ERNST & YOUNG SRL

  |  2013-03-14

Ernst & Young Eurozone Forecast of 2013

Welcome to the first Ernst & Young Eurozone Forecast of 2013. The year began with the hope that better times lay ahead, but has so far been marked by news both good and bad.

Even after the difficulties of 2012 and the relief that a near-term Eurozone breakup has been avoided, challenges still remain.

 

The outcome of February’s EU summit, which agreed to limit the EU’s spending in 2014-20 to €960b, 3% below the current seven-year budget, prompted reassurance that European leaders can put aside individual country concerns and come together to address ongoing challenges.

 

However, it would be disappointing if the deal, which represents the first cut in the EU’s budget in its 56-year history, also serves to hamper future growth. Cuts in funds to develop cross-border infrastructure for example, would hit peripheral EU and Eurozone countries particularly hard.

 

 

While balancing the books is clearly crucial, policy-makers must also seek to create a balance between austerity and the necessary investment to promote growth, the pursuit of which has intensified since the turn of the year. News that the Eurozone economy shrank by 0.6% in the final quarter of 2012 — the sharpest contraction since the beginning of 2009 and the first time the region failed to grow in any quarter during a calendar year — reverberated across the region. Even Germany, so long the engine of the European economy, has suffered, with its exports slumping by 2% in the fourth quarter of 2012, causing its overall economy to fall by 0.6%.

 

 

More recently, the political deadlock arising from the Italian elections has been an unwelcome reminder of the fragility of the Eurozone’s attempts to recover from the financial crisis. The apparent rejection of austerity measures by Italian voters, together with the prospect of another election within months, will do little to build much-needed confidence and has already injected further uncertainty into the markets. Such issues help to explain why we now expect the Eurozone’s GDP to decline by 0.5% in 2013, the same as the fall in 2012.

 

 

However, our forecast also expects some pickup during the second half of the year, in turn paving the way for growth of just over 1% in 2014. This will then be followed by slow-paced expansion, which will hit an annual rate of 1.6% in 2017. A number of different factors will underpin this slow recovery. Improved competitiveness and strengthening demand from the US and emerging markets will boost exports.

 

 

And while increased business investment and consumer spending will also play a significant role in the years to come, further policy reforms will also drive growth — a broader tax base, the ongoing restructuring of the public sector and developments such as reduced bureaucracy and stronger competition laws will all come into play.

 

 

It is important, too, to recognize that globalization is still increasing the levels of cross-border trade and capital and labor integration. And despite the problems of recent years, developed markets continue to be major drivers of world economic activity, a point highlighted by our recent report, Globalization and new opportunitiesfor growth. With technology integral to our increasingly digital and connected world, the presence of advanced broadband, social and mobile technologies across the Eurozone offers a chance for agile businesses to leverage these capabilities into a significant competitive advantage.

 

 

Such opportunities are integral to unlocking the huge reserves of cash that many European companies have built up in recent years. Only time will tell whether this reluctance to invest will evaporate in the face of better economic news, but with the shadow of the financial crisis seemingly poised to begin its slow retreat, and concerns about an imminent breakup of the Eurozone now fading, we can be hopeful that this year will see a corner turned and a brighter Europe emerge on the horizon.

 

 

Read the full report in the attached document

 

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