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EY Eurozone Forecast June 2015
Eurozone
rebalancing
toward broad-
based recovery
Greece
Austria France Latvia Portugal
Belgium Germany Lithuania Slovakia
Cyprus Greece Luxembourg Slovenia
Estonia Ireland Malta Spain
Finland Italy NetherlandsOutlook for Greece
Delay in agreeing reform agenda has
undermined the recovery
Finland
Estonia
Latvia
Lithuania
Ireland
Netherlands
Germany
Belgium
Luxembourg
Slovakia
Austria
France
Slovenia
Italy
Portugal Spain
Greece
Malta
Cyprus
Published in collaboration withHighlights
• The immediate economic outlook for • While activity appears to have held up in Q1
Greece continues to be highly uncertain.
Although the Syriza-led Government
this year, there are now increasing signs
that the uncertainty surrounding Greece’s
GDP growth
–0. 1%
agreed an extension to the existing future and the growing lack of liquidity in
2015
adjustment program in February, the Greek the economy are beginning to have real
government and its international creditors economic consequences for activity. The
have so far failed to agree a reform agenda progress made in 2014, when the economy
that would secure the release of much- emerged from six years of recession, now
f]]\]\ÕfYf[af_& appears to have been lost, and there was GDP growth
probably a return to recession in Q2 2015.
1. 8%
• Greece has now survived for nine months
• 2016
oal`gmlYfq]pl]jfYdÕfYf[af_Yf\`Yk Our forecast of GDP growth of 1.8% in
been forced to rely entirely on its own 2016, after an expected small contraction
resources to meet its redemptions and this year, is therefore conditional on an
interest payments. This has seen the agreement being reached that would
Government postpone payments to key enable Greece to avoid defaulting to the
suppliers and borrow from the cash International Monetary Fund (IMF) and the
reserves of local authorities. Reserves are European Central Bank (ECB). Failure to
dwindling rapidly and Greece is struggling secure an agreement by the end of June
to meet its redemption schedule without would almost certainly precipitate a
renewed international assistance. decision by the ECB to halt the provision of
ƻ`]j]^gj]$Yf]oY\bmkle]flhjg_jYe emergency liquidity to the Greek banking
between Greece and its international sector. This in turn would probably force
creditors urgently needs to be agreed. the Government to impose capital controls,
which would leave Greece on the precipice
of an exit from the Eurozone.
Unemployment
25. 6%
2015
Consumer prices
–1. 8%
2015
EY Eurozone Forecast June 2015 | Greece 1Delay in agreeing reform agenda has undermined the recovery
Greece slides back into recession … €1.5b to repay the IMF by the end of June the uncertain environment as firms
(with several repayments being bundled increasingly put hiring and capital spending
Greece is rapidly running out of road together), before needing €6.7b to meet plans on hold. Early indications are that
and urgently needs an agreement with its bond redemptions owed to the ECB in July activity contracted sharply in Q2. The
international creditors, not only so that and August and some €600m in further IMF manufacturing Purchasing Managers’ Index
funds can be dispersed from the existing repayments. With the existing adjustment (PMI), for example, dropped to 46.5 in
adjustment program, but also so that program scheduled to be concluded at the April, its lowest level for nearly two years.
agreement can be reached on financing end of June, Greece must therefore Signs of a renewed recession in Greece
after that. In February, Greece agreed a simultaneously begin negotiations on what would be particularly unwelcome, imposing
four-month extension to its existing will replace it. Failure to reach an agreement further hardship on the population and
adjustment program, conditional on the would leave the Government on the brink of undermining the Government’s efforts to
new Syriza-led Government being able to defaulting to both the IMF and the ECB. achieve its budgetary program targets.
agree a fully funded reform agenda with
its international creditors. No such Despite exiting a six-year recession last … as impetus from consumption
agreement has yet been reached, forcing year, there are increasing signs that the and net trade falters
the Government to take increasingly uncertainty surrounding Greece’s future
extraordinary measures to raise the and a growing lack of liquidity in the The macroeconomic adjustment in
finance necessary to meet its schedule of economy are beginning to have a negative Greece has been significant, with the
external loan and interest repayments. effect on economic activity. After growing Government undoubtedly making a huge
by 0.7% in 2014, the economy contracted effort to address the imbalances and
After successfully meeting its repayment by 0.2% in Q1 this year, with investment in indebtedness that existed at the onset of
to the IMF in May, Greece must now find particular showing signs of responding to the crisis. Hence, a current account deficit
Table 1
Greece (annual percentage changes unless specified)
2014 2015 2016 2017 2018 2019
GDP 0.7 –0.1 1.8 2.5 2.5 2.6
Private consumption 1.4 1.3 1.2 1.4 1.6 1.8
Fixed investment 3.0 –10.1 3.3 5.0 4.8 4.6
Stockbuilding (% of GDP) –0.4 –0.4 –0.2 0.1 0.3 0.6
Government consumption –0.8 –5.5 –0.9 1.7 1.6 1.7
Exports of goods and services 8.8 4.0 4.8 4.8 4.9 4.7
Imports of goods and services 7.4 –0.3 3.0 3.7 4.0 4.1
Consumer prices –1.4 –1.8 –0.4 1.1 1.8 1.9
Unemployment rate (level) 26.6 25.6 24.1 22.2 20.4 18.7
Current account balance (% of GDP) 0.5 0.5 0.5 0.5 0.5 0.5
Government budget (% of GDP) –3.5 –3.1 –2.8 –2.6 –2.3 –1.9
Government debt (% of GDP) 177.1 183.2 181.9 176.6 170.9 164.9
=;:eYafj]ÕfYf[af_jYl] ! 0.1 0.1 0.1 0.1 0.2 0.5
Euro effective exchange rate (1995 = 100) 123.9 114.4 113.1 113.3 114.7 116.2
Exchange rate (US$ per €) 1.33 1.11 1.07 1.06 1.09 1.11
Source: Oxford Economics.
2 EY Eurozone Forecast June 2015 | Greeceof over 14% of GDP in 2008 has been transformed into a small wages. However, this will to a certain extent be offset by the policies
surplus, while the budget deficit has been reduced from over 15% designed to boost pensions and welfare payments, especially to the
of GDP to a little over 3%. This sizeable fiscal adjustment has very poor. Over the election period at New Year, last year’s solid
exacted a heavy toll on the economy and the Greek people. Overall, increases in employment, which saw the previously moribund
the economy has shrunk by a quarter, with unemployment rising to economy generate 60,000 new jobs, appeared to have stalled.
a peak of more than 27%, while average earnings have fallen by Retail sales have now been declining in annual terms for the last
over 16%. Last year, however, was something of a turning point. four months and were down 3.3% in February, which suggests
The pace of adjustment began to slow and labor market activity consumer finances may be coming under renewed pressure.
finally started to bottom out. This boosted consumer confidence
and enabled private consumption in particular to become a strong Unemployment and negative output gap are long-term
driver of last year’s recovery, rising 1.4%. constraints
Average earnings have begun to recover and were up 2.6% on the year In the longer term, the outlook for consumption will be constrained
in Q4. Together with a recovery in employment, this has arrested the by the continued high level of unemployment and the large
decline in nominal incomes, which increased by 1.5% over the course negative output gap. These factors are likely to exert significant
of 2014. Falling oil prices have in the meantime pushed Greece deeper downward pressure on wage growth for the foreseeable future. As
into deflation, with the harmonized index of consumer prices down a result, we expect earnings to remain muted across the forecast
1.9% in the year to March. However, the combination of rising nominal horizon. In turn, this constrains the outlook for consumption. In the
incomes and falling inflation has boosted consumer purchasing power, short run, we expect consumption spending to be boosted by
with real incomes rising — for the first time in five years — by 3.4% in Q4 pent-up demand, but we expect the effect to diminish over time.
2014. As a result, while the rise in consumption last year was initially Consequently, we see consumer expenditure growth of
funded by a sharp fall in the savings ratio, consumption was beginning 1.3% this year and then 1.2% in 2016.
to be driven by increases in real income.
Net trade has been the other significant driver of the recovery,
One of the key questions is therefore whether this positive with net tourism receipts in 2014 up more than 10% from the
outlook for consumption can be sustained in the face of continued preceding year. But export performance has been mixed, with
uncertainty about Greece’s future. The Government’s decision to exports only starting to recover strongly at the start of 2014
suspend payments to key suppliers will have a negative effect on despite the earlier significant fall in wages. On the other hand,
Figure 1 Figure 2
Contributions to GDP growth Unemployment
% year %
8 Domestic demand Forecast 30 Forecast
6
25
4
2
20
0
–2 15
Net exports
–4
10
–6
GDP
–8
5
–10
–12 0
2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2003 2005 2007 2009 2011 2013 2015 2017 2019
Source: Oxford Economics. Source: Oxford Economics.
Table 2
Forecast for Greece by sector (annual percentage changes in gross added value)
2014 2015 2016 2017 2018 2019
GDP 0.7 –0.1 1.8 2.5 2.5 2.6
Manufacturing –1.1 1.6 1.8 2.3 2.4 2.6
Agriculture –0.5 0.5 1.7 1.6 1.8 1.9
Construction –17.3 3.8 3.6 3.4 3.0 2.8
Utilities –5.6 2.7 2.9 3.2 3.3 3.5
Trade 6.9 2.7 3.0 3.2 3.1 3.2
Financial and business services –1.7 1.6 1.9 2.2 2.2 2.3
Communications –4.0 3.0 3.5 3.7 3.8 4.0
Non–market services 0.9 –5.8 –0.1 1.9 1.8 1.9
Source: Oxford Economics.
EY Eurozone Forecast June 2015 | Greece 3Delay in agreeing reform agenda has undermined the recovery
the weakness of domestic demand has seen imports fall more constrain new developments. As a result, total investment is
than 40% from their peak. Even so, Greece is only running a forecast to fall by about 10% in 2015, which would be the worst
small current account surplus, suggesting that there is a need performance for three years. Conditional on uncertainty being
for more structural reforms to further enhance competitiveness reduced and financing constraints easing, we forecast a gradual
and so secure a long-lasting recovery. investment recovery to get under way in 2016, when total
investment spending is forecast to rise by 3.3%.
Furthermore, the pickup in consumption is also leading to increased
spending on imports. As a result, the positive contribution from trade As a result of the improvement in consumption and business
last year was significantly smaller, at just 0.2 percentage points of investment, GDP is now forecast to fall by 0.1% in 2015, before
GDP, than in the preceding years when net trade was boosted by the recovery can become re-established in 2016. GDP is expected to
weakness of domestic demand. Looking ahead, we expect this broad grow by 1.8% next year, as investment reaccelerates and exports
pattern to be maintained, with the contribution from net trade continue to outpace imports.
constrained by the lack of export competitiveness and rising imports.
Indeed, as the recovery becomes more mature and investment Longer-term challenges remain
spending begins to improve, import growth is likely to accelerate,
further reducing the positive contribution from net trade. While next year’s return to growth will obviously be very welcome,
securing a lasting and sustainable recovery remains challenging.
Investment picture mixed Although unemployment is below its recent peak, it remains
exceptionally high, with more than 25% of the workforce without a
At first sight, the aggregate data suggests that investment spending job. Generating sufficient employment growth to absorb this level of
is still lagging behind the recovery in consumption and exports. And joblessness is going to take the best part of a decade. Therefore,
certainly, the investment picture is rather mixed. Total investment Greece urgently needs a long-term plan that will continue the
rose by 3% last year, the first increase in six years. However, this necessary near-term reforms but also invest in the future. Securing
aggregate figure masks a sharp divergence between housing and a new agreement with international creditors and the rest of the
business investment. Given the sharp drop in earnings and the European Union (EU) will be a fundamental part of that plan.
increase in unemployment, the fall in housing investment has been
precipitous, down some 94% from its peak in Q3 2007. And although At about 180% of GDP, public debt remains high both by
housing investment has recently shown some signs of bottoming out, international and historical standards. However, just over 60% of
the construction sector has obviously been one of the main causes of that debt is in the form of bilateral loans from the rest of the EU or
the recession. In contrast, business investment appears to be rising borrowing from the European Financial Stability Facility. Both
strongly and was up 4.8% on the year in Q3 2014, suggesting that interest payments and repayment of capital on these loans have
the efforts to restructure the banking sector and improve financing already been significantly deferred, meaning that the effective
conditions for firms had been beginning to bear fruit. interest rate Greece pays on this debt is just over 2%. As a result,
the debt-service burden is relatively low, at around 4% of GDP. So
However, investment is likely to prove to be particularly sensitive even if the Government is successful in negotiating a further
to the increased uncertainty surrounding Greece’s future. Moreover, restructuring of official sector debt, it is not obvious that this will
since the election in January, there has been significant capital significantly reduce the need to run primary surpluses in order to
flight from the banking system, which is also leading to a severe place the debt on a declining trajectory. On the other hand, Greece
shortage of liquidity. Both of these factors are likely to constrain faces significant international redemptions later this year that it will
business investment until a new program is put in place. The not be able to roll over unless it can secure renewed external
recovery in housing investment meanwhile is forecast to remain assistance. Using the next month to secure a new agreement with
muted, as high unemployment and lower wages continue to international creditors is now an urgent priority.
Figure 3 Figure 4
Prices and wages ?gn]jfe]fl\]Ô[alYf\\]Zl
% year % of GDP % of GDP
21 Forecast 0 200
18 180
–2
15 Wages 160
–4
12 140
–6
9 120
6 –8 100
?gn]jfe]fl\]Zl
3 ja_`l%`Yf\ka\]! 80
–10
0 60
–12
–3 40
Consumer prices
–14 ?gn]jfe]fl\]Ô[al
–6 20
d]^l%`Yf\ka\]!
>gj][Ykl
–9 –16 0
1996 1999 2002 2005 2008 2011 2014 2017 1996 1999 2002 2005 2008 2011 2014 2017
Source: Oxford Economics. Source: Oxford Economics.
4 EY Eurozone Forecast June 2015 | GreeceMacroeconomic data and analysis
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