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EURO AREA 2 CALENDAR 16 NOTES 18
PUBLICATION DATE 26 July 2016 FORECASTS COLLECTED 19 July - 25 July 2016
INFORMATION AVAILABLE Up to and including 25 July 2016 NEXT EDITION 30 August 2016
Eurozone • August 2016
Contributors ARNE POHLMAN Chief Economist
ARMANDO CICCARELLI Head of Data Solutions
RICARD TORNÉ Head of Economic Research
RICARDO ACEVES Senior Economist
ANGELA BOUZANIS Senior Economist
DIRINA MANÇELLARI Senior Economist
DAVID AMPUDIA Economist MASSIMO BASSETTI Economist OLGA COSCODAN Economist ROBERT HILL Economist
TERESA KERSTING Economist CHRISTOPHER MC INNES Economist MARLÈNE RUMP Economist
JEAN-PHILIPPE POURCELOT Economist ANDREA VETRUGNO Economist MIRIAM DOWD Editor
FOCUSECONOMICS Euro area
FocusEconomics Consensus Forecast | 2
REAL SECTOR | Composite PMI performs better than expected in the face of Brexit Recent data suggest that business activity in the Euro area lost momentum in July. The preliminary Eurozone Composite Purchasing Managers’ Index (PMI), elaborated by Markit, fell from 53.1 in June to 52.9 in July. The result overshot market analysts’ expectations of a starker fall to a 52.5 reading amid Brexit concerns and marked a one-and-a-half year low.
July’s downturn mainly reflected softer activity in the services sector, while conditions in the manufacturing sector remained broadly stable. Output growth slowed in both sectors, while employment increased at the quickest pace in over five years. Rising energy prices along with a weak euro led to an increase in input costs across the bloc. Meanwhile, business expectations among service providers fell to an over-one-year low amid rising political and
The Eurozone economy showed resilience in Q1 and growth picked up to a one-year high despite external headwinds, yet data for Q2 suggests that the economy has lost some steam: industrial production contracted in May and economic sentiment decreased in June. Most importantly, the UK’s vote to leave the EU has dramatically increased downside risks for the Eurozone economy. The vote will have ramifications for the bloc’s trading patterns, financials and political stability. While some of the economic consequences were immediate—financial markets have experienced heightened volatility—how negotiations between EU and UK officials play out will be key to determining the full economic impact. The first available data since the vote suggest that activity has cooled: the Composite PMI fell in July, yet the indicator still beat market analysts’ bleak post-Brexit expectations, offering a glimmer of hope that the Eurozone economy could prove resilient despite heightened risks.
The brunt of the impact of Brexit is not expected to be felt this year, as negotiations will likely drag out and European rules set a two-year period for negotiating an exit, subject to possible extension. Our panel sees the Eurozone economy expanding 1.5% in 2016, which is unchanged from last month’s forecast. For next year, our panel sees the economy decelerating slightly to 1.4% growth as the impact from Brexit starts to kick in.
Harmonized inflation was 0.1% in June (May: -0.1% year-on-year). Despite meagre price pressures and growing risks to the Eurozone economy, the European Central Bank took a wait-and-see approach following Brexit and left interest rates unchanged in July. Our panel predicts that inflation will be subdued this year and average 0.3%. For 2017, inflation is expected to rise to 1.3%.
LONG-TERM TRENDS | 3-year averages
Angela Bouzanis Senior Economist
2012-14 2015-17 2018-20 Population (million): 331 334 337 GDP (EUR bn): 9,957 10,627 11,547 GDP per capita (EUR): 30,043 31,804 34,312 GDP growth (%): -0.1 1.5 1.5 Fiscal Balance (% of GDP): -3.1 -1.9 -1.5 Public Debt (% of GDP): 90.8 89.9 86.7 Inflation (%): 1.4 0.5 1.6 Current Account (% of GDP): 2.0 3.0 2.2
FOCUSECONOMICS Euro area
FocusEconomics Consensus Forecast | 3
economic uncertainty. The result is largely due to the downside risks to the Eurozone outlook in the aftermath of Brexit.
Regarding the two largest Eurozone economies, economic conditions improved in Germany and stabilized in France. Elsewhere in the region, economic momentum weakened. Commenting on the result, Market analysts stated that, “policymakers will be reassured by the resilience of the PMI in the immediate aftermath of the Brexit vote, but the fragility of the recovery leaves plenty of room for speculation about further stimulus later in the year.”
