The outlook for the Euro area improved again this month. FocusEconomics panelists revised up their 2014 GDP growth expectations for the second month in a row following five consecutive months of stable projections. Panelists now expect the Euro area economy to expand 1.2% in 2014, which is up 0.1 percentage points over last month’s forecast. The improvement was driven by stronger growth prospects for 10 of the 18 countries covered (Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovenia and Spain), while the outlook for three economies deteriorated (Estonia, Finland and Latvia) and 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 unchanged over last month’s projection.
Cyprus is expected to be the worst performer in 2014 with a 4.5% contraction, followed by Slovenia with an expected 0.1% drop. On the other end of the spectrum, Latvia (3.9%), Slovakia (2.2%) and Estonia (also 2.2%) are expected to be the strongest performers in 2014. Among the region’s major economies, Germany is expected to grow at the fastest pace with a 1.9% expansion, followed by Spain with 1.0% growth and France with 0.9% growth, while Italy will experience a 0.6% expansion.
Recent economic indicators suggest recovery remains on track
The Eurozone recovery is holding steady as is suggested by recent economic indicators, although weaknesses do persist. Industrial output expanded 0.2% over the previous month in February, thus recovering from a contraction in December and a flat reading in January. That said, unemployment is still at worryingly-high levels. In February, the unemployment rate remained stable at 11.9% for a fifth consecutive month despite a drop in the number of jobseekers.
Survey-based indicators broadly point to continued improvement going forward. The Markit Composite PMI Output Index flash estimate rose from 53.2 in March to 54.0 in April, marking the highest result since May 2011. This is the tenth consecutive month in which the index is in expansionary territory. According to Markit, the reading for April implies a 0.5% GDP expansion in the Euro area in the second quarter, which would represent an acceleration over an estimated 0.4% expansion in the first quarter.
Greece returns to bond markets for first time in five years
The news flow from the region was broadly positive over the course of the month. Greece hit an important milestone on 10 April when the government issued EUR 3.3 billion worth of five-year government bonds. This represents the first time the country has tapped into international financial markets since the height of the crisis in 2010 and is sending a signal that the country is now able to sustain itself financially and can thus avoid a third bailout from international lenders. More recently, on 24 April, Eurostat confirmed the government’s estimate of a primary balance surplus in 2013; this announcement paves the way for discussions about further debt relief from international lenders to take place as early as the next meeting of EU finance ministers, which will take place in May.
News about the Spanish economy has been generally positive over the course of the past month. According to preliminary Central Bank data, the economy expanded 0.4% over the previous quarter in Q1 (Q4 2013: +0.2% quarter-on-quarter). If the National Statistical Institute (INE) confirms the figures later in April, this will mark the strongest expansion in six years. The pace of recovery has been picking up of late, which prompted Fitch, the international rating agency, to upgrade the country’s credit rating from BBB to BBB+. Fitch cited the improved long-term outlook as the reason for its decision.
In France, the Socialist government is trying to gain back its popularity ahead of the May European elections. President François Hollande’s administration is facing widespread disappointment for how it has handled the economy; economic growth is still stagnant and unemployment is mounting. Although Manuel Valls, former Minister of Internal Affairs, had been one of the cabinet’s most popular ministers, his recent appointment as Prime Minister has proven to be controversial. Valls is facing strong interparty opposition to a set of measures he announced that are intended to kick start the ailing French economy.
ECB ready to act against deflationary threat
Regarding price developments, detailed data confirmed that inflation has slowed to its lowest level since October 2009, which is fuelling fears that the Eurozone could enter into a dangerous deflationary spiral. Despite the adverse price developments, the European Central Bank (ECB) kept the refinancing rate unchanged at the record low of 0.25% at its 3 April meeting. In the monetary policy statement, however, ECB President Mario Draghi stressed that the ECB is ready to act and is open to adopting unconventional measures in case the current low inflation were to turn into outright deflation. This has raised expectations that the ECB may announce further monetary stimulus as early as its next meeting, which will be held on 8 May.
Against this backdrop, FocusEconomics Consensus Forecast panelists maintained their projections this month. They expect inflation to average 0.9% in 2014, which is down 0.1 percentage points over last month’s forecast. In 2015, inflation is expected to accelerate to 1.3%, which is also down 0.1 percentage points from last month’s projection.Note: This is an excerpt from the FocusEconomics Consensus Forecast Euro area –May 2014, published April 29th, 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.