Eurozone GDP growth set to pick up in 2015

Economic growth in the eurozone should speed up, significantly next year, but authorities are effectively running on empty regarding defences to any future downturns, a new report has warned.

In its latest outlook on the eurozone region, professional services giant EY (formerly Ernst & Young) has said it expects the single-currency economy to see GDP growth of 1.2% in 2015, picking up from a more modest 0.8% increase this year. It anticipates the region’s economy will rise by 1.6% per annum from 2016 to 2018, inclusive.

“The lagged effect of a weakening euro, easing fiscal austerity, lower oil prices and more certainty in the banking sector will combine to support the gradually strengthening eurozone recovery,” the report states.

The eurozone will also, EY claims, see export growth in the region of 3.7% in 2015 (up from around 3.4% for this year) and slightly higher, at 4%, for the following three years. This is because the US and UK economies will continue to recover and the weaker euro offers more relief to less competitive member states.

Even though EY sees stronger growth ahead for the eurozone, it sees only modest unemployment declines and a slower recovery than in previous rebounds. The company is concerned about the ability to tackle any further downturns.

“Policymakers have much-diminished weaponry to tackle any further shocks. With eight eurozone member states’ public debt above 90% of GDP, and six of these above 100%, governments have minimal room for fiscal stimulus. And, in the event that inflation fails to pick up as fast as anticipated in the coming years, it is unclear whether a large-scale sovereign bond purchase programme would be as powerful as it might have been a year or two ago,” the report states.

According to Mark Otty, EY’s area managing partner for Europe, the Middle East, India, and Africa: “Even given divergences among countries, we think that 2015 holds a lot of promise for the eurozone, as a whole. The effects of a weakening euro should be more substantial next year and exports should rise as a result. Despite this positive sentiment, the news of strong growth in some of the periphery is undercut by very high unemployment — a main concern for the eurozone and a problem that will not disappear overnight.

“Several eurozone governments are beginning to ease austerity programmes, which should help domestic demand to grow. The sharp fall in world oil prices also will be welcome news to both households and businesses.

“On the other side, a slower growth in Asia-Pacific and China — key destinations for many eurozone investments and exports — as well as the very weak growth in France and contraction in Italy, are among factors which continue to make the eurozone vulnerable.”

Tom Rogers, a senior economic adviser to EY on its eurozone forecast report, said that if the region is to avert future crises, “the hard work to secure financial stability and economic prosperity needs to continue, in particular, via improving the environment for investment and job creation in a number of economies.”

According to EY, the pace of eurozone economic growth from 2016 to the end of 2018 will be more than half a percentage point slower than in the decade up to 2007, when GDP growth averaged 2.3% a year in the bloc.