Eurozone - Deloitte US · industries. He is the author of numerous publications on topics such as...
7
Political risks have receded; however, they have not yet disappeared, and new risks are emerging. The political situation in Italy after the elections is complicated; whether and how a new government can be formed is very unclear. Germany, on the other hand, needed half a year to form a new gov- ernment, a new record for German standards by far. Apart from these electoral events, the biggest threat for the Eurozone’s export-oriented economies are new protectionist trends in world trade. It has been a while since the Eurozone was in as good economic shape as it is today. To be precise, it was more than a decade ago, back in 2007, when the Eurozone achieved a growth rate higher than last year’s 2.5 percent. Given the focus on political risks in early 2017 and the gloomy predictions about the future of the Eurozone, this growth is a remarkable achievement. Eurozone As good as it gets? By: Alexander Börsch
Transcript of Eurozone - Deloitte US · industries. He is the author of numerous publications on topics such as...
Political risks have receded; however, they have not yet disappeared, and new risks are emerging. The political situation in Italy after the elections is complicated; whether and how a new government can be formed is very unclear. Germany, on the
other hand, needed half a year to form a new gov-ernment, a new record for German standards by far. Apart from these electoral events, the biggest threat for the Eurozone’s export-oriented economies are new protectionist trends in world trade.
It has been a while since the Eurozone was in as good economic shape as it is today. To be precise, it was more than a decade ago, back in 2007, when the Eurozone achieved a growth rate higher than last year’s 2.5 percent. Given the focus on political risks in early 2017 and the gloomy predictions about the future of the Eurozone, this growth is a remarkable achievement.
EurozoneAs good as it gets?
By: Alexander Börsch
Drivers of the recovery
The Eurozone’s recovery has been ongoing since 2014, but, so far, it had lacked dynamism. The re-cent acceleration is based on a recovering labor market with corresponding increases in consumer spending, helped by the synchronized upswing of the world economy.
However, another major cause was rebound-ing corporate investments (figure 1). Corporate in-vestments are indispensable for a sustainable, and particularly for a self-sustaining, recovery. Since the financial crisis, investments have been the Achilles’ heel of the Eurozone’s economy, with the subsequent recession resulting in a much longer-than-usual period of low investment activity. Con-sequently, economic recovery remained subdued. Since then, the much higher investment activity has been driven by factors such as tight capacities and low interest rates, and reflects a change in business sentiment. This is a strong sign of economic nor-malization, even though it took exceptionally long.
Growing above trend
The Eurozone has grown substantially above its potential growth rate, which lies between 1.0 percent and 1.5 percent. At the same time, the la-bor market continues to improve: In the summer of 2017, employment was even higher than before the financial crisis, and in autumn, employment reached a new record high.1 The resulting increase in consumer demand is a key driver for the recovery.
Early indicators such as the EU Commissions’ Economic Sentiment Index and Purchasing Manag-ers’ Index decreased slightly in the first few months of 2018, but they are still very close to their long-term highs.2 At the same time, inflation remains low (1.1 percent in February) and far away from the Eu-ropean Central Bank’s (ECB’s) target of “close [to], but below, 2.0 percent.”3
Among the big four Eurozone economies, Spain again grew the fastest (at 3.0 percent); Germany (2.5 percent) grew at the same speed as the Euro-zone as a whole; France, somewhat slower (2.0
Figure 1. Corporate investment growth
Source: Oxford Economics. Deloitte Insights | deloitte.com/insights
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
2012 2013 2014 2015 2016 2017
Eurozone Germany Spain France Italy
Eurozone: As good as it gets?
2
percent); and Italy grew at 1.5 percent (figure 2). Nevertheless, the recovery in France and Italy ac-celerated significantly. The only headwind for the recovery came from a stronger euro, but the general rise in world trade has compensated for the euro’s appreciation.
Germany, as the Eurozone’s biggest economy, is a key driver of the development. It grew at 2.5 percent in 2017, which is the strongest growth since 2011. This indicates that the country is fast approaching a boom phase, if it has not already entered it. The number of employees and capacity utilization regularly reach new record levels; wages keep increasing; and the real estate markets in the biggest cities, especially Munich and Berlin, have been climbing to heights never seen before.
Indeed, Germany has been growing above its potential growth rate since 2014, which fuels dis-cussions about an overheating economy. Some in-dicators, such as the development of the real estate markets, point in this direction. However, while real estate markets are certainly driven by the low inter-est rate environment, other key drivers are more fundamental, including rising demand for housing, thanks to labor markets and migration to the cities.
Nevertheless, low inflation, as well as the significant, though still moderate, wage increases speak against an overheating of the economy.
Politics: Difficult coalition building in Germany and Italy
Germany’s new grand coalition between the conservative Christian Democratic Union and the Social Democratic Party (SPD) was born out of not love but necessity. Initially, the SPD ruled out the possibility of joining another grand coalition after achieving their worst election result of the post-war era. However, it remained the only viable combina-tion once the coalition talks between the Conserva-tives, Greens, and Liberals broke down last autumn. The process to reverse that decision was supported by the SPD member vote, which is another reason for the prolonged government formation for almost half a year. During the coalition talks, labor law and health care policy were the main dividing issues between the parties involved. In the end, the SDP managed to take control over key ministries, such as foreign affairs, finance, and labor.
