit margins and adding cash to their balance sheets. If they have some confidence that stability is returning we could see investment and job creation follow.”

Eurozone crisis presents both risk and opportunity for Africa
The prospects of a recovery in Eurozone, albeit likely slow and drawn out, is good news for South Africa and Africa more generally. Europe remains a key trade and investment partner, and prolonged economic woes there would negatively impact many of Africa’s manufacturing and agricultural exporters in particular.

Michael Lalor, Director of Ernst & Young’s Africa Business Center comments, “Africa should also not lose sight of the opportunities that the Eurozone crisis has opened up to reorientate Africa in the context of shifting dynamics in the global economy. In the wake of the 2008-2009 global economic crisis, there has been significant growth in trade with and investment from a group of rapid growth markets, led by China and India, that are also now driving global growth.”  

“Furthermore, and arguably more importantly, the Eurozone crisis has added impetus to the intra-Africa trade and investment agenda. Even so, there remains significant scope to reduce barriers to and raise levels of cross-border trade and investment throughout the continent,” says Lalor.

Key considerations include accelerating regional integration – with the most promising development being the tripartite free trade agreement, which will cover 26 countries and a market of about 600m people – and investing in the infrastructure required to connect and power African economies. An expanded, growing and connected regional market will not only lessen dependencies on external partners (be they European, American or Asian), but will also increase levels of domestically driven growth and diversification (a critical factor for sustainable long term growth).

Lalor concludes, “Perhaps above all, what the Eurozone crisis has highlighted is the time is ripe for Africa to take ownership and control of its own economic destiny. After a decade of strong and sustained growth, the resilience displayed through the economic crisis, and with a positive long term growth outlook, African leaders across government and business have an unprecedented opportunity to work together to fundamentally reposition the continent in the context of the shifting dynamics in the global economy. “

ENDS

About the Ernst & Young Eurozone Forecast
The forecasts and analyses presented in the EY Eurozone Forecast are based on the European Central Bank’s model of the Eurozone economy. This model embeds state-of-the-art economic theory and techniques and is used by the ECB to produce its quarterly forecasts of the euro area.

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Following on from Ernst & Young’s successful integration in 2008 of 87 countries into one area from across Europe, Middle East, India and Africa (EMEIA), the firm has launched its Africa Business Center™ (ABC), which aims to enhance the effective and efficient links between its geographic reach and areas of expertise. The firm enjoys representation in 33 countries across Africa.