World Economy

Eurozone Recovery Looks More Stable

Eurozone Recovery Looks More StableEurozone Recovery Looks More Stable

The eurozone will continue its path to recovery next year, boosted by capital investment at rates that have not been seen since 2007, according to the December 2015 issue of the EY Eurozone Forecast.

After initially being led by consumer spending during 2014 and 2015, economic conditions in the eurozone continue to rebound with eurozone capital investment expected to underpin a steady recovery into the medium term, Ernst & Young reported.

“Creating more jobs and encouraging those who are inactive to search for work will be key determinants of prosperity in the years ahead.

“Investment will help in this respect, but there remains a need for governments to do more to tackle the cost of employment in some major economies,” says Ronald Attard, country managing partner, EY Malta, which is a global leader in assurance, tax, transactions and advisory services.

 GDP Growth

The forecast expects gross domestic product growth of 1.5% in 2015, before picking up to 1.8% in 2016 and 2017.

Growing exports and rebounding domestic demand mean that capacity constraints are emerging in a number of sectors, such as financial services, professional services and tourism and leisure.

In addition, better access to credit and low interest rates for the foreseeable future is driving increased loan demand.

The forecast expects total fixed investment to grow by 2.4% in 2016–the fastest rate since 2007–accelerating to 3.1% in 2017. In 2018 and 2019, total fixed investment is expected to grow by around 2.5% a year. While this growth is at a slower rate than in the decade to 2007, much of the capital accumulation that took place during that period was in housing, meaning that a slower rate of investment growth does not necessarily mean slower potential growth.

 More Stable

Mark Otty, EY area managing partner for Europe, Middle East, India and Africa, says: “As we move into 2016, the economic recovery of the eurozone is looking more stable.

“Capital spending has begun to show an upturn as firms have become more confident in the recovery and are seeing improved profitability.

“We should not forget, however, that growth will remain distinctly underwhelming into the medium–and even long-term.”

Tom Rogers, senior economic adviser to the EY Eurozone Forecast, says: “Recent measures by the ECB to extend bond purchases and cut the deposit rate offer further reassurance of low borrowing costs for some time to come. This should boost loan demand further in 2016 and help drive the recovery in capital investment.”

Additional capital investment should complement the competitiveness-enhancing reforms that have boosted exports from some eurozone economies in recent years. But the slowdown in emerging markets will weigh on prospects. Despite a lower exchange rate–aided by an extension of asset purchases by the ECB and expected monetary tightening in the US–and recovery in advanced economies, the forecast expects export growth to ease from 4.5% in 2015 to 3.7% in 2016 and 3.4% a year from 2017 to 2019.