The outlook for the Euro area stabilized this month. FocusEconomics Consensus Forecast panelists expect the region’s economy to expand 1.0% in 2014, which is in line with last month’s estimate. Panelists also kept their 2013 forecasts unchanged; they currently expect the Eurozone economy to experience a 0.4% contraction. The result was broad-based, coming in on the back of stable projections for 11 of the 17 economies surveyed. Forecasts improved for four countries (Cyprus, France, Malta and Spain), while the outlook deteriorated for the remaining two economies (Estonia and Slovenia).
Estonia and Slovakia expected to be the two strongest performers in 2014
Cyprus is expected to be the worst performer in 2014, with a 4.6% contraction; it did, however, experience a notable upward revision of 0.3 percentage points this month. Slovenia is expected to be the second-worst performing country in 2014 with a 0.3% contraction. On the other end of the spectrum, Estonia and Slovakia are expected to be the strongest performers next year, with a 3.5% and a 2.2% expansion respectively. Among the major economies in the region, Germany is expected to expand at the fastest pace with a 1.7% expansion, followed by France with 0.9% growth. Spain is expected to expand 0.6%, just a tad above the 0.5% growth expected for Italy next year.
Forward-looking indicators suggest that the positive trend in the Euro area continues
Recent data for the Euro area point to a firm pick-up in economic activity; that said, the road to recovery remains fraught with uncertainty. In August, industrial production posted the strongest sequential increase in the last 25 months (+1.0% month-on-month), recovering from the 1.0% contraction recorded in July. In the same month, unemployment finally stabilized; the unemployment rate was unchanged at 12.0% in August, after hovering at a record high of 12.1% from April to June. Forward-looking survey data point to a continuation of the positive trend. The composite Markit PMI index fell from 52.2 in September to 51.5 in October, although the index did remain in expansionary territory (above 50 points) for the fourth consecutive month.
Positive developments in the periphery; Ireland moves to bailout exit, Spain exits recession
Positive developments in peripheral countries took center stage this month, as Ireland moves toward exiting its bailout program in December of this year. The government recently presented the budget for 2014, which includes EUR 600 million less in tax hikes and spending cuts than was originally expected. Ireland has met the targets set by international lenders and has stockpiled EUR 25 billion in reserves to pay the country’s bills through 2014. Spain is also on track to conclude its bank-aid program by the end of the year. The Spanish economy exited recession in the third quarter, as GDP expanded a seasonally-adjusted 0.1% in Q3 according to Central Bank estimates. This was the first positive reading after nine consecutive quarters of contraction. The job market improved in the third quarter, with the unemployment rate falling to 26.0%, down from 26.3% in Q2.
Portugal also presented its 2014 budget this month, with the intention of exiting its EUR 78 billion bailout program in June of next year (see details on page 127). Authorities believe that the country will not need a second aid program and that it will be able to finance itself in debt markets when the bailout expires—although, according to Minister of the Economy Antonio Pires de Lima, the country will seek a precautionary credit line from international lenders at the beginning of the new year. Despite signs of improvement, the situation remains tense in Greece. According to the draft budget presented in early October, the economy is expected to grow in 2014, marking the first expansion since 2007. In addition, the government is eyeing a EUR 340 million primary surplus for this year and EUR 2.8 billion for next year. Achieving a primary surplus is a pre-condition for tabling talks with the country’s creditors regarding additional debt relief. International lenders, however, believe that the country will miss next year’s goal by about EUR 2.0 billion unless it adopts further austerity measures, which the government currently seems unwilling to accept.
Eurozone inflation confirmed at lowest level since February 2010
More detailed estimates for September confirmed Eurozone inflation at 1.1% (August: 1.3%), the lowest level in since February 2010. Inflation remains below the ECB target of, “below, but close to, 2%.” Panelists expect inflation to average 1.5% in 2014, which is unchanged from last month’s estimate. For 2013, panelists also project inflation to average 1.5%. Meanwhile, at the 2 October 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.” On 23 October, the ECB announced the criteria by which it will run a comprehensive assessment of the region’s banking sector in advance of taking on the role of single supervisor of the banking system next year.Note: This is an excerpt from the FocusEconomics Consensus Forecast Euro area – November 2013, published October 29th, 2013. The full report (157 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.