The 2014 GDP outlook for the Euro area was stable for a second consecutive month as FocusEconomics panelists maintained their 1.1% projection. The result reflected stable projections for 11 of the 18 economies in the region. The forecasts for four economies (Estonia, France, Italy and Latvia) were revised downward, while three economies’ (Ireland, Slovakia and Slovenia) forecasts were revised upward. Panelists expect the Euro area economy to accelerate slightly in 2015 and maintained their forecast of a 1.5% expansion in GDP, which has not been changed since May.
Recent Data Paint a Mixed Picture of the Global Economic Recovery
Cyprus is expected to be the worst performer in 2014 with a 4.3% contraction, followed by Finland, where economic growth is expected to be 0.1%. At the other end of the spectrum, Latvia is expected to be the strongest performer in 2014 with a 3.5% expansion, followed by Ireland, Luxembourg and Slovakia—all with a 2.5% expansion. Among the region’s major economies, Germany is projected to grow at the fastest pace with a 2.0% expansion followed by Spain with a 1.1% increase and France with 0.7% growth. Italy is expected to experience a meager 0.3% expansion. This month, Italy experienced the third consecutive downward revision to its growth outlook.
Recent indicator releases provided a mixed picture of the Euro area economy. Industrial production contracted a seasonally-adjusted 1.1% over the previous month in May, which contrasted the 0.7% expansion recorded in the previous month and marked the largest drop in 20 months. Meanwhile, the unemployment rate held steady at 11.6% in May. The reading, which was in line with April’s result, represents the lowest unemployment rate in almost two years.
Eurozone PMI Shows Recovery Regaining Momentum
Survey-based indicators suggest that the Eurozone economy started the second half of the year on stronger footing. The Markit Composite PMI Output Index flash estimate reached 54.0 in July. The reading, which came above the 52.8 recorded in June, marked a rebound following a decline both in May and June. The reading was underlined by stronger performance in Germany, while in France the index remained in contractionary territory for a third consecutive month. That said, the composite PMI for the other countries in the region reached the highest level since August 2007.
Juncker Becomes New European Commission President
In the political arena, Jean-Claude Juncker—former Luxembourg Prime Minister—was approved as President of the European Commission by a majority in the European Parliament. Juncker will take over for incumbent Jose Manuel Barroso in November. In his appointment speech, Juncker pledged to launch a EUR 300-billion investment plan to create jobs for young people and to stimulate growth over the course of the next three years.
Growing Concerns about Greek and Portuguese Economies
On a negative note, following the relative quiet and general stability of late, recent events that are taking place in the region’s peripheral countries are raising concerns. Greece is facing uncertainty regarding its financial sustainability after demand for the EUR 1.5 billion in bonds that the country sold on 10 July was lower than expected. Concerns are mounting ahead of the meeting with Troika officials that is scheduled for mid-September that Greece will require a third bailout at some point in the future (see details on page 110). Meanwhile, in Portugal, financial irregularities in a parent company that controls Banco Espirito Santo were disclosed. This sent jitters through European financial markets as it sparked fear that spillover effects could impact Portugal’s second largest bank.
Inflation within “Danger Zone”
Inflation figures continue to be a source of worry. More detailed estimates for June confirmed that annual HICP inflation came in at 0.5% in June, which was in line with the result recorded in May. This means that inflation is within what ECB President Mario Draghi called the “danger zone” of below 1.0% for the ninth consecutive month. The impact that geopolitical tensions between Ukraine and Russia will have in the coming months remains to be seen. The situation, in fact, has the potential to boost inflation through an increase in energy prices.
Against this backdrop, the ECB left the main interest rates unchanged at its 3 July monetary policy meeting. This decision followed the ECB’s bold move in June to adopt a negative rate on its deposits. That said, in the statement that accompanied the ECB’s decision, President Mario Draghi stressed the Bank’s commitment to utilize unconventional instruments should inflation remain low for an extended period of time.
Inflation Projections Stable for 2014
Taking into account recent developments, FocusEconomics Consensus Forecast panelists kept their inflation projections stable this month. They expect inflation to average 0.7% in 2014, which is unchanged over last month’s forecast. In 2015, inflation is expected to accelerate to 1.2%, which is also unchanged from last month’s projection.Note: This is an excerpt from the FocusEconomics Consensus Forecast Euro area – August 2014, published July 29th, 2014. The full report (172 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.