Internal Consumer spending is the strongest driver of Romania’s economic growth
- Eurozone is experiencing its strongest period of growth since 2011
- Consumer spending and exports to lift Eurozone growth to 1.6% this year and then 1.9% in 2016
- Possible Greek exit from the euro still a threat for financial markets
The Eurozone’s positive start to 2015 — with Q1 GDP growing by 0.4% on the quarter, stronger than the US or the UK — suggests that consumers are responding to lower energy prices according to the June 2015 issue of the EY Eurozone Forecast (EEF). The forecast also predicts that the recovery will become more broad-based, with growth forecast at 1.6% in 2015 and then 1.9% for 2016.
The Romanian economy - strongly pushed ahead by the increase in consumer spending
Romania’s economic performance in Q1 this year was stronger than expected, with a quarterly 1.6% rise in GDP lifting annual growth to 4.2%. While this pace is very unlikely to be sustained during the rest of the year, the outlook still appears relatively optimistic. Indeed, the European Commission measure of economic sentiment in Romania reached a new six-year high in April. Provided that the Eurozone recovery does not fizzle out, we expect Romania’s GDP to grow by 3.1% in 2015 and 3.2% in 2016, before edging a little higher in 2017-19.
In 2014, real household consumption grew at its fastest pace since 2008, including a 2.6% quarterly gain in Q4. And the strong data have carried over into this year, with average wages growing by nearly 7% year-on-year in January and February. We expect private consumption to grow by over 4% in 2015, following on from the 5% expansion recorded in 2014. Robust wage growth, of over 6%, combined with very low inflation is boosting consumers’ purchasing power.
„Consumer spending is now a key driver of Romanian growth after a long period of stagnation following the global crisis – during which it slumped by nearly 10% in Romania. The trend in spending is now firmly upwards, reflecting higher confidence and rising real wages. Investment is also expected to pick up in response to the higher level of business confidence, although the scale of the improvement will be heavily dependent on sentiment about Eurozone prospects,” says Bogdan Ion, Country Managing Partner EY Romania
Investments are rising in the Eurozone
Businesses are preparing to invest, with increasingly positive business surveys and loans data in recent months. The EEF expects total investment to grow 1.1% in 2015, before accelerating to almost 3% in 2016–17 but then easing to 2.5% in 2018–19. This is well short of pre-crisis rates of investment growth, but since much of the latter was accounted for by housing, a slower pace of capital accumulation need not necessarily imply lower future output growth.
Quantitative easing will help keep borrowing costs low for businesses, governments and individuals in the Eurozone this year and next. However, the possibility of a Greek exit from the euro may continue to overshadow financial markets.
Lower energy prices, higher consumer spending, a stronger labor market and a weaker euro are all contributing to a broad-based recovery. But despite the positive movement in consumer spending, unemployment is high in much of the currency block. The Eurozone business and political community have to work together to address this major challenge with the top priority of creating a better environment for young people.
Consumer spending faster than any year since 2006
In the second half of 2015, households will start to feel energy bills rising by 5% in 2016 in line with world oil prices, taking a little steam out of consumer spending.
Nevertheless, with more reliable labor market prospects, EEF expects consumer spending to rise by 1.7% in 2015 and by 1.6% in 2016, up from just 1% in 2014 and well above the average of recent years. In some countries, such as Germany, this is being driven by wage growth in tightening labor markets. In others, such as Italy, consumers are spending their energy windfall on big-ticket items such as cars and white goods, encouraged by stabilizing employment markets.
Exports to regain momentum
Depreciation has left the euro 7% weaker than at the start of 2015 and weaker still against the Sterling. This has reinforced Eurozone competitiveness in key export markets as the dollar soars. The EEF expects the euro to weaken to US$1.10 by the end of this year and about US$1.05 by the end of 2016.
Exporters will also continue to benefit from the recovery in other advanced economies like the UK and the US. The EEF expects Eurozone exports to grow by 3.7% in 2015, while imports remain strong despite becoming more expensive. However with some emerging economies — in particular China — set for a managed slowdown in the coming years, demand for European capital goods could grow modestly with export growth easing back from a peak of 4.2% in 2016 to 4.1% in 2017 and 3.6% in each of 2018 and 2019.
Composition of growth to shift in H2 2015
The EEF expects a gradual pickup in the pace of investment spending through the second half of this year and in 2016. Credit conditions have continued to improve, as have measures of business confidence. However, with ongoing uncertainty over Greece’s future in the Eurozone, and the consequences of its possible exit, this is not yet materializing into higher investment spending.
The economic outlook is certainly much improved, but it is important for policymakers to sustain efforts across the board. It is particularly important for governments to push ahead with sometimes difficult economic reforms that improve competitiveness, and to use whatever fiscal space opens to prioritize spending in areas that boost future potential growth.
Business leaders with interests in the Eurozone need to prepare themselves for this return to more stable growth. The fate of Greece remains a major stumbling block for the single currency. But as uncertainty over Greece’s future is addressed, we expect investment growth to become more apparent in the near future.
About the EY Eurozone Forecast
The EY Eurozone Forecast is based on the European Central Bank’s model, used in conjunction with the Oxford Economics Global Economic Model. Forecasts and analysis cover the Eurozone as a whole, together with detailed reports and forecasts for each member state of the euro area.