Euro area: Outlook improves for second consecutive month

The outlook for the Euro area improved over the last month. Following nearly a year of downward revisions to the Euro area’s 2013 GDP growth forecast, FocusEconomics Consensus Forecast panelists raised their forecasts for a second consecutive month and now expect the region’s economy to contract only 0.4% in 2013. The new forecast is up 0.1 percentage points over last month when predictions improved by the same magnitude. Panelists also raised their 2014 forecasts by 0.1 percentage points; they currently expect the Eurozone economy to have an output growth rate of 1.0%.

This month’s improvement comes on the back of a stronger outlook for 6 of the 17 economies surveyed (Cyprus, France, Germany, Greece, Portugal and Spain). The upward revision for France was of particular relevance. After six months forecasting that the French economy would contract in 2013, panelists now expect positive growth, with a 0.1% expansion. In contrast, five countries experienced a downward revision (Estonia, Finland, Ireland, Luxembourg and Malta), while the outlook for the remaining six economies was unchanged.

photo by K J Payne

photo by K J Payne

Cyprus and Greece expected to be the two worst performers

Cyprus is still expected to be the worst performer in 2013, with an 8.9% contraction; it did, however, experience a notable upward revision of 0.6 percentage points. Greece is expected to be the second-worst performing country in 2013 with a 4.1% contraction. That said, the forecast has improved continuously from the 4.7% contraction expected in June.

Eurozone economic sentiment picks up to the highest level in over two years

The latest economic indicators for the Euro area suggest that, although the region’s economy is picking up, the recovery is feeble and erratic. Industrial production unexpectedly dropped in July, contrasting the positive result recorded in the previous month. On a positive note, forward-looking indicators, such as economic sentiment, which picked up to the highest level in over two years in September, suggest that the Euro area economy’s positive trend will firm in the coming months.

Political turbulence in Italy, Greece and Portugal still source of concern

However, doubts about the region’s recovery are emerging from the political arena. Political turmoil in Italy has sparked concerns among investors that the Euro crisis may flare up once again. Following the 28 September resignation of five ministers from Silvio Berlusconi’s Forza Italia (FI) party, Prime Minister Enrico Letta announced that he will call a confidence vote on 2 October. The crisis reflects disagreements inside the unstable left-right coalition about the implementation of a VAT hike planned for October. Forza Italia had been pushing to delay the planned rise in the sales tax whereas Letta’s Democratic Party opted for a timely rise. Tensions have been amplified by the impending Senate vote on whether to strip Berlusconi of his seat, following his conviction for tax fraud in August. Markets reacted negatively to the news and yields on Italian 10-year government bonds spiked to pre-summer levels.

Tensions also remain high in the peripheral economies. In Greece, the government met with international investors to review progress on the implementation of the bailout program and to discuss the possibility of additional financial help next year. Social unrest surrounded the meeting, as public sector workers launched a two-day strike on 24 September to protest against further austerity measures. Meanwhile, in Portugal, voters punished the governing Social Democrat party in local elections on 29 September. The defeat suggests that bailout fatigue is increasing among citizens. Prime Minister Pedro Passos Coelho has vowed to stick with the austerity agenda since the government is struggling to meet the terms of the bailout program and also avoid the threat of a second bailout program.

photo by Nico Kaiser

photo by Nico Kaiser

Eurozone inflation marks the lowest level since February 2010

A moderation in energy prices affected recent price developments in the region. According to a preliminary estimate for September, Eurozone inflation slowed to 1.1% (August: 1.3%), marking the lowest level in since February 2010. As a result, inflation remains under the ECB target of “below, but close to, 2%.” Panelists expect inflation to average 1.5% in 2013, which is unchanged from last month’s estimate. For 2014, panelists project inflation to average 1.5% as well. Meanwhile, at the 5 September policy meeting, the European Central Bank (ECB) kept the monetary policy rate unchanged at a record low of 0.50%. ECB President Mario Draghi reiterated the forward guidance adopted in the previous meetings, 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 – October 2013, published October 1st, 2013. The full report (159 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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