Download Euro-zone Economic Outlook January 2013: Mild recovery by mid-2013 (PDF, 91 KB)

Eurozone economic outlook
January 9, 2013
Association of Three Leading European Economic Institutes
Mild recovery by mid-2013
GDP in the Eurozone contracted by 0.1% in Q3 2012 and business surveys as well as the decline of the
industrial production in October suggest a further decrease of activity in Q4 (-0.4%). In the first half of
2013, the Eurozone would exhibit a mild recovery with a stagnation in Q1 (0.0%) and a slight
improvement in Q2 (+0.2%). External demand would accelerate, because emerging countries are
expected to grow faster and the agreement on the “fiscal cliff” in the United States limits its negative
impact on the ongoing American recovery. The easing of tensions surrounding sovereign debts would
support a stabilization of investment over the forecast horizon. Private consumption remains burdened
by the decline of purchasing power of households, due to unfavourable labour market conditions. In
2013, the decline would be softened by the decrease of inflation and the mitigation of fiscal
consolidation efforts. Under the assumption that the oil price stabilizes at USD 110 per barrel and that
the euro/dollar exchange rate fluctuates around 1.29, inflation is expected to decrease from 2.3% in Q4
2012 to 1.7% in Q2 2013. This scenario is subject to various risks stemming from possible social
tensions in some countries due to the still deteriorating labour market conditions and from renewed
escalation of the debt crisis.
Significant
decline
production in Q4 2012
of
industrial
The low level of business confidence in Q4 2012
signals a further decline in economic activity. In
particular, after a sharp fall in September and in
October, industrial production in the Eurozone is
expected to drop by 2.0% in Q4 2012.
In 2013, the foreseen acceleration of the
external demand and the stabilization of the
domestic demand would induce a modest
recovery of industrial production. It would still
decline in Q1 (-0.4%) before growing in Q2
(+0.2%).
GDP should recover slowly in 2013
Output in the Eurozone declined in Q3 2012 for
the second quarter in a row (-0.1%). In Q4,
activity is expected to contract again (-0.4%).
GDP continues to suffer from tight credit
conditions, the impact of the ongoing fiscal
consolidation in several member states and
sluggish external demand in the last quarter of
2012.
In 2013, the Eurozone would recover slowly:
0.0% in Q1 and +0.2% in Q2. This progressive
improvement stems from several factors: the
weakening of the tensions plaguing sovereign
debts, the mitigation of the fiscal consolidation
effort and the acceleration of external demand.
Indeed, emerging countries have started to
accelerate, as a consequence of the easing of
fiscal and monetary policies in past months.
Furthermore, in the United States, also thanks
to the agreement on the “fiscal cliff”, the
activity should continue to expand moderately.
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The past weakness of activity weighs on
employment and it would decrease over the
forecast horizon. This worsening of the labour
market limits the rise of nominal wages.
Besides, tax increases and social benefits cuts
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Eurozone economic outlook
January 9, 2013
Association of Three Leading European Economic Institutes
are implemented in several countries. The
purchasing power would decrease, though at a
slower pace in 2013 thanks to the decrease of
inflation and to the mitigation of the fiscal
consolidation policy. In Q4, private consumption
is expected to drop (-0.2%), with this decline
being particularly strong in Spain due the VAT
rise in September. In Q1 and Q2 2013, it would
stabilize (0.0%).
forecast to decrease from 1.4% in Q4 2012 to
1.2% in Q2 2013. Furthermore, the effects of
relatively high energy and food prices during
2012 as well as the effects of past increases in
indirect taxes will slowly peter out.
The decision of the ECB to launch its Outright
Monetary Transactions program and the recent
changes in the European fiscal framework
weakened the tensions plaguing sovereign debt
markets. Assuming no renewed escalation of
the debt crisis, the financing conditions faced by
firms should thus improve slowly in the euro
area.
Total investment would likely decline further
over the forecast horizon, but at a decreasing
pace (-1.0% in Q4 2012, -0.4% in Q1 and 0.1% in Q2 2013), thanks to the rebound in
external demand and to the increasing need for
previously postponed replacement investment.
Inflation keeps on decreasing
After peaking at 2.9% (year-on-year) in Q4
2011, headline inflation has fallen to 2.3% in
Q4 2012. This trend would continue and
inflation is expected to come down to 1.7% in
Q2 2013. This scenario assumes that the Brent
oil price stabilizes around US$ 110 per barrel
while the US$/euro exchange rate fluctuates
around 1.29.
The high level of unemployment and the
weakness of demand keep domestic inflationary
pressures moderate and core inflation is
Methodological note
This quarterly publication is prepared jointly by the German IFO institute, the French INSEE institute, and the Italian
ISTAT institute. The forecast methods are shared by the three institutes. They are based on time-series models using
business surveys by national institutes, Eurostat, and the European Commission. The joint three-quarter forecast
covers Eurozone industrial production, GDP, consumption, investment, