Eurozone Painfully Progressing to Stability

Despite a year of turmoil in the Eurozone the currency union will enter 2013 with a brighter outlook than 12 months ago. However, despite the early indications of improved stability there are many significant obstacles to overcome before any kind of recovery can take place according to the winter Ernst & Young Eurozone Forecast (EEF).

 

The forecast predicts that Eurozone GDP will shrink by 0.2% in 2013 but there will be a modest pickup from 2014 to 2016 of 1.3% a year. Similar growth rates are expected for the remainder of the decade.  The North-South divide will remain for the foreseeable future with growth in some southern countries not predicted until 2015 at the earliest.

 

Although the forecast has lowered its assumption of a Greek exit from 15% to 5% no significant growth will return until the remaining doubts over the Euro are removed. 

 

EEF believes that more needs to be done by the ECB and governments to extinguish remaining concerns. There are however, encouraging signs that the policy mix is shifting from a sole focus on austerity towards measures designed to foster growth.

 

“The markets seem much more convinced than they did in the early summer that the Eurozone will survive," says Marie Diron, senior economic adviser to the Ernst & Young Eurozone Forecast.

 

"However, growth performance within the Eurozone is set to remain divided, with the core countries expected to continue to out-perform the troubled peripherals, with the latter struggling to grow at all over the next few years.”

 

According to the EEF, 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 20 million.

 

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.

 

“Business leaders must recognise that the current environment that they are operating in is the new normal," says Mark Otty, Ernst & Young Area Managing Partner for Europe, Middle East, India and Africa. "Companies cannot assume that growth will be driven by their domestic markets. Growth will also have to come from cost cutting, winning market share and exporting to more rapidly growing economies.”

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