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.
After the summer’s uncertainty, the Eurozone is settling into slow, but steady, growth. 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, with the worst of austerity over, fiscal policy will drag less on growth.
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.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.
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.
How is the Romanian economy evolving?
Although the pace of quarterly GDP growth in Romania slowed to just 0.1% in Q2 this year (from around 1% in each of the previous three quarters), annual growth continued at a robust pace, at 3.7% compared with 3.8% in Q1. Growth was driven predominantly by consumer spending, with investment also maintaining its recent strong growth. Buoyant real income growth, underpinned by low inflation and a gradual fall in unemployment, will be supportive of consumption throughout 2015 and 2016. Tax cuts will give a further boost to disposable incomes.
Overall, we now expect GDP to grow by 3.5% in 2015 (up from our forecast of 3.1% in June), followed by a pick-up to 3.7% in 2016 on strong domestic demand and less of a drag from net exports. The pace will then slow, but remain quite solid at an average of about 3% a year in 2017-19.
„Internal consumption continues the upward trend outlined at the beginning of the year and remains the main growth driver in Romania for the end of the year as well, fueled by the low inflation level and by the recent fiscal relaxation. Unlike most countries in the Eurozone, Romania enjoys a low unemployment rate and steady economic growth. To fully exploit these advantages, we need strong efforts to grow the competitiveness of the Romanian economy, by reforming the labor market and improving the business environment”, explains Bogdan Ion, Country Managing Partner EY Romania.
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 cu 212.000 employees in 700 offices across 150 countries, and revenues of approximately $28,7 billion in the fiscal year that ended on June 30, 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 650 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. EY Romania is the most attractive employer in consultancy in the country, and the most sought after employer out of the Big4, according to studies conducted by Catalyst and Trendence 2015. For more information, please visit www.ey.com