EY Eurozone Forecast: December 2015
A broadening recovery points to a brighter future
- Heading into 2016, the Eurozone recovery is becoming broader-based and more self-sustaining. After initially being led by consumer spending in 2014-15, conditions are now right for the rebound in capital investment that should underpin a steady (if unspectacular) recovery into the medium term. We expect GDP growth of 1.5% in 2015, before it picks up to 1.8% in 2016 and 2017.
- Growing exports and rebounding domestic demand mean that capacity constraints are emerging in a number of sectors. Alongside better access to credit and low interest rates for the foreseeable future, this is driving increased loan demand. We expect total fixed investment to grow 2.4% in 2016 (the fastest rate since 2007), accelerating to 3.1% in 2017.
- In 2018-19, capital investment should grow by around 2.5% a year. This is somewhat slower than in the decade to 2007, but because much of the capital accumulation that took place in this period was in housing, a slower rate of investment growth need not necessarily mean slower potential growth.
- As firms expand their capital stock, workers will benefit from additional labor demand and increased productivity. Both will support wage growth from 2016 onwards, and although the temporary boost from lower energy prices will fade, consumption growth should remain robust. We expect consumer spending to grow 1.7% in 2015 and 1.6% in 2016. Over the medium term, we expect spending growth of around 1.4% a year.
- Additional capital investment should also complement the reforms to enhance competitiveness that have boosted exports from some Eurozone economies in recent years. But the slowdown in emerging markets will have an impact upon export prospects. So despite a more favorable exchange rate – aided by an extension of asset purchases by the European Central Bank (ECB), as the path for price growth remains worryingly weak – and recovery in advanced economies, we forecast that export growth will ease from 4.5% in 2015 to 3.7% in 2016 and 3.4% a year into the medium term.
- Finally, with emergency austerity measures now largely in the past, governments should start to ease their capital budgets. After falling for six straight years up to 2015, we expect public investment to grow by 0.4% in 2016 and then gather pace to 3.2% by 2018, before easing gradually thereafter. More generally, current government spending will continue to recover, albeit to a pace well short of the pre-crisis era.
- Overall, the Eurozone economy should enter 2016 supported by a rebound in capital spending and the prospect that all components will contribute to growth. But eroded competitiveness, ongoing fiscal restraint and demographic decline will keep GDP growth contained at around 1.5% from 2018 onwards. Only with further (and more widespread) structural reforms will the Eurozone regain the GDP growth of around 2% a year that was the norm in the pre-crisis era.