eurozone - deloitte us...the dollar and the general economic outlook for the eurozone is clouded by...
TRANSCRIPT
At the end of the year, the Eurozone is doing significantly better than predicted. Political risks did not materialize; the euro has appreciated sub-stantially; and the Eurozone has taken a much more dynamic growth path. Current growth is becoming broader-based. While consumption remains the key
driver, exports recently contributed more and cor-porate investments—hitherto the recovery’s Achil-les heel—seem to have left the legacy of the financial crisis behind. The key question is whether the Euro-zone can continue to expand at this speed.
What a difference 11 months make. Rewind back to January 2017. Analyses of the Eurozone reserve the most space for political risks and expect—at best—a continuation of the anemic recovery. The euro is heading toward parity with the dollar and the general economic outlook for the Eurozone is clouded by political risks that weigh heavily on economic sentiment.
EurozoneA new dynamism
By: Alexander Börsch
Current situation: Rosy
The fourth quarter of 2017 brought unambigu-ously good news for the Eurozone’s economy. The post-crisis period with its feeble growth and lasting unemployment seems to have come to an end.
• The recovery has now lasted for 18 consecutive quarters and the Eurozone has been growing at the highest rate for the last 10 years.
• Unemployment has fallen to the lowest level since 2009 and employment figures are now above pre-crisis levels.1
• The sentiment indicators paint a rosy pic-ture. The European Commission’s Economic Sentiment Index reached its highest level in 16 years; the same applies to its consumer confidence component.2
The main upside surprise in the last quarter came from exports. Driven by stronger-than-ex-pected world trade and a synchronized upswing in
world economic growth, the Eurozone’s exports ac-celerated and developed stronger than anticipated. So far, the strong euro has not been able to stop this trend. At the same time, corporate investments sur-prised positively, lending more stability to the hith-erto consumption-based recovery.
Consequently, GDP projections for 2017 had to be revised upward. The Eurozone economy is now projected to grow at 2.2 percent instead of 1.7 per-cent (figure 1). Among the bigger Eurozone econo-mies, the Netherlands and Spain are the growth leaders, followed by Germany, France, and Italy. Some countries such as Ireland or Slovenia have reached impressive growth rates of almost 5.0 per-cent.
The improvement in labor markets greatly sup-ports household spending, so far the essential pillar of the recovery. While employment is now higher than before the crisis in 2008, the number of unem-ployed fell by 1.5 million between autumn 2016 and autumn 2017. Accordingly, the unemployment rate fell to 8.9 percent, down from more than 12 percent in 2013.3
Figure 1. GDP growth rates 2017 (in percent)
Source: European economic forecast, European Commission, autumn 2017. Deloitte Insights | deloitte.com/insights
2.2 2.2
1.6 1.5
3.1 3.2
4.8 4.7
0.0
1.0
2.0
3.0
4.0
5.0
6.0
Eurozone Germany France Italy Spain Netherlands Ireland Slovenia
Eurozone: A new dynamism
2
All well?
After elections in France and the Netherlands earlier this year, federal elections in Germany posed a potential threat from political disruption in the Eurozone. Indeed, for the first time in the post-war era, a right-wing party made it into the German parliament. The anti-immigrant, anti-euro party Alternative for Deutschland (AfD) won more than 12.0 percent of votes. Although the political climate might change as a result, the immediate economic impact appears limited. All other parliamentary groups have credibly excluded a coalition with the AfD, for now and in the future. Forming a coalition after the election is difficult though—the first coali-tion talks have failed. At the time of writing, a mi-nority government (unseen in post-war Germany), new elections, or a renewed grand coalition seem the most likely outcome.
On the monetary policy side, the European Cen-tral Bank (ECB) changed its course somewhat. By deciding to slow down its bond-purchase program from EUR 60 billion to EUR 30 billion a month, it cautiously initiated an exit from the quantitative easing program. Consequently, the program is con-tinuing at a slower speed, so this decision is unlikely to affect the economic outlook of the Eurozone sig-nificantly.
Monetary policy continues to stay very loose—and some may argue too loose for the current economic situation—mainly because the recovery has not led to the ECB’s target inflation rate of 2.0 percent. One of the underlying reasons is that the improving situation in the labor market has not resulted in corresponding wage increases yet, leav-ing inflation rates to languish at around 1.5 percent. This may have to do with weak productivity in-creases or an underutilized workforce. In any case, problems in the labor markets have not disappeared despite the overall positive trend. From a regional perspective, unemployment rates continue to differ widely in the European Union, between less than 3.0 percent in the Czech Republic and 21.0 percent in Greece.4
Is the recovery sustainable?
The auspices for a continued recovery in 2018 are relatively good, as a look at the growth compo-nents shows. Unemployment in the Eurozone is ex-pected to fall further, supporting consumer demand as a primary source of the upswing. In addition to the risk of a protectionist turn in global trade policy, there are some uncertainties on the trade side. Al-though the stronger euro has had no effect on ex-ports so far, it might change; it also remains unclear if world trade can maintain its current growth rate.
