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S&P Economic Research: Europe 2013: Recession Strikes Again - Feb 2013


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Standard & Poors Economic Research: Europe 2013: Recession Strikes Again - Feb 2013

Standard & Poors Economic Research: Europe 2013: Recession Strikes Again - Feb 2013

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  • 1. Economic Research:Europe 2013: Recession Strikes AgainEMEA Chief Economist:Jean-Michel Six, Paris (33) 1-4420-6705; jean-michel_six@standardandpoors.comMedia Contact:Sharon L Beach, London (44) 20-7176-3536; sharon_beach@standardandpoors.comTable Of ContentsThe Real Uncertainties Are For 2014 And BeyondWWW.STANDARDANDPOORS.COM/RATINGSDIRECT FEBRUARY 25, 2013 1 1083448 | 301674531
  • 2. Economic Research:Europe 2013: Recession Strikes AgainAt first glance, the latest European Commission (EC) estimates for GDP growth in Europe in 2013 appear close to theprojections Standard & Poors released in December. After a 0.6% contraction last year, both the EC and our forecastssee the eurozone experiencing another year of recession, whereas we both expect activity in the U.K. economy torebound modestly on the back of a gradual recovery in consumer demand and investment.Looking specifically at the eurozone members, the ECs latest Feb. 22 forecast has Germany recovering more slowlythan our baseline forecast. Two explanations for the difference come to mind: Our December forecast was producedbefore the release of results showing very weak performance in the fourth quarter of 2012 across the eurozone. Thiswas particularly apparent in Germany, where GDP contracted by 0.6%, which sets a lower starting point for 2013.Also, while our forecast and the ECs have the same expected growth rate for consumer demand in Germany in 2013,the Commission anticipates export growth to be weaker than us (3.3% versus 3.8% in our projections) and importgrowth to be stronger (4.1% versus 3.5%). Overview • The European Commissions new forecasts for economic growth in the EU broadly agree with those we published in December, predicting continued recession in the eurozone and modest recovery in the U.K. in 2013. • Whereas the EC now anticipates a slower recovery for Germany and a deeper recession for Italy this year than our baseline forecasts, it predicts a slightly stronger upturn in Europe in 2014 than we do. • We believe these forecasts indicate that the adjustment process in the European economies still has some way to go before we can hope to get back on a higher growth path.For France and Spain, the ECs forecasts are very close to ours, whereas the EC expects a deeper recession in Italy(-1.0% by the EC versus our -0.7%). Italys poor fourth-quarter performance, when GDP contracted 0.9% in threemonths, explains part of the divergence. More fundamentally, the Commission anticipates a larger decline inconsumption (-2% versus -1.5%) and lower export growth (2.1% versus 2.5%). Recent high frequency indicators, suchas the Purchasing Managers Indices and industrial production data tend to support the ECs more pessimistic view.The EC forecasts also provide a stern estimate of the short-term growth prospects in The Netherlands, with GDPcontracting 0.6% compared with our overly optimistic prediction of a 0.3% rise. The sharp downturn in the localhousing market is severely affecting highly leveraged households, which we think will cause consumption to slump1.7% this year.Table 1Comparison Of Standard & Poors And The ECs Economic ForecastsGDP, annual percentage changeWWW.STANDARDANDPOORS.COM/RATINGSDIRECT FEBRUARY 25, 2013 2 1083448 | 301674531
  • 3. Economic Research: Europe 2013: Recession Strikes AgainTable 1Comparison Of Standard & Poors And The ECs Economic Forecasts (cont.) --European Commission-- --Standard & Poors-- 2012 2013f 2014f 2013f 2014fGermany 0.7 0.5 2.0 0.9 1.4France 0.0 0.1 1.2 0.1 1.1Italy (2.2) (1.0) 0.8 (0.7) 0.8Spain (1.4) (1.4) 0.8 (1.3) 0.7Netherlands (0.9) (0.6) 1.1 0.3 1.2Belgium (0.2) 0.2 1.5 0.4 1.0Eurozone (0.6) (0.3) 1.4 (0.1) 1.0U.K. 0.0 0.9 1.9 1.0 1.7f-- Forecasts. Sources: Standard & Poors, European Commission.The Real Uncertainties Are For 2014 And BeyondBeyond a few individual countries, we see a broad consenus on the outlook for Europe in 2013. However, the realpuzzle for forecasters is determining the long-term prospects for 2014 and beyond. After another year of recession,how strong is a recovery in the region likely to be in the following years?The EC projections assume, as we do, a gradual improvement in Europes external environment, with growth in theU.S. and in emerging markets gaining speed. But it remains to be seen how fast the structural reforms implemented inthe various European countries will affect their overall competitiveness and therefore allow them to reap the benefitsof this improvement. Furthermore, its not yet clear how much damage the current recession has inflicted on potentialgrowth. In particular, the lack of investment in most economies since the beginning of the downturn in 2009 is likely tohandicap those economies in the near future.Starting with that second aspect, data for the change in global factor productivity (GFP) since 1999 highlight somestriking trends. GFP combines capital and labor productivity; it is a key variable affecting potential growth. As table 2shows, GFP growth trends have varied considerably between countries in the past 14 years.Table 2Ratio Of Global Factor Productivity To Total EconomyCumulative % change 1999-2012Eurozone (17 countries) 2.3Germany 6.5Ireland 12.2Spain 0.2France 1.1Italy (3.4)Portugal (0.6)Source: European Commission AMECO database.WWW.STANDARDANDPOORS.COM/RATINGSDIRECT FEBRUARY 25, 2013 3 1083448 | 301674531
  • 4. Economic Research: Europe 2013: Recession Strikes AgainWhile GFP growth has been robust in Germany and in Ireland, it has been weak in Spain and in France, and negativein Italy. The drop in Italys GFP presents a serious threat to the longer term growth prospects of that economy.Meanwhile, the recovery in external demand from the second half of 2013 should provide a somewhat uneven lift togrowth across the region. The EC projections for export growth in 2014 are generally slightly more optimistic thanours, but do reflect the uneven performance across the region, with Germany rising 6%, Spain 5.7%, France 4.7%, andItaly and The Netherlands 3.9%.The EC GDP growth projections for 2014 appear more bullish than ours, with the eurozone growing 1.4% (1% in ourforecast) and the U.K. 1.9% (1.7%). Nevertheless, they point to a very slow improvement in the various countriescurrent account balances and a continued rise in government debt-to-GDP ratios in most cases (table 3).Table 3EC Projections As Of February 2013Current account balance (% of GDP) 2012e 2013f 2014fGermany 6.3 6.0 5.6France (1.9) (1.6) (1.8)Italy (0.7) 0.6 0.8Spain (1.9) 1.0 2.5Netherlands 8.2 8.6 8.9Belgium 1.5 2.0 1.9U.K. (3.7) (3.1) (2.0)General government gross debt (% of GDP) 2012e 2013f 2014fGermany 81.6 80.7 78.3France 90.3 93.4 95Italy 127.1 128.1 127.1Spain 88.4 95.8 101Netherlands 70.8 73.8 75Belgium 99.8 100.8 101.1U.K. 89.8 95.4 97.9e-- Estimate, f-- Forecasts. Source: European Commission.Overall, the ECs new set of economic forecasts for the EU and the eurozone appear close to those we published inDecember, although they anticipate a slightly stronger upturn in 2014. More fundamentally, they illustrate that theadjustment process in the European economies still has some way to go before we can hope to get back on a highergrowth path.WWW.STANDARDANDPOORS.COM/RATINGSDIRECT FEBRUARY 25, 2013 4 1083448 | 301674531
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