• Eurozone GDP growth to pick up to 1.2% in 2015 from 0.8% in 2014
• Romania’s GDP will continue to grow in 2015
• Unemployment rate only to fall modestly by 0.5%, to 11% by the end of 2016

Although the second half of 2014 saw a continued slow pace of recovery and a revival of fears about the Eurozone’s long-term future in the final months of 2014, GDP growth is expected to pick up from 0.8% in 2014 to 1.2% in 2015, and then 1.6% a year in 2016-18 according to the December 2014 issue of the EY Eurozone Forecast (EEF). The lagged effect of a weakening euro, easing fiscal austerity, lower oil prices and more certainty in the banking sector will combine to support the gradually strengthening Eurozone recovery.

Romanian GDP is estimated to continue its growth in 2015...
Romania surpassed expectations in Q3, growing by an initial estimate of over 2% on a year-on-year basis, the second-fastest in the EU. The surprisingly large 1.9% quarterly increase in Q3 followed revised estimates of a 0.3% fall in Q2 and a 0.5% rise in Q1, whereas previous data had indicated two consecutive falls and hence a technical recession in H1 2014. The revisions were influenced by the shift in the national accounts to the latest European System of Accounts methodology.

Although the quarterly profile has been volatile this year, the outlook still appears relatively optimistic. The EC measure of economic sentiment in Romania is now above its long-term average, industrial output and retail sales both rose 5-6% on the year in Q3, slower than their recent trend but still fairly strong, and imports rose to a new high in Q3 in line with rising domestic demand. Provided that the Eurozone recovery does not stall altogether, we now expect GDP to grow 2% in 2014 and over 2.5% in 2015.

… supported by rising consumer spending …
Retail sales volumes were relatively subdued in Q2 and Q3 after rapid growth in Q1. But the underlying trend in spending should be positive now given higher confidence and rising real incomes. We forecast that consumption will increase by 3.5% in 2014 and 3% in 2015. Investment is also expected to pick up in response to the higher level of business confidence, having been weak since 2012. However, this will be influenced by whether the Eurozone recovery can regain momentum.

Solid domestic demand will be supported by:
 Low inflation helping consumers – CPI inflation was 1.4% in October, higher than earlier in the year though still fairly subdued. Price pressures should gradually increase as the economy strengthens. Inflation is expected to average 1.1% this year and 2.2% in 2015. However, robust wage growth should provide a solid expansion in real incomes.
 Easy monetary policy – the National Bank of Romania (NBR) eased policy further in November, cutting the policy rate to 2.75% and the reserve requirement on foreign-denominated deposits to 14%. This was in response to inflation remaining well below target and credit continuing to shrink. But we think that the NBR is near the end of its easing cycle as inflation is now rising back to target.

… and generally positive trend in exports
The strong performance of export volumes (up by 13%) in 2013 boosted industrial activity, which rose by over 7%. Rising external demand should continue to support industrial activity and exports this year. However, industrial output in particular has struggled to make headway in recent months against a background of a faltering Eurozone manufacturing sector, although this latest trend is not expected to persist.

Medium-term outlook still tied to Eurozone
Prospects for the Romanian economy remain highly dependent on the EU, which takes 70% of its exports. World trade weighted for Romanian export shares is forecast to grow by 4.1% in 2014 and 4.6% in 2015 compared with a rise of just 2.5% last year. Assuming the European economy continues to recover, Romanian GDP growth is forecast to average 3.4% pa in 2015-20.

The Eurozone prospects
The Eurozone will enjoy stronger export demand in 2015 — accelerating from 3.4% in 2014 to 3.7% in 2015 and then about 4% on average in 2016-18 — as the US and UK recoveries continue and a weaker euro offers relief to less competitive economies in the euro area. Furthermore, with the European Central Bank (ECB) asset quality review (AQR) helping to restore confidence in the banking sector, together with complementary measures from the ECB to boost liquidity, rising business confidence should be met with more readily available finance from 2015 onwards.

Despite the prospect of stronger growth in 2015, the legacy of the crisis means that the recovery will be slower than in previous rebounds. Households, businesses and governments in almost all countries will need to restrain spending growth in order to reduce debt levels. The pace of Eurozone growth in 2016-18 will be more than half a percentage point slower than in the decade up to 2007, when GDP growth averaged 2.3% a year.

It is also notable that policy-makers have much-diminished weaponry to tackle any further shocks. With eight Eurozone Member States’ public debt above 90% of GDP and six of these above 100%, governments have minimal room for fiscal stimulus. And in the event that inflation fails to pick up as fast as anticipated in the coming years, it is unclear whether a large-scale sovereign bond purchase program would be as powerful as it might have been a year or two ago.


Investment set to recover as banks’ fears ease
With financing more readily available and demand conditions improving steadily, total fixed Eurozone investment growth is estimated to pick up from zero in 2014 to 0.9% in 2015 and 2.7% in 2016, before settling around 2.5% thereafter. Moreover, with the ECB also aiming to reinvigorate the market for asset-backed securities — enabling banks to sell on loans and make further room for lending on their balance sheets — there is potential for an upside scenario.