Nevertheless, the biggest signs of hope come from the corporate investment side. The recent up-swing in investment has substantial upside potential, given the receding fears of populist governments in the Eurozone and a positive business sentiment. According to the Deloitte European CFO Survey of 1,546 participants, the investment intentions of Eu-ropean corporates for the next 12 months continue to point upward all over the Eurozone (figure 2). Almost half of the European CFOs in the Eurozone intend to increase their investments, with only 9.0 percent intending to decrease them. In Germany, for example, investment intentions reached their highest level in six years.
Therefore, the baseline scenario sees a simi-lar growth rate to this year at around 2.0 percent. Downside risks to this outlook are not hard to find. Political risks have not yet disappeared: Italy’s gen-eral elections in early 2018 might result in a populist government. The crisis in Spain around the Cata-lan independence movement has escalated and it remains to be seen whether the elections that the Spanish government slated for late December will result in a solution. The difficult coalition-building in Germany and the possibility of new elections has slowed down political initiatives for the European Union and the Eurozone and is adding to political uncertainty. Also, the threat from growing protec-tionism is likely to remain a key risk in 2018.
But a much more positive scenario for the de-velopment of the Eurozone is conceivable—more so than in the preceding years. If the downside risks
Eurozone: A new dynamism
3
do not occur, their absence could energize the re-covery. The key variable here is corporate invest-ments; two factors could have an impact on them. First, receding fears about populism might result in even higher business confidence and a push for cor-porate investments. Second, the same may happen if the synchronized upswing in the world economy
continues, protectionism fails to materialize, and the expansion of world trade accelerates. Also in this scenario, the result could be a sharper increase in investments and therefore a better growth mo-mentum than that predicted in the forecasts. In short, risks to the Eurozone outlook are no longer automatically tilted to the downside.
Figure 2. Investment intentions in the Eurozone
Source: European CFO Survey, autumn 2017. Deloitte Insights | deloitte.com/insights
-9%
49%
-12%
52%
-10%
50%
-3%-9%
45%
-5%
50%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
Eurozone
Inve
stm
ent
decr
ease
Inve
stm
ent
incr
ease
Germany Spain France Italy Netherlands
Capital expenditure (%)
47%
1. European Commission, “Business and consumer surveys,” accessed November 27, 2017.
2. Ibid.
3. Eurostat, “Euro area unemployment at 8.9%,” press release, October 31, 2017.
4. Ibid.
ENDNOTES
Eurozone: A new dynamism
4
ALEXANDER BÖRSCH
Alexander Börsch is the chief economist and head of research at Deloitte Germany. Before joining Deloitte, he worked as senior economist in the investment management and management consulting in-dustries. He is the author of numerous publications on topics such as the European economy, economic trends, digital economy, Brexit, and competitiveness of companies, cities, and nations. He holds a PhD from the European University Institute and was a visiting researcher at the London School of Economics, Warwick University, and INSEAD.
ABOUT THE AUTHOR
CONTACTS
Alexander Börsch Deloitte & Touche GmbHGermany+49 (0) 89290368689 [email protected]
Global industry leaders
Consumer and Industrial ProductsTim HanleyDeloitte Services LPUSA+1 414 688 [email protected]
Energy & ResourcesRajeev ChopraDeloitte Touche Tohmatsu LimitedUK+44 7775 [email protected]
Financial ServicesBob ContriDeloitte Services LPUSA+1 917 327 [email protected]
Life Sciences & Health CareGreg RehDeloitte Consulting LLPUSA+1 215 680 [email protected]
Public SectorMike TurleyDeloitte Touche Tohmatsu LimitedUK+1 44 7711 [email protected]
Eurozone: A new dynamism
5
Telecommunications, Media & Technology
Paul SallomiDeloitte Tax LLPUSA+1 408 704 [email protected]
US industry leaders
Financial ServicesKenny SmithDeloitte Consulting LLP+1 415 783 [email protected]
Consumer & Industrial ProductsSeema PajulaDeloitte & Touche LLP+1 312 486 [email protected]
Life Sciences & Health CareBill CopelandDeloitte Consulting LLP+1 215 446 [email protected]
Eurozone: A new dynamism
6
About Deloitte Insights Deloitte Insights publishes original articles, reports and periodicals that provide insights for businesses, the public sector and NGOs. Our goal is to draw upon research and experience from throughout our professional services organization, and that of coauthors in academia and business, to advance the conversation on a broad spectrum of topics of interest to executives and government leaders.
Deloitte Insights is an imprint of Deloitte Development LLC.
About this publication This publication contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms, or its and their affiliates are, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your finances or your business. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser.
None of Deloitte Touche Tohmatsu Limited, its member firms, or its and their respective affiliates shall be responsible for any loss whatsoever sustained by any person who relies on this publication.
About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. In the United States, Deloitte refers to one or more of the US member firms of DTTL, their related entities that operate using the “Deloitte” name in the United States and their respective affiliates. Certain services may not be available to attest clients under the rules and regulations of public accounting. Please see www.deloitte.com/about to learn more about our global network of member firms.
Copyright © 2017 Deloitte Development LLC. All rights reserved. Member of Deloitte Touche Tohmatsu Limited
ContributorsEditorial: Rithu Thomas, Abrar KhanCreative: Anoop R, Mahima Dinesh NairPromotion: Amy Bergstrom, Shraddha SachdevArtwork: Tushar Barman
Sign up for Deloitte Insights updates at www.deloitte.com/insights.
Follow @DeloitteInsight