Euro area outlook improves as region pulls out of recession

The outlook for the Euro area finally improved this month. FocusEconomics Consensus Forecast panellists expect the region’s economy to contract 0.5% in 2013, which is up 0.1 percentage points from the forecasts in July and August. Panellists did not revise their 2014 forecasts and still expect the Eurozone economy to experience a moderate recovery, with a projected output growth rate of 0.9%.

This month’s improvement comes on the back of an improved outlook for 7 out of the 17 economies surveyed (Belgium, Cyprus, France, Greece, Italy, Portugal and Spain). Three countries experienced a downward revision (Finland, Ireland and Netherlands), while the outlook for the remaining nine economies was unchanged. Cyprus is still expected to be the worst performer in 2013, with a 9.5% contraction; it did, however, experience a notable upward revision of 0.4 percentage points. Greece is expected to be the second-worst performing country in 2013 with a 4.5% contraction.

photo by LifeSupercharger

photo by LifeSupercharger

Economic indicators point to recovery in the Euro area

The latest batch of economic indicators sparked some optimism for recovery in the Euro area. The region pulled out of recession in Q2 as GDP expanded 0.3% over the previous quarter. The reading represented the first expansion after six consecutive quarters of negative output growth and marked the end of the longest recession in the history of the common currency area. While the reading was mainly led by the positive performance of Germany and France—which account for more than 50% of the region’s GDP—it was also underlined by a strong rebound in Portugal, as the economy finally expanded after ten quarters of contraction. Forward-looking indicators suggest that the positive trend in the Euro area economy will persist in the coming months; in August, economic sentiment picked up to the highest level since March of last year. On a negative note, the unemployment rate was unchanged at 12.1% in July—a record high level—despite the second consecutive drop in the number of unemployed.

Portugal and Greece remain source of concern

Developments in Portugal and Greece dominated the headlines this month. In Portugal, less than two months after an internal crisis threatened to destabilize the current government coalition, the Constitutional Court rejected a government plan to make public sector layoffs easier. The decision means a setback for Prime Minister Pedro Passos Coelho’s attempt to implement austerity measures.  It also threatens to spark worries among investors regarding the country’s ability to comply with the terms of the bailout program, which Portugal is expected to exit next year. Meanwhile, in Greece, Finance Minister Yannis Stournaras announced on 26 August that the country may need a third bailout package of EUR 10 billion. The announcement came after several European leaders acknowledged that an additional program might be needed. A decision will not be made, however, before the beginning of next year.

photo by CubaGallery

photo by CubaGallery

Greece has been one of the main themes of the campaign leading up to Germany’s long-awaited 22 September federal election. Opinion polls continue to indicate that Chancellor Angela Merkel’s Christian Democratic Union/Christian Social Union (CDU/CSU)—the major partner in the governing coalition—is the front-runner with 40% of the vote. The Free Democratic Party (FDP), CDU/CSU’s junior coalition partner, is losing ground in the polls. Thus, a likely outcome would be a so-called “Grand Coalition” between CDU/CSU and the country’s second-largest political force, the Social Democratic Party (SPD). These parties last co-governed from 2005 to 2009, during Merkel’s first term.

Eurozone inflation rate at lowest level in five months

A moderation in energy prices has affected recent price developments. According to a preliminary estimate for August, Eurozone inflation slowed to 1.3% (July: 1.6%), marking the lowest level in five months. That said, inflation remains under the ECB target of “below, but close to, 2%.” Panellists expect inflation to average 1.5% in 2013, which is unchanged from last month’s estimate. For 2014, panellists project inflation to average 1.5% as well. Meanwhile, at the 1 August policy meeting, European Central Bank (ECB) President Mario Draghi kept the monetary policy rate unchanged at a record low of 0.50%. Draghi also reiterated the forward guidance adopted in the previous meeting, stating that the refinancing rate will remain, “at present or lower levels for an extended period of time.”

Note: This is an excerpt from the FocusEconomics Consensus Forecast Euro Area – September 2013, published September 3rd, 2013. The full report (158 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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