Euro Area: Growth prospects improve in April

The outlook for the Euro area improved this month. FocusEconomics panelists revised up their 2014 GDP growth projections following five consecutive months of stable expectations. Panelists now project the Euro Area economy to expand 1.1% in 2014, which is up 0.1 percentage points over last month’s forecast. The improvement was driven by stronger growth prospects for eight of the 18 countries covered (Austria, Belgium, France, Greece, the Netherlands, Portugal, Slovenia and Spain). The outlook deteriorated for five economies (Cyprus, Estonia, Finland, Ireland and Latvia) and it remained unchanged for the remaining five economies. Panelists expect the Euro area economy to accelerate slightly in 2015 and forecast a 1.5% GDP expansion, which is also up 0.1 percentage points over last month’s projection.

photo by mammal

photo by mammal

Cyprus is expected to be the worst performer in 2014 with a 4.5% contraction, followed by Slovenia with an expected 0.4% drop. On the other end of the spectrum, Latvia and Estonia are expected to be 2014’s strongest performers expanding 4.2% and 2.7% respectively. Among the region’s major economies, Germany is expected to grow at the fastest pace with a 1.8% expansion, followed by France and Spain with 0.9% growth each, while Italy will experience a meager 0.5% expansion.

Recovery continues to move ahead

Recent figures confirm that the economic recovery is continuing to move ahead although it is weak. Detailed GDP figures confirmed that the Euro area economy accelerated at the end of last year. In Q4 2013, GDP expanded a seasonally-adjusted 0.3% over the previous quarter, which was up from the 0.2% expansion recorded in Q3 and marked a third consecutive expansion. The result was mainly driven by a stronger external sector, while domestic demand weakened compared to the previous quarter. Weaknesses in the economy persist, however, as suggested by industrial production data. Industrial production dropped 0.2% over the previous month in January; the reading marked an improvement over the 0.4% drop recorded in December, but represented the second contraction in a row.

Survey-based indicators broadly point to continued improvement going forward. The Markit Composite Purchasing Managers’ Index (PMI) flash estimate inched down from the 32-month high of 53.3 recorded in February to 53.2 in March. While representing a moderation, the reading marked the ninth consecutive month in which the index was in expansionary territory. According to Markit, the reading for March implies a 0.5% GDP expansion in the Euro area in the first quarter, which would represent an acceleration over the Q4 2013 GDP reading. Meanwhile, the European Commission’s economic sentiment indicator rose from 101.2 points in February to 102.4 points in March. This is the highest reading since July 2011 and was driven by improvements in all the sectors covered.

Tensions in Ukraine and Russia seem to not have had a notable impact on the region. That said, further developments in the confrontation between Russia and the Western economies-specifically retaliation over potential trade sanctions—may influence the region more strongly in the coming months. The flow of news in the region was broadly positive over the course of the month. On 20 March, the European Parliament and the Euro area member states reached a deal to establish the long-awaited banking union. The union will allow European authorities to shut down failing Eurozone banks in order to prevent contagion and systemic crisis. The agreement includes a common resolution fund of EUR 55 billion from the banks that will be built up over eight years.

Meanwhile, in Greece, the government and international lenders came to an agreement on the fifth review of the country’s second bailout—ending seven months of intense negotiations. The deal paves the way for much-needed funds from the rescue package to be disbursed once the IMF and the Eurozone financial minister sign off on the review.

photo by Images_of_Money

photo by Images_of_Money

Inflation projections stable ahead of decisive ECB meeting on 3 April

Regarding price developments, annual inflation slowed from 0.7% in February to 0.5% in March, marking the lowest level since October 2009. Against this backdrop, FocusEconomics Consensus Forecast panelists maintained their projections this month. They expect inflation to average 1.0% in 2014, which is unchanged over last month’s forecast. In 2015, inflation is expected to accelerate to 1.4%, which is also 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 5 March meeting. Amid the scenario of persistently-low inflation that could thwart the incipient recovery, pressure is mounting on the ECB to step in and adopt counteractive measures. The very low inflation reading in March points toward the ECB taking action at its upcoming 3 April meeting. However, the recent flow of positive data and expectations for improvement going forward suggests that the ECB may maintain its wait-and-see approach, making it challenging to determine what the next ECB decision will be.

Note: This is an excerpt from the FocusEconomics Consensus Forecast Euro area –April 2014, published April 1st , 2014. The full report (167 pages, covering all 18 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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