Earlier this week the Chancellor of the Exchequer, George Osborne, delivered a speech in which he stressed the need for bold economic reforms across the EU, warning that the status quo risked an ongoing economic crisis in the region. The eurozone economy remains in a fragile state, with unemployment at a record-high level, bank lending depressed, fiscal consolidation set to continue and deflationary pressures a growing concern in a number of countries. But having belatedly emerged last year from a protracted recession, business sentiment and economic activity in the region have since displayed some tentative (and very welcome) signs of recovery.
As we have recently highlighted, our latest Executive Survey revealed that UK manufacturers view rising demand in emerging markets as one of the top growth opportunities in 2014. Nevertheless, as the world's largest single economic entity and the UK's main export destination, the eurozone remains a vitally important market for the country's manufacturers. What are the near-term prospects for the region and is the tepid recovery likely to broaden during the course of this year?
Recent survey data have been encouraging. The composite PMI for the eurozone showed a sixth successive month of (albeit modest) output growth in December, contributing to the strongest quarterly performance in two-and-a-half years.
Manufacturing continued to drive the revival, with the eurozone sectoral PMI rising to a 31-month high of 52.7.
The latest official industrial output figures also point to a pick-up in momentum, with output in November up by a consensus-beating 1.8% over the month and 3% higher than a year earlier, as activity strengthened across all main categories. New orders data too have improved.
With the economy seemingly gaining some traction at the end of 2013, this is likely to result in a moderate acceleration of real GDP growth in the first quarter of this year, up from an estimated 0.1-0.2% in October-December 2013. This pick-up should have a positive effect on household and business confidence, providing some extra momentum for consumer spending and investment. Over 2014 as a whole the eurozone economy is forecast to expand by around 1%, marking a return to growth after declines in output in both 2012 and 2013.
Percentage change in eurozone real GDP*
Source: Oxford Economics
* 2013 figure is estimate. 2014 figure is forecast
The German economy remains more resilient than the wider eurozone and has been the main driver of regional activity since the crisis. Overall activity is still fairly modest—real GDP in Germany rose by a subdued 0.4% in 2013—but underlying fundamentals are improving and, crucially, domestic demand is expected to provide the main support to a stronger growth picture this year of around 1.6%, implying improved sales opportunities for UK manufacturers. The Irish economy faces a long haul to recover fully from its banking catastrophes, but having exited its EU/IMF bail-out programme at the end of last year, private consumption, investment and exports are all projected to expand in 2014. More promising signs are also evident in Spain, as the economy attempts to recover from its epic housing market and construction sector collapse. Improving sentiment appears to be supporting a release of pent-up demand, although unemployment remains alarmingly high.
The growth picture in the region is likely to remain uneven. Although financial conditions in parts of the long-troubled periphery are improving—Portugal recently tapped the bond markets for the first time in two years—consumer sentiment is still fragile and household finances weak. The Italian economy remains in recession (the country's longest since the Second World War) and although recent indicators point to a degree of stabilisation, risks of further political instability and rising unemployment will continue to depress domestic demand. The biggest concern undoubtedly remains France, given the structural deficiencies of its large economy, high unemployment and weak levels of public support that will constrain the government's ability to push through much-needed economic reforms.
So overall, some more encouraging signs in parts of the eurozone, but also a number of significant risks that threaten to derail the nascent revival. A better 2014 than 2013? Quite likely. The beginnings of a self-sustaining recovery in economic activity? Hold that thought.