Growth prospects deteriorate as Euro area economy remains mired in recession

FocusEconomics panellists cut their growth projections for the region for the ninth time in the last 10 months. Panellists lowered their 2013 GDP projections by 0.1 percentage points over the previous month and now see the Eurozone contracting 0.5%. Over the course of the last six months, the outlook for the region has been revised down by a total of 0.5 percentage points. Nine out of the 17 Eurozone member states experienced downward revisions to their growth forecast, while the outlook for the remaining eight was stable.

Cyprus worst overall performer, Germany only major economy in the region with expected positive growth in 2013

The strongest downward revision (-2.3 percentage points) was experienced by Cyprus. In the wake of the international bailout approved in April, Cyprus is currently projected to be the worst performer in 2013 with a 8.0% contraction, followed by Greece (-4.7%). Among the region’s four major economies, panellists expect positive growth only in Germany (+0.5%). That said, the outlook for the country has been revised down for a second consecutive month and the current forecast is down 0.3 percentage points from the 0.8% growth expected at the beginning of the year. Meanwhile, panellists forecast contractions in Spain (-1.6%), Italy (-1.6%) and France (-0.2%). The panel expects only a moderate recovery in the Eurozone next year and see GDP expanding 0.9% in 2014, which is down 0.1 percentage points from last month’s forecast.

Euro area

by Reinald Kirchner

Pessimism across the board as labour market continues to deteriorate

Recent indicators point to continued weakness in the Euro area economy. GDP contracted 0.2% in the first quarter of 2013, which represents an improvement over the 0.6% drop seen in Q4 2012 but marks, nonetheless, a sixth consecutive decline in economic activity. Out of the four major economies in the region, only Germany experienced positive growth, while the remaining economies contracted over the previous quarter. Moreover, amid the persistent deterioration in economic activity and the impact of austerity measures across the region, the situation in the labour market continues to deteriorate, with the unemployment rate reaching a new Euro area record-high in April (12.2%). Forward-looking indicators offer only a glimmer of hope, with economic sentiment improving for the first time in the last three months in May. The sentiment index remains, nonetheless, in pessimistic territory.

European Commission extends deficit targets as financial markets tension subside

Despite the weak economic momentum, tensions in financial markets remain subdued and bond yields on peripheral sovereign debt remain at the lowest level seen in at least two years. Benefiting from the more favourable scenario, on 29 May, the European Commission decided to extend the deadline on budget deficit goals to various countries in the region, most notably Spain, France and the Netherlands. In the case of Spain, the Commission set a new budget deficit ceiling of 6.5% of GDP for this year and 5.8% of GDP for 2014, and recommended a set of economic reforms, including an overhaul of the pension system and the health-care sector as well as pushing ahead with labour reforms. At the same time, the European Commission ratified Italy’s exit from the Excessive Deficit Procedure, as the country was able to bring the budget deficit below the required 3.0% threshold in 2012. As a result, pressure is mounting now on the new Italian government to relax the austerity drive, which could, however, put the budgetary rigour at risk and therefore spark new tensions.

Euro area

by Eddy Van 3000

Inflation picks up but remains below ECB target

Despite a combination of subdued domestic demand and low energy prices, inflation picked up in May for the first time in the last seven months. According to a preliminary estimate released by Eurostat, Eurozone inflation rose from 1.2% in March – the lowest level seen since February 2010 – to 1.4% in April. That said, inflation remains well below the ECB target of “below, but close to, 2%”. Against a scenario of benign inflation, eyes are now pointed to the next ECB meeting on 6 June. While it is not clear that President Draghi will lower interest rates further following a rate cut at the previous month’s meeting, analysts are pondering the possibility that monetary authorities will announce non-standard policy measures, in particular to address the lack of credit for small and medium enterprises.

Panellists expect inflation to average 1.6% in 2013, which is down 0.1 percentage points from last month’s estimate. For 2014, panellists project inflation also to average 1.6%.

Note: This is an excerpt from the FocusEconomics Consensus Forecast Euro Area – June 2013, published June 4th, 2013. The full report (162 pages, covering all 17 Eurozone member states is available for immediate download at the FocusEconomics Online Store). For more information and a free sample of the report please visit our website.

One response to “Growth prospects deteriorate as Euro area economy remains mired in recession

  1. Pingback: Focus-Economics | Punto de Vista Economico·

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