Figure 2. Real GDP growth
Source: Oxford Economics. Deloitte Insights | deloitte.com/insights
-3%
-2%
-1%
0%
1%
2%
3%
4%
2012 2013 2014 2015 2016 2017
Eurozone Germany Spain France Italy
Eurozone: As good as it gets?
3
The government’s agenda for the next four years focuses on continuity, with some new areas. There will be a soft cap on immigration and an array of social policy measures, fed by the current budget surplus, which amounted to €37 billion last year. These policy measures include tax breaks for low- and middle-income households, increased support for families with children, and more investment in social housing construction. There are also plans to increase spending on public infrastructure and in-vest in broadband expansion. The new coalition also indicated its willingness to contribute more to the EU household.
In early March, Italy voted for a new parliament. While it was unlikely from the beginning that the elections would deliver a clear winner, the results make any coalition-building even harder than ex-pected. Italian voters massively turned their back on the two mainstream, moderate parties: the cen-ter-left Democratic Party, which is the main partner in the current government coalition, and the center-right Forza Italia party. Instead, they favored two populist and anti-EU parties, the Northern League and the Five Star Movement, which campaigned for substantial tax cuts and widespread increases in public spending. Those results eliminate the option
of a centrist coalition between the Democratic Party and Forza Italia and offer no easy or quick solution to achieve a majority in any of the parliament’s two chambers.
Nevertheless, financial markets have been rela-tively unimpressed by this outcome. The spread between Italian and German government bonds has barely reacted to the political results and is cur-rently even lower than at the end of 2017. The ECB’s continuing quantitative easing scheme might play a role here as well, as the average duration of the pub-lic debt is quite long.
Overall outlook
From a cyclical perspective, the recovery is in-tact and robust. Risks to the Eurozone’s economy come mainly from international politics. The trend toward protectionism and declining political sup-port for an open and multilateral trade system are an obvious threat to the export-oriented European economies. If tensions escalate and result in a trade war, Europe’s growth will be endangered—and thus the growth of the world economy as a whole.
1. KfW Research, Konjunkturampel bleibt 2018 auf Grün, March 7, 2018 and Eurozone: Aufschwung geht weiter, December 7, 2017.
2. European Commission, Business and consumer survey results, February 2018.
3. Eurostat, “Annual inflation down to 1.1% in the euro area,” March 16, 2018.
ENDNOTES
Eurozone: As good as it gets?
4
ALEXANDER BÖRSCH
Alexander Börsch is the chief economist and head of research at Deloitte Germany. Before joining Deloitte, he worked as senior economist in the investment management and management consulting industries. He is the author of numerous publications on topics such as the European economy, eco-nomic trends, digital economy, Brexit, and competitiveness of companies, cities, and nations. He holds a PhD from the European University Institute and was a visiting researcher at the London School of Eco-nomics, Warwick University, and INSEAD.
ABOUT THE AUTHOR
CONTACTS
Alexander Börsch Deloitte & Touche GmbHGermany+49 (0) 89290368689 [email protected]
Global industry leaders
Consumer and Industrial ProductsTim HanleyDeloitte Services LPUSA+1 414 688 [email protected]
Energy & ResourcesRajeev ChopraDeloitte Touche Tohmatsu LimitedUK+44 7775 [email protected]
Financial ServicesBob ContriDeloitte Services LPUSA+1 917 327 [email protected]
Life Sciences & Health CareGreg RehDeloitte Consulting LLPUSA+1 215 680 [email protected]
Public SectorMike TurleyDeloitte Touche Tohmatsu LimitedUK+1 44 7711 [email protected]
Eurozone: As good as it gets?
5
Telecommunications, Media & Technology
Paul SallomiDeloitte Tax LLPUSA+1 408 704 [email protected]
US industry leaders
Financial ServicesKenny SmithDeloitte Consulting LLP+1 415 783 [email protected]
Consumer & Industrial ProductsSeema PajulaDeloitte & Touche LLP+1 312 486 [email protected]
Life Sciences & Health CareBill CopelandDeloitte Consulting LLP+1 215 446 [email protected]
Eurozone: As good as it gets?
6
About Deloitte Insights Deloitte Insights publishes original articles, reports and periodicals that provide insights for businesses, the public sector and NGOs. Our goal is to draw upon research and experience from throughout our professional services organization, and that of coauthors in academia and business, to advance the conversation on a broad spectrum of topics of interest to executives and government leaders.
Deloitte Insights is an imprint of Deloitte Development LLC.
About this publication This publication contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms, or its and their affiliates are, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your finances or your business. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser.
None of Deloitte Touche Tohmatsu Limited, its member firms, or its and their respective affiliates shall be responsible for any loss whatsoever sustained by any person who relies on this publication.
About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. In the United States, Deloitte refers to one or more of the US member firms of DTTL, their related entities that operate using the “Deloitte” name in the United States and their respective affiliates. Certain services may not be available to attest clients under the rules and regulations of public accounting. Please see www.deloitte.com/about to learn more about our global network of member firms.
Copyright © 2018 Deloitte Development LLC. All rights reserved. Member of Deloitte Touche Tohmatsu Limited
Deloitte Insights contributorsEditorial: Rithu Thomas, Aditi Rao, Abrar Khan, Preetha DevanCreative: Anoop K. R.Promotion: Shraddha SachdevArtwork: Tushar Barman
Sign up for Deloitte Insights updates at www.deloitte.com/insights.
Follow @DeloitteInsight
