Modest Eurozone recovery of 2 la suta in 2011

Publish date: 21-06-2011
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Assuming that governments and the European Central Bank (ECB) come to an agreement on a range of measures to take Greece through the next couple of years, Eurozone GDP is forecast to increase by only 2% this year and by 1.6% in 2012. It is in the interest of all to strike an agreement.

Marie Diron, senior economic adviser to the Ernst & Young Eurozone Forecast comments, "Our forecast for 2011 has been revised upwards because of the positive signs that we saw in the first quarter of the year. However, there is still much uncertainty about the impact of Greek debt restructuring on the financial sector and its implications for the Eurozone economy as a whole."

Mark Otty, Ernst & Young Area Managing Partner for Europe, Middle East, India and Africa, says, "The business environment across the Eurozone will be challenging for some time with slow economic growth and an uncertain investment environment providing little incentive for organizations to help deal with the critical issue of rising unemployment particularly in the periphery. Unemployment is forecast to remain above 13 million until 2015, compared with 11.5 million at the beginning of 2008."

Opportunities in two speed Europe

While overall Eurozone growth will be weak and faces significant downside risks, some countries are expected to grow robustly in the next few years. In the 'core' Eurozone countries including Germany, France and the Netherlands, GDP is forecast to rise by 2.2% per year on average in 2011 - 2015, a growth rate slightly higher than in the decade before the crisis. EEF forecast growth in 2011 of 3.5% in Germany, 4.1% in Finland and 2.2% in the Netherlands for instance. By contrast, in the periphery of Portugal, Ireland, Greece and Spain, GDP is forecast to rise by only 1.2% in the next five years, not even half the pace of the decade before the crisis.

As Marie explains, "This strong growth has created significant opportunities for companies that are looking to tap rising purchasing power in the core countries. Companies with strong balance sheets could also see opportunities in the periphery where production costs are likely to fall. This is particularly the case for Ireland, where labor costs have already fallen."

Eurozone prospects are also mixed at the sectoral level. Business services is among the sectors with the brightest outlook, with the Eurozone benefiting from a skilled workforce and established expertise in this area. The manufacturing sector is also expected to recover more quickly than the economy as a whole, benefiting from robust external demand for the Eurozone's goods, in particular from emerging markets.

Difficult choices ahead on inflation and interest rates

The European Central Bank continues to face difficult choices as it struggles to deal with relatively high inflation, prospects of low growth and the contrasts between a robust core and a shrinking periphery. So far, it has put more emphasis on high inflation and the robust core, and has signalled that further increases in interest rates are likely in the second half of 2011.

Marie comments, "This tightening is premature, adding to the challenges for the peripheral economies, especially as further monetary tightening will exert upward pressure on the euro. We think it is unlikely that the current elevated inflation rate will feed into wages or prices more generally. Instead, we forecast Eurozone inflation to fall back below 2% at the beginning of
next year."
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