World Economy

Eurozone Economy at ‘Tipping Point’

Eurozone Economy at ‘Tipping Point’
Eurozone Economy at ‘Tipping Point’

The economic recovery in the eurozone is likely to gain momentum on the back of consumer demand, according to ratings agency Standard and Poor’s (S&P), but a “shock” from Greece could lead to “increased risk aversion among investors, lenders, and consumers.”

S&P revised its growth forecasts for the eurozone upwards on Wednesday, on the back of increasing consumer demand. It now predicts the 19-country single currency zone will average 1.6% gross domestic product growth this year and 1.9% in 2016, up from the 1.5% and 1.7% respectively forecast in March, CNBC reported.

“We continue to assume that the current recovery is likely to gain momentum in the coming two years,” said the agency in its quarterly economic update published on Wednesday.

But despite upward revisions to its forecasts for most eurozone countries, S&P warned that the region was “at a tipping point,” with Greece a potential catalyst for weaker growth.

“We recognize that the resolution of the Greek crisis remains highly uncertain,” said Jean-Michel Six, S&P chief economist for Europe, the Middle East, and Africa, in the update.

  Worst-Case Scenario

S&P said that the worst-case scenario – a “shock” Greek exit from the euro zone – could “easily weaken the upturn we are currently contemplating.”

Currently, Greece is in limbo between its expired bailout program, which ended at midnight last night, and hopes of a last-minute reforms-for-aid deal with lenders this week.

Risks of a “Grexit” are rising, after the Greek prime minister called a referendum for July 5 in which the Greek people must vote on whether to accept the reforms demanded by lenders, or reject them and risk a forced exit from the eurozone.

S&P warned that a Grexit could cause “increased risk aversion,” which could weaken its forecast upturn in which business and consumer confidence is a “key factor.”

  Spain, France Catch-Up

Despite Greece’s descent into crisis over the last five months, S&P noted two positive trends in the eurozone that led them to revise regional forecasts higher.

Firstly, markets continued to look favorably on the European Central Bank’s inflation-boosting quantitative easing program. Secondly, S&P said its own confidence was boosted by eurozone growth of 0.4% in the first quarter, which was among the strongest expansion seen in five years.

S&P forecast the recovery would gain momentum in the coming two years. On Wednesday, its biggest upward revision of growth was for Spain, where economic expansion is now seen averaging 3% in 2015, versus the previously forecast 2.2%.

The agency also raised its forecast for the French economy to 1.3% growth this year and 1.6% in 2016.

Other good news from the eurozone came from Markit on Wednesday, whose final manufacturing purchasing manager’s index for the region came in at a 14-month high of 52.5 in June, up from May’s 52.2. The index showed that manufacturing expanded in all countries bar Greece.