Euro Area: Outlook remains stable

FocusEconomics panelists’ outlook for the region was unchanged over last month. They still project that the Euro Area economy will expand 1.0% in 2014, which marks a rebound over the 0.4% contraction projected for 2013. Compared to the previous month, panelists’ forecasts were unchanged for 8 of the 18 economies surveyed. Forecasts improved for six countries (Belgium, Greece, Ireland, Portugal, Slovakia and Spain), while the outlook deteriorated for the remaining four economies (Cyprus, Estonia, Finland and Luxembourg). Panelists expect the Euro area economy to accelerate slightly in 2015, as they forecast a 1.4% GDP expansion, which is in line with last month’s forecast.

photo by Yukiko Matsuoka

photo by Yukiko Matsuoka

Cyprus is expected to be the worst performer in 2014 with a 4.5% contraction, followed by Slovenia with an expected contraction of 0.6%. On the other end of the spectrum, Latvia and Estonia are expected to be 2014’s strongest performers, with expansions of 4.2% and 3.1% respectively. Among the region’s major economies, Germany is expected to expand at the fastest pace with a 1.7% expansion followed by France and Spain with 0.8% growth. Finally, Italy is expected to expand 0.5%.

While the area’s recovery remains fraught with uncertainties, the latest data paint a moderately positive picture for the Euro area economy. Industrial production expanded 1.8% over the previous month in November, which contrasted the 0.8% drop recorded in October and marked the strongest expansion in three and a half years. Despite the gradual pick up in economic activity, unemployment remains at levels that are worryingly high. In December, unemployment was unchanged at 12.0%, which was on par with November’s result.

Recent indicators paint a broadly positive picture for the Euro area economy

Survey-based indicators point to a continued improvement going forward. In January, the economic sentiment indicator that the European Commission releases increased from 100.4 points in December to 100.9 points, marking the highest level since July 2011. In addition, the Markit Manufacturing Purchasing Managers’ Index (PMI) rose to a 32-month high in January, reaching 54.0 from 52.7 in December. The reading was underlined by the strength of the German manufacturing sector and by an improvement in countries like Spain and Italy, which lagged behind in previous months.

Portugal targets bailout program exit in June; Greece confirms primary surplus

News from peripheral countries was broadly positive this month. Portugal’s Finance Minister, Maria Luis Albuquerque, announced that the 2013 budget deficit was around 5.0% of GDP, which was below the 5.5% of GDP the country had agreed upon with the Troika in May 2013. Against a backdrop of improving economic indicators, the government announced that it would return to markets for financing this year with the goal of exiting the bailout program in June. Greece also published final budget figures for 2013, which confirmed that the country reached a primary surplus of more than EUR 1 billion. The figure exceeded the EUR 812 million the government had projected. Reaching a primary surplus is a condition that the Troika requests to provide additional debt relief.

Panelists leave regional inflation forecasts unchanged 

Regarding price developments, inflation remains on a downward trend. According to the preliminary figures the Eurostat released on 31 January, annual inflation slowed from 0.9% in December to 0.7% in January. The reading matched the result that was recorded in October 2013, which had marked the lowest level in almost four years. FocusEconomics panelists expect inflation to average 1.1% in 2014, which is unchanged from last month’s projection. This marks a decrease compared to the 1.4% recorded in 2013. In 2015, inflation is expected to accelerate to 1.4%.

photo by Images_of_Money

photo by Images_of_Money

Despite the adverse price developments, the European Central Bank kept the refinancing rate unchanged at the record low of 0.25% at its 9 January meeting. That said, President Mario Draghi emphasized that monetary authorities, “remain determined to maintain the high degree of monetary accommodation and to take further decisive action if required.” According to analysts, the phrasing of the statement suggests that the ECB is ready to step up, especially if there is a further slowdown in inflation as this could undermine the incipient economic recovery.

Note: This is an excerpt from the FocusEconomics Consensus Forecast Euro area – February 2014, published February 4th, 2014. The full report (167 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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