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EY Eurozone Forecast March 2015

Date: 04/01/2015
Source: EY

  • Romania GDP growth seen at 3,1% in 2015 supported by the increase in both external and domestic demand
  • Lower oil prices and Quantitative easing (QE) to lift Eurozone GDP growth to 1.5% in 2015 and then 1.8% in 2016
  • Eurozone consumer spending growth to accelerate from 0.9% in 2014 to 1.6% this year, as households get windfall from lower energy costs

Strong growth of GDP and consumer spending in the Eurozone
After a year of tentative recovery in 2014, the Eurozone has moved into 2015 aided by two important growth drivers – sharply lower oil prices and QE according to the March 2015 issue of the EY Eurozone Forecast (EEF). These two factors will support a domestic recovery that began in 2014, helping GDP growth accelerate from 0.9% in 2014 to 1.5% this year and then 1.8% in 2016.

But the medium-term outlook remains constrained by a number of structural factors, in particular the need for fiscal restraint and the dampening effect on wage growth of high – but gradually falling – unemployment. These factors will mean growth should remain around 1.6% a year in 2017-19. Meanwhile, the crisis in Ukraine and difficult negotiations over Greek debt will continue to present a risk to economic and financial stability for some time.

The gradual improvement of the Eurozone economy – with consumers regaining confidence and the labor market continuing to gradually recover – will be supported in 2015 by lower oil prices, which are expected to average US$55 a barrel compared with about US$100 a barrel in 2014; we expect this to add 1% to 1.5% to real consumer incomes in the Eurozone in 2015.

Overall, the EEF estimates real household income will grow by 2.5% this year, enabling consumer spending growth to rise from 0.9% in 2014 to 1.6% this year. But as the degree of spare labor continues to hold back wage growth for some years, consumer spending growth is expected to remain steady around 1.5% from 2016 onwards.

The EUR/USD exchange rate may aid exporters
The downside to lower oil prices has been a further slide in headline inflation, from an already tepid 0.4% in October to -0.6% in January, and the intensification of fears about a prolonged spell of falling prices in the Eurozone. Through both the real economy and exchange rate impacts, inflation in the Eurozone is expected to pick up from -0.2% in 2015 to 1.1% in 2016, and then to 1.7% by 2019.

All other things being equal, this should weaken the euro from US$1.14 on average in February to just over US$1 by the end of 2015 according to the EEF, offering exporters across the Eurozone a substantial boost to competitiveness in global markets.

Romania GDP growth seen at 3.1% in 2015
The March 2015 issue of the EY Eurozone Forecast (EEF) shows that Romania’s GDP is expected to rise slightly by 3.1% in 2015, supported by reasonable growth in both external and domestic demand. The GDP growth in Q4 was broadly in line with EEF expectations, growing 0.5% on the quarter after a much larger 2.2% rise in Q3. In 2014 as a whole, the economy grew by 3%, only marginally slower than in 2013. Although no breakdown of Q4 GDP is yet available, we estimate that industry, exports and consumer spending were all fairly subdued.

In 2014, real household consumption rose in all three quarters, including a 1.4% gain in Q3. And the underlying trend in spending should be positive now given higher confidence and rising real incomes. Indeed, retail sales volumes showed renewed strength in Q4 2014. We forecast that consumption will increase by about 4% in 2015, not far short of its 2014 pace.

Industrial production struggled to make much headway in 2014 against a background of a faltering Eurozone manufacturing sector. This performance has been mirrored in three consecutive quarterly declines in export volumes, which is not particularly surprising after the export surge seen during 2013. Looking ahead, output and exports should record solid growth in 2015 as the Eurozone economy picks up.

Financial markets have stayed calm despite the ongoing Ukraine crisis, with the Leu broadly stable against the Euro and long-term interest rates falling well below 4%. The IMF cites supportive policy, better absorption of EU funds, regulatory reform and rising confidence as positives, while the budget deficit narrowed to less than 2% of GDP in 2014.

However, there are concerns about the slow pace of privatization and reform in state-owned enterprises. Provided the economic outlook remains generally upbeat and policy does not stray too far from previous efforts, investor confidence should be able to withstand the recent disagreement between the authorities and the IMF over the direction of fiscal policy and insufficient structural reform.

Bogdan Ion, Country Managing Partner EY Romania states:

"State authorities need to take advantage of this period of improving economic conditions to cushion any short-term impacts from reforms, so that their long-term payoffs can be realized. Further labor market reforms, amendments to tax and benefits arrangements and entitlements, and regulation would all improve long-term growth prospects.

Furthermore, the improving financial and economic situation presents businesses with a key choice – do we invest for the future, or take profits now, possibly at the expense of longer term competitiveness? The balance between these two factors will be different across sectors, but could be tipped toward investment and job creation by further improvements in the business environment, both on the local market and within Eurozone economies. "

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About 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.

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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. In 2014, EY Romania has affiliated to the only global competition dedicated to entrepreneurship, EY Entrepreneur Of The Year. The winner of the local edition represents Romania in the international finale that takes place every year in June in Monte Carlo. The World Entrepreneur Of The Year title is awarded at the international finale. For more information, please visit www.ey.com.


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EY Eurozone March 2015

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