Irish companies need to prepare for a European lost decade on the back of sluggish growth and rising unemployment, according to Marie Diron, senior economic adviser to the Ernst & Young Eurozone Forecast.
“This will be a tough operating environment for both business and political leaders. Businesses need to plan for a European ‘lost decade’ as growth will remain muted and unemployment will continue to rise throughout 2013, peaking at close to 20m,” Ms Diron said.
“The peak in unemployment is expected to be both higher and slower to unwind in the peripheral economies with the unemployment rate expected to reach over 28% in Greece, 26% in Spain, and almost 17% in Portugal and 15.3% in Ireland.”
The forecast claims Irish GDP growth will reach 1% in 2013. The eurozone is expected to shrink by 0.2% next year before making a modest pickup to 1.3% between 2014 and 2016.
But it will be a tale of two economies within the region as southern member states, including Greece, Spain, Portugal, and Italy, are not expected to grow until 2015 at the earliest.
However, widespread doubts about the viability of the eurozone, which existed this time last year, have now lifted.
Comments made by ECB president Mario Draghi in July, that he would do whatever it takes to preserve the single currency, have introduced much-needed stability to the region.
But business and consumer confidence have stagnated since the summer. Consequently capital spending is forecast to drop in 2013 as companies take a “wait and see” approach.
On a brighter note, the forecast said there had been an improvement in competitiveness which was helping correct the structural imbalances that helped cause the sovereign debt crisis.
“Strong exports have contributed to reduce current account deficits that were very large at the start of the crisis and a symptom of the imbalances within these economies. This has in turn eased financing issues as foreign capital inflows dried up. However, the benefits from this will not be felt in the immediate future.”
Ms Diron said a cut in the ECB interest rate would boost exports, but that the Frankfurt-based institution is unlikely to change monetary policy between now and 2017.
“Although there are some positive indicators for the eurozone this is just the beginning of the road,” she said.
“Further steps to complete frameworks for both a banking and fiscal union, the introduction of some form of eurobond and the full implementation of the growth pact should help to begin to restore confidence although they are unlikely to alter prospects for demand and growth in the short term.”
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