It is also worth considering the potential for an upside risk from inward foreign direct investment (FDI). Some countries, Spain and Ireland in particular, have already benefited substantially from increased FDI inflows in recent years, thanks to much improved cost competitiveness and business environments. A depreciating euro should make inward FDI more attractive to firms outside the Eurozone, as would reform efforts to boost underlying growth.

Households buoyed by cheaper energy and a recovering labor market
After 15 consecutive quarters of oil prices above US$100 a barrel, consumers are experiencing an unexpected windfall as a range of supply and demand-side factors have pushed the oil price down to below US$80 a barrel. This factor alone should boost real household incomes by at least 0.3 percentage points in 2015 compared with our September forecast.

Furthermore, as exports continue to rebound and business investment gathers pace, the labor market will continue to heal, building on the progress made in 2014. That said, as public sector payrolls are rationalized further in a number of countries, overall employment is likely to grow only gradually, at around 0.4% a year through the forecast period. Moreover, with labor force participation recovering thanks to a combination of improved job prospects and reform efforts the unemployment rate will only fall modestly — from 11.5% in October 2014 to just over 11% by the end of 2016 and about 10.5% by the end of 2018.

Taking these supports to household income into account, we expect the pace of consumer spending growth to pick up from 0.7% in 2014 to 1.3% in 2015. However, there is likely to be only minimal acceleration thereafter, to 1.4% annually in 2016-18.

***
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.

***

About EY Romania
EY is one of the world's leading professional services firms with approximately 190,000 employees in 700 offices across 150 countries, and revenues of approximately $27.4 billion in the fiscal year that ended on 30 June 2014. Our network is the most integrated at global level and its vast resources allow us to help our clients benefit from every opportunity. In Romania, EY has been a leader on the professional services market since its set up in 1992. Our over 500 employees in Romania and Moldova provide seamless assurance, tax, transactions, and advisory services to clients ranging from multinationals to local companies. Our offices are based in Bucharest, Cluj-Napoca, Timisoara, Iasi and Chisinau. From 1 July 2013, Ernst & Young becomes EY, the logo has been modified in response to this change and the company's new tagline becomes "Building a better working world". The new visual identity reflects the new strategy of EY, Vision 2020. For more information, please visit www.ey.com.
With exports expected to rise by 3.7% in 2015 and investments spending to accelerate the pace, Eurozone recovers gradually

 Eurozone GDP growth to pick up to 1.2% in 2015 from 0.8% in 2014
 Romania’s GDP will continue to grow in 2015
 Unemployment rate only to fall modestly by 0.5%, to 11% by the end of 2016

Although the second half of 2014 saw a continued slow pace of recovery and a revival of fears about the Eurozone’s long-term future in the final months of 2014, GDP growth is expected to pick up from 0.8% in 2014 to 1.2% in 2015, and then 1.6% a year in 2016-18 according to the December 2014 issue of the EY Eurozone Forecast (EEF). The lagged effect of a weakening euro, easing fiscal austerity, lower oil prices and more certainty in the banking sector will combine to support the gradually strengthening Eurozone recovery.

Romanian GDP is estimated to continue its growth in 2015...
Romania surpassed expectations in Q3, growing by an initial estimate of over 2% on a year-on-year basis, the second-fastest in the EU. The surprisingly large 1.9% quarterly increase in Q3 followed revised estimates of a 0.3% fall in Q2 and a 0.5% rise in Q1, whereas previous data had indicated two consecutive falls and hence a technical recession in H1 2014. The revisions were influenced by the shift in the national accounts to the latest European System of Accounts methodology.

Although the quarterly profile has been volatile this year, the outlook still appears relatively optimistic. The EC measure of economic sentiment in Romania is now above its long-term average, industrial output and retail sales both rose 5-6% on the year in Q3, slower than their recent trend but still fairly strong, and imports rose to a new high in Q3 in line with rising domestic demand. Provided that the Eurozone recovery does not stall altogether, we now expect GDP to grow 2% in 2014 and over 2.5% in 2015.

… supported by rising consumer spending …
Retail sales volumes were relatively subdued in Q2 and Q3 after rapid growth in Q1. But the underlying trend in spending should be positive now given higher confidence and rising real incomes. We forecast that consumption will increase by 3.5% in 2014 and 3% in 2015. Investment is also expected to pick up in response to the higher level of business confidence, having been weak since 2012. However, this will be influenced by whether the Eurozone recovery can regain momentum.

Solid domestic demand will be supported by:
 Low inflation helping consumers – CPI inflation was 1.4% in October, higher than earlier in the year though still fairly subdued. Price pressures should gradually increase as the economy strengthens. Inflation is expected to average 1.1% this year and 2.2% in 2015. However, robust wage growth should provide a solid expansion in real incomes.
 Easy monetary policy – the National Bank of Romania (NBR) eased policy further in November, cutting the policy rate to 2.75% and the reserve requirement on foreign-denominated deposits to 14%. This was in response to inflation remaining well below target and credit continuing to shrink. But we think that the NBR is near the end of its easing cycle as inflation is now rising back to target.