The European Central Bank (ECB) expects that GDP will expand by 1.6% in 2016 and 1.7% in 2017. FocusEconomics Consensus Forecast panelists expect the Euro area economy to expand 1.5% in 2016, which is unchanged from last month’s forecast. For 2017, panelists expect the economy to expand 1.4%.
REAL SECTOR | Industrial production contracts in May The industrial sector in the common-currency bloc swung to contraction in May, falling a seasonally-adjusted 1.2% over the previous month. The reading notably contrasted the 1.4% increase observed in April and was a more pronounced fall than market analysts’ expectations of a 0.8% drop.
May’s reading reflected contractions in all the main industrial groupings. Energy production recorded the largest decline. Industrial production grew 0.5% in May over the same month last year (April: +2.2% year-on-year).
Among the Euro area economies for which data are available, the largest gains in production were recorded in Lithuania (+3.9% month-on-month), Latvia (+2.4% mom) and Slovenia (+0.6% mom). On the flipside, the largest drops were recorded in the Netherlands (-7.8% mom), Portugal (-4.4% mom) and Greece (-4.3% mom). Regarding the region’s largest economies, output dropped across the board, falling in France (-0.5% mom), Germany (-1.3% mom), Italy (-0.6% mom) and Spain (-0.6% mom).
FocusEconomics Consensus Forecast panelists see industrial production expanding 1.7% in 2016, which is down 0.1 percentage points from last month’s forecast. For 2017, panelists see industrial production growing 1.5%.
REAL SECTOR | Eurozone unemployment rate inches down in May Conditions in the labor market in the common-currency bloc improved in May according to recently released data by Eurostat. The number of unemployed persons fell by 112,000, which followed April’s decrease of 75,000 job seekers. The unemployment rate in May inched down from April’s 10.2% to 10.1%, which represented the lowest rate since July 2011.
Looking at the countries in the region, drops in the unemployment rate were observed in the majority of the countries, with only three countries seeing a rise in the rate. However, notable divergences persist in the labor market among core Eurozone countries and those on the periphery. Greece is by far the economy in the Eurozone with the highest unemployment rate (23.3%, data refer to April), followed by Spain (19.8%) and Cyprus (12.0%).
At the other end of the spectrum, Malta (4.1%), Germany (4.2%) and Austria (6.1%) registered the lowest unemployment rates in the Eurozone in May. Among the remaining major economies, Italy had the highest unemployment rate with 11.5%, followed by France with 9.9%.
Purchasing Managers’ Index
Note: Markit Purchasing Managers’ Index (PMI) Composite Output. A reading above 50 indicates an expansion in business activity while a value below 50 points to a contraction. Source: Markit.
Jul-14 Jan-15 Jul-15 Jan-16 Jul-16
Industrial Production | variation in %
Note: Month-on-month var. of seasonally-adjusted industrial production and annual average growth rate in %. Source: Eurostat.
May-14 Nov-14 May-15 Nov-15 May-16
Month-on-month s.a. (left scale)
Annual average (right scale)
Unemployment | May 2016
Note: Unemployment, % of active population. Data for Greece and Estonia refer to April. Source: Eurostat.
0 10 20 30
Austria Luxembourg Netherlands
Lithuania Slovenia Belgium Finland
Slovakia Euro area
FOCUSECONOMICS Euro area
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FocusEconomics Consensus Forecast panelists expect the unemployment rate to average 10.1% in 2016, which is down 0.1 percentage points from last month’s forecast. For 2017, the panel expects the unemployment rate to average 9.8%.
OUTLOOK | Economic sentiment edges down in June Economic sentiment in the Eurozone fell in June, according to the European Commission (EC). The economic sentiment index (ESI) decreased from 104.6 in May to 104.4. The result undershot the 104.7 reading that market analysts had expected.
Looking at the sectors of the economy, economic sentiment fell to a three- month low in the services sector and a one-year low in retail trade. In addition, consumers were less optimistic in June than May.
At a country level, sentiment deteriorated in France, Italy and Lithuania. However, an increase in sentiment was recorded in Germany, the largest economy in the Eurozone, along with Belgium and Spain.