Euro area outlook remains stable

The outlook for the Euro area was stable for a second consecutive period 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 2014 forecast comes on the back of stable projections for 9 of the 17 economies surveyed. Forecasts improved for three countries (Belgium, Cyprus, Greece, Luxembourg, Malta and Portugal), while the outlook deteriorated for two economies (Ireland and Slovenia).

photo by neate photos

photo by neate photos

Cyprus is expected to be the worst performer in 2014 with a 4.3% contraction, followed by Slovenia with an expected contraction of 0.6%. On the other end of the spectrum, Estonia and Slovakia are expected to be the strongest performers next year, with expansions of 3.5% and a 2.2% respectively. Among the region’s major economies, 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%, which is just a tad above the 0.5% growth expected for Italy next year.

Regional recovery at risk of losing momentum

Recent data suggest that recovery in the Euro area remains weak and fraught with uncertainty. According to preliminary estimates, GDP expanded 0.1% over the previous quarter in Q3 2013; the reading marked a moderation over the 0.3% expansion recorded in Q2. Despite two consecutive quarters of expanding economic activity, unemployment remains worryingly high. In September, the unemployment rate was stable at the revised 12.2% recorded in August (previously reported: 12.0%), which represents a record-high for the region. Forward-looking survey data show mixed signals regarding developments in the coming months. Economic sentiment picked up from 96.9 points recorded in September to 97.8 points in October. The result marked the sixth consecutive improvement in the index and the highest level since August 2011. Meanwhile, the composite Markit PMI index inched down from 51.9 in October to 51.5 in November. Although the index remained in expansionary territory (above 50 points) for the fifth consecutive month, it slowed for a second consecutive month, suggesting that the recovery is losing momentum.

Spain and Ireland announce exit of bailout programs

Meanwhile, developments in debt-ridden countries were broadly positive this month. At their summit on 14 November, Eurozone finance ministers welcomed announcements from Ireland and Spain that they would both exit their bailout programs this year without requiring precautionary aid from the European Union lender. EU officials remain concerned, however, about fiscal developments in some of the peripheral countries. The European Commission and the Eurogroup reviewed each of the Euro area members’ 2014 budget proposals—this is the first time that these bodies have given an opinion on national budgets before they become law. After the review of Italy’s and Spain’s budgets, EU officials recommended that both countries make further adjustments in order to avoid non-compliance with the Stability and Growth Pact.

photo by quinn.anya

photo by quinn.anya

Panelists revise down regional inflation forecast as plunge in inflation prompts ECB action

Regarding price developments, annual inflation dropped to 0.7% in October, which was down from the 1.1% recorded in September and marked the slowest reading in more than four years. The moderation stemmed primarily from a drop in the price of energy. As a result, inflation has remained below the ECB target of, “below, but close to, 2%,” for the ninth consecutive month. Taking into account the latest developments in the region, panelists revised down their inflation projections. Panelists now expect inflation to average 1.4% in 2014, which is down 0.1 percentage points from last month’s estimate. For 2013, panelists also project inflation to average 1.4%. Against this backdrop, the ECB cut the refinancing rate to a new record-low of 0.25% at its meeting on 7 November, as the plunge in inflation in recent months is threatening to cripple the budding economic recovery.

Note: This is an excerpt from the FocusEconomics Consensus Forecast Euro area – December 2013, published November 26th, 2013. The full report (163 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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