Eurozone enjoying a “sweet spot” in the second half of 2015

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The FINANCIAL — The Eurozone remains in a ”sweet spot,” benefiting from lower energy prices, a more competitive exchange rate and solid demand in the UK and US, according to the October 2015 issue of the EY Eurozone Forecast (EEF). The forecast also predicts that with business confidence improving investment spending will pick up in 2016, boosting GDP growth from 1.6% this year to 1.8% in 2016.

Consumer demand remains a key driver of the Eurozone recovery in H2 2015. Weakness in oil prices continues to provide a boost to household incomes, while household views of labor market prospects are improving tentatively. The EEF expects consumer spending growth of 1.7% in 2015, the strongest since 2007. However, with energy prices recovering, the pace of spending is expected to ease to 1.4% in 2016 and 1.3% on average in 2017-19.

The systemic risks facing the Eurozone – widespread fiscal crisis and deflation – are fading, while the recent agreement between the Eurozone and Greece suggests renewed appetite to compromise on both sides.

Tom Rogers, Senior Economic Adviser to the EY Eurozone Economic Forecast, says:

“Internal and external factors have aligned for a stronger Eurozone recovery in 2015-16. The slowdown in emerging markets is a worry, but is countered by strengthening export markets in the US and UK. Meanwhile consumers are increasingly hopeful about their labor market prospects and, with the worst of austerity over, fiscal policy will drag less on growth.”

Mark Otty, EY Area Managing Partner for Europe, Middle East, India and Africa, says:

“After the summer’s uncertainty, the Eurozone is settling into slow, but steady, growth. A stable overall recovery may have set in and this will mean, on average and over time, that conditions get better for everyone in the Eurozone. However, in the next few years unemployment will remain a major issue. We expect the jobless rate to fall steadily as the recovery becomes more established, but it will not fall below 10% until 2019. Businesses working in Europe should acclimatize themselves to this ‘new normal’ of slow but steady growth across the Eurozone.”

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Weaker euro – a welcome relief for Eurozone firms

Eurozone exports posted the strongest year-on-year growth rate for four years in Q2 2015, benefiting from both the weaker euro and faster growth in the US and UK. The EEF expects that exports will grow by 4.8% this year, before easing to 4% in 2016 and then 3.6% in 2017 and 3.4% on average in 2017-19 as growth in the advanced economies slows. In addition, forecasts for export growth are subject to greater risk than they have been for some time in the light of mounting uncertainty about the slowdown in China and associated recent financial market turbulence.

Capital spending to play an increasing role in recovery

As a result of firmer consumer and export demand profitability is improving for Eurozone firms, with signs that this is feeding through to capital spending. The EEF expects total capital investment to grow by 2.4% in 2016, significantly faster than this year, before picking up further to 2.8% in 2017 and then averaging 2.6% in 2017-19.

Fiscal restraint is here to stay

With the Eurozone economy now in recovery mode, more of the work in closing budget deficits will be done by rising tax revenues. But given the extent to which the Eurozone’s debt burden rose through the crisis years, the EEF expects government spending to remain constrained for some time. The EEF expects only modest growth in current government spending through its forecast of around 1% a year in 2015-19.

Looking ahead

Rogers says: “A slower pace of long-term growth looks to be the ‘new normal’ for the Eurozone. But sustained – and more geographically broadened – efforts to reform labor markets and improve the business environment could change this. The recovery in economies that have done most in this respect, in particular Ireland and Spain, demonstrates that a slower pace of recovery is not inevitable.”

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Otty says: “I think that businesses, governments and people should be positive about the future of the Eurozone. The migrant crisis that has dominated headlines over the last few months is perhaps a salient reminder that however much doom and gloom is forecast for the single currency, Europe remains a beacon of hope for many of those suffering economic and physical hardship in other parts of the world.”

 

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