Euro area outlook deteriorates further

FocusEconomics panellists cut their growth projections for the region for the 10th time in the last 11 months. Panellists lowered their 2013 GDP projections by 0.1 percentage points over the previous month and now see the Eurozone contracting 0.6%. 9 of the 17 Eurozone member states experienced downward revisions to their growth forecast, two countries were upgraded (Luxembourg and Greece) and the outlook for the remaining six economies was stable.

Among the four major economies in the region, only Germany expects positive growth in 2013

The strongest downward revision (-1.8 percentage points) was experienced once again 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 9.8% contraction, followed by Greece (-4.6%). Among the region’s four major economies, panellists expect positive growth only in Germany (+0.4%), although the region’s behemoth experienced a third consecutive downward revision to its outlook this month. Meanwhile, panellists forecast contractions in Italy (-1.7%), Spain (-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 unchanged from last month’s forecast.

by Yodamanu

by Yodamanu

Market tensions resurface as debt crisis threatens to flare up once again

Tensions in financial markets resurfaced following the announcement by Chairman of the Federal Reserve Ben Bernanke on 19 June that the Fed may start tapering its QE program later this year. In response to the announcement, peripheral bond yields surged to levels not seen since the beginning of the year, sparking fears that the region’s debt crisis could flare up once again. Market jitters subsided in recent days, however, as uncertainty surrounding the outlook for the U.S. economy does not seem to offer the Fed enough room to withdraw its stimulus as early as suggested.

European leaders make further steps toward banking union, agree to fight youth unemployment

On a positive note, European leaders made progress towards the creation of a banking union at the latest summit on 27/28 June. In particular, politicians agreed on a draft directive aimed at harmonizing the resolution mechanism of failing banks, which now awaits a ratification of the European parliament. The new scheme shifts part of the burden of rescuing troubled banks from taxpayers to shareholders and uninsured depositors. That said, the new rules will only be operative in 2018. At the same meeting, EU leaders also agreed to spend EUR 6 billion over the next two years to fight youth unemployment and to boost the lending activity of the European Investment Bank, in particular to foster lending for small and medium enterprises.

by Old Sarge

by Old Sarge

Euro area remains mired in recession

Economic indicators continue to paint a negative picture for the Euro area. Detailed GDP figures confirmed the previously reported 0.2% contraction in Q1 2013. While the reading marks an improvement over the 0.6% drop seen in Q4 2012, it represents a sixth consecutive decline in economic activity – the longest recession in the region’s history. Moreover, the situation in the labour market remains dire and the unemployment rate reached yet another new Euro area record-high in May (12.1%, up from a revised 12.0% in May). On a positive note, industrial output recorded an unexpected gain in April. Meanwhile, forward-looking indicators point to improving conditions going forward, as economic sentiment rose for a second consecutive month in June, reaching the highest level in more than one year, although the index still remains in pessimistic territory.

Inflation picks up, ECB keeps rates on hold

Meanwhile, inflation picked up in June for a second consecutive month on the back of higher energy and food prices. According to a preliminary estimate released by Eurostat, Eurozone inflation rose from 1.4% in May to 1.6% in June. That said, inflation remains below the ECB target of “below, but close to, 2%”. As the inflation scenario remains benign, the ECB left the main refinancing rate unchanged at 0.50% at its meeting on 6 June. Against this backdrop, panellists expect inflation to average 1.5% in 2013, which is down 0.1 percentage points from last month’s estimate. For 2014, panellists project inflation also to average 1.5%.

Note: This is an excerpt from the FocusEconomics Consensus Forecast Euro Area – July 2013, published July 2nd, 2013. The full report (161 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.

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