… and generally positive trend in exports
The strong performance of export volumes (up by 13%) in 2013 boosted industrial activity, which rose by over 7%. Rising external demand should continue to support industrial activity and exports this year. However, industrial output in particular has struggled to make headway in recent months against a background of a faltering Eurozone manufacturing sector, although this latest trend is not expected to persist.

Medium-term outlook still tied to Eurozone
Prospects for the Romanian economy remain highly dependent on the EU, which takes 70% of its exports. World trade weighted for Romanian export shares is forecast to grow by 4.1% in 2014 and 4.6% in 2015 compared with a rise of just 2.5% last year. Assuming the European economy continues to recover, Romanian GDP growth is forecast to average 3.4% pa in 2015-20.

The Eurozone prospects
The Eurozone will enjoy stronger export demand in 2015 — accelerating from 3.4% in 2014 to 3.7% in 2015 and then about 4% on average in 2016-18 — as the US and UK recoveries continue and a weaker euro offers relief to less competitive economies in the euro area. Furthermore, with the European Central Bank (ECB) asset quality review (AQR) helping to restore confidence in the banking sector, together with complementary measures from the ECB to boost liquidity, rising business confidence should be met with more readily available finance from 2015 onwards.

Despite the prospect of stronger growth in 2015, the legacy of the crisis means that the recovery will be slower than in previous rebounds. Households, businesses and governments in almost all countries will need to restrain spending growth in order to reduce debt levels. The pace of Eurozone growth in 2016-18 will be more than half a percentage point slower than in the decade up to 2007, when GDP growth averaged 2.3% a year.

It is also notable that policy-makers have much-diminished weaponry to tackle any further shocks. With eight Eurozone Member States’ public debt above 90% of GDP and six of these above 100%, governments have minimal room for fiscal stimulus. And in the event that inflation fails to pick up as fast as anticipated in the coming years, it is unclear whether a large-scale sovereign bond purchase program would be as powerful as it might have been a year or two ago.


Investment set to recover as banks’ fears ease
With financing more readily available and demand conditions improving steadily, total fixed Eurozone investment growth is estimated to pick up from zero in 2014 to 0.9% in 2015 and 2.7% in 2016, before settling around 2.5% thereafter. Moreover, with the ECB also aiming to reinvigorate the market for asset-backed securities — enabling banks to sell on loans and make further room for lending on their balance sheets — there is potential for an upside scenario.

It is also worth considering the potential for an upside risk from inward foreign direct investment (FDI). Some countries, Spain and Ireland in particular, have already benefited substantially from increased FDI inflows in recent years, thanks to much improved cost competitiveness and business environments. A depreciating euro should make inward FDI more attractive to firms outside the Eurozone, as would reform efforts to boost underlying growth.

Households buoyed by cheaper energy and a recovering labor market
After 15 consecutive quarters of oil prices above US$100 a barrel, consumers are experiencing an unexpected windfall as a range of supply and demand-side factors have pushed the oil price down to below US$80 a barrel. This factor alone should boost real household incomes by at least 0.3 percentage points in 2015 compared with our September forecast.

Furthermore, as exports continue to rebound and business investment gathers pace, the labor market will continue to heal, building on the progress made in 2014. That said, as public sector payrolls are rationalized further in a number of countries, overall employment is likely to grow only gradually, at around 0.4% a year through the forecast period. Moreover, with labor force participation recovering thanks to a combination of improved job prospects and reform efforts the unemployment rate will only fall modestly — from 11.5% in October 2014 to just over 11% by the end of 2016 and about 10.5% by the end of 2018.

Taking these supports to household income into account, we expect the pace of consumer spending growth to pick up from 0.7% in 2014 to 1.3% in 2015. However, there is likely to be only minimal acceleration thereafter, to 1.4% annually in 2016-18.

***
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.

***

About EY Romania
EY is one of the world's leading professional services firms with approximately 190,000 employees in 700 offices across 150 countries, and revenues of approximately $27.4 billion in the fiscal year that ended on 30 June 2014. Our network is the most integrated at global level and its vast resources allow us to help our clients benefit from every opportunity. In Romania, EY has been a leader on the professional services market since its set up in 1992. Our over 500 employees in Romania and Moldova provide seamless assurance, tax, transactions, and advisory services to clients ranging from multinationals to local companies. Our offices are based in Bucharest, Cluj-Napoca, Timisoara, Iasi and Chisinau. From 1 July 2013, Ernst & Young becomes EY, the logo has been modified in response to this change and the company's new tagline becomes "Building a better working world". The new visual identity reflects the new strategy of EY, Vision 2020. For more information, please visit www.ey.com.