Euro Area: Stable growth outlook continues for 5th month

FocusEconomics panelists’ outlook for the Euro area remained stable for the fifth consecutive period this month. Panelists project that the Euro Area economy will expand 1.0% in 2014. Compared to the previous month, panelists’ forecasts were unchanged for 10 of the 18 economies surveyed. Forecasts improved for seven countries (Cyprus, Germany, Ireland, Latvia, Luxembourg, the Netherlands and Portugal), while the outlook deteriorated only for Estonia. Panelists expect the Euro area economy to accelerate slightly in 2015, as they forecast a 1.4% GDP expansion, which is unchanged over last month’s projection.

photo by GlasgowAmateur

photo by GlasgowAmateur

Cyprus is expected to be the worst performer in 2014 with a 4.4% contraction, followed by Slovenia with an expected 0.6% drop. On the other end of the spectrum, Latvia and Estonia are expected to be 2014’s strongest performers, with expansions of 4.3% and 2.8% respectively. Among the region’s major economies, Germany is expected to grow at the fastest pace with a 1.8% expansion followed by France with 0.8% growth. Spain is expected to expand also 0.8%, which is higher than the 0.5% growth expected for Italy.

Recovery in the Euro area gains momentum, but weaknesses persist

According to the Eurostat preliminary estimate, the recovery in the region gathered momentum in the final quarter of 2013; the Euro area economy expanded a seasonally-adjusted 0.3% over the previous quarter. The reading represented an acceleration compared to the 0.1% expansion recorded in Q3 and marked a third consecutive expansion. The result was underscored by expansions in the four major regional economies—including Italy, where output expanded for the first time since the second quarter of 2011. Industrial production data, however, suggest that some weaknesses in the economy persist. Industrial production dropped 0.7% over the previous month in December, which contrasted the 1.6% increase recorded in November and marked the third contraction in the last four months.

In addition, the labor market is still a weak point in the region as unemployment remains at worryingly-high levels. In January, unemployment remained unchanged at December’s 12.0%. Survey-based indicators paint a mixed picture. In February, the European Commission’s economic sentiment indicator inched up from 101.0 points in January to 101.2 points, which marked the highest level since July 2011. In the same month, the Markit Manufacturing Purchasing Managers’ Index (PMI) fell from the 32-month high of 54.0 recorded in January to 53.0.

Renzi takes power in Italy, uncertainty surround his reform agenda

 Political events took center stage this month amid the recent change of power in Italy. Following a power struggle in the majority Democratic Party (PD), Matteo Renzi—former mayor of Florence and president of the PD—became Prime Minister, taking over from Enrico Letta. Renzi has vowed to pursue a very ambitious reform agenda in order to kick-start the ailing Italian economy, which is currently hampered by red-tape regulations and rigid labor laws that stifle business growth and job creation. However, the new government is resting on the same shaky foundation as that of the previous administration and uncertainties regarding whether Renzi—the youngest Prime Minister in the country’s history—will succeed in pursuing his agenda persist.

Positive developments for Spain, Portugal and Greece

 The news flow from the remaining peripheral countries was broadly positive this month. In Spain, Moody’s upgraded the country’s credit rating from Baa3 to Baa2 with a positive outlook, citing progress in economic rebalancing, the structural reforms that had been implemented and improved market access. In Portugal, the national debt agency repurchased 1.32 EUR billion in bonds in an operation aimed at easing the country’s financial needs ahead of the exit from the bailout program, which is likely to happen in May. Finally, Greece posted its first current account surplus in almost seventy years in 2013, as a boom in the tourism sector drove revenue. Meanwhile, Greece’s government resumed talks with international lenders in an attempt to put an end to the bailout review that began last September. The disbursement of funds required to pay the EUR 9.3 billion of loans that mature this May are at stake. The talks will also focus on the amount of additional capital that Greece’s top four banks need under the bank recapitalization plan.

Photo by Oneras

Photo by Oneras

Inflation in Euro Area Remains Low

Regarding price developments, while inflation stabilized in February, it remains low. According to preliminary figures that the Eurostat released on 28 February, annual inflation was stable at the 0.8% recorded in January. Against this backdrop, FocusEconomics Consensus Forecast panelists cut their projections for this month. They expect inflation to average 1.0% in 2014, which is down 0.1 percentage points over last month’s forecast. In 2015, inflation is expected to accelerate to 1.4%, which is unchanged from last month’s projection. Despite the adverse price developments, the European Central Bank (ECB) kept the refinancing rate unchanged at the record low of 0.25% at its 6 February meeting. Ahead of the next meeting on 5 March, pressure is mounting for the ECB to cut interest rates, amid persistently low inflation.

Note: This is an excerpt from the FocusEconomics Consensus Forecast Euro area – March 2014, published March  4th, 2014. The full report (169 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.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s