fm report eu_2015

Special Report - Europe 2015

REPORT 2015

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Europe Economic Forecast 2015

Is Europe’s economy finally getting its act together? That’s what the International Monetary Fund thinks, according to its latest World Economic Outlook. The chart below shows the IMF expecting moderate growth on the Continent this year.

Data suggested an upward trend until recently. Industrial production in Europe rose slowly from summer 2012 through last September. Since then, though, production has leveled off. Over the past year, countries in the European Union have expanded industrial production just 1.1 percent.

Two years ago, Eastern Europe was looking strong, but now not so much. Tension between Russia and Ukraine is part of the problem, but soft energy prices in Europe contribute to the East’s economic weakness.

2015 Global Economic Outlook: Better Than 2014—but Not By Much

Northern Europe’s growth will be strong, in the IMF forecast. Western European countries will grow moderately, and Southern European a little less so.

IMF EU GDP Growth Forecast


The IMF forecast is plausible but optimistic. One could take it as a base case, and then add lots of risk factors. Debt is still much too high in Southern Europe. The financial crisis is not much in the news now, but the problem lingers.

The Russia-Ukraine hostilities continue to be a major risk to all of Europe. How it will play out is beyond our forecasting ability, but note that nobody is very good at figuring out when minor conflicts turn into full-blown wars. Think about that and the recent 100th anniversary of the start of World War I.European economies are likely to expand this year and next, but we are nervous about the entire region. The downside possibilities seem much larger than the upside.


Growth rate of world economy


Taxing and Spending

Fights over taxing and spending will probably heat up next year, especially in the euro zone, where France and Italy are clashing with Germany over how big their budget deficits can be. The European Commission in Brussels allowed the French and Italians to run oversize deficits in October but warned that all euro countries will get an in-depth assessment in mid-November. Germany’s insistence on austerity makes it hard for euro nations to spark economic growth, says Dennis Gartman, author of a daily market commentary. “I tend to be a far right-winger,” says Gartman, “but there are times when you can’t run balanced budgets. When you have 15 percent unemployment, that’s one of the times.”


Source: Businessweek - Projected price of crude oil

Some things about 2015 are known, such as the continued warming of the planet. Others are unimportant, like who wins the Super Bowl on Feb. 1 in Phoenix. (Sorry, football fans.) Keep an eye on things that are unknown and important: Will Russia’s and China’s clashes with their neighbors escalate into armed conflict? Will the Ebola epidemic break out of West Africa on a large scale? Will China snuff out Hong Kong’s democracy movement?


Will British elections in May increase pressure on the United Kingdom to drop out of the European Union? Will one of the conflicts in the Middle East boil over? Any one of those could make 2015 a very ugly year.

Eastern Europe in 2015

Ukrainian crisis continues to dampen growthUntil a political solution to the crisis in Ukraine is found, the conflict will continue to have a dampening effect on production, business confidence and consumer sentiment across Eastern Europe. More complete data show that the region’s economies decelerated in the third quarter of last year. Regional GDP rose 1.3% year-on-year (previously reported: +1.5% year-on-year) and came in below the 1.5% increase registered in Q2. The result, which marked the slowest pace of growth since Q1 2013, was mainly dragged down by the deepening recession in Ukraine and a further contraction in Croatia. In Russia, the deceleration in Q3 GDP growth was less than expected, demonstrating resilience to geopolitical headwinds, while in Turkey economic activity cooled and reached a two-year low. Leading indicators for Russia suggest that the economy contracted in Q4, while more recent data for Turkey pointed to a further deceleration in the last quarter of 2014.

Regional prospects still clouded by Russia and Ukraine

The 2015 growth outlook for Eastern Europe deteriorated again this month as analysts surveyed by FocusEconomics cut the region’s GDP growth forecast from last month’s projected 1.5% increase to 0.8%. This marks a



significant downgrade to the forecast. If the 2015 result is in line with the current projection, this will represent the weakest growth rate since 2009. Once again, deteriorating prospects stemmed from a sizeable cut to the forecasts for Russia and Ukraine, which account for the majority of this month’s downward revision to the regional projection. Russia alone accounts nearly for half of the region’s GDP, thus a deterioration in its growth prospects depresses the regional outlook. In fact, Russia’s economy is expected to experience an outright recession in 2015 as a result of lower oil prices, Western sanctions and tighter monetary conditions.

The Eurozone’s economic deceleration that began in Q2 2014 is also having an adverse impact on most economies in the region. In addition to the downward revisions for Russia and Ukraine, projections were cut for 4 additional countries of the 14 included in the survey, while growth prospects for 5 countries were unchanged. Latvia, Lithuania and Slovenia were the only economies for which panelists raised their projections. Lithuania became the 19th country to join the Eurozone and adopt the region’s common currency on 1 January. The adoption of the euro is expected to boost Lithuania’s economy as it will contribute to an increase in household incomes, a relaxation in monetary policy and improved business confidence. The region is seen recovering gradually in 2016, with a projected GDP growth rate of 2.3%


fm report eu_2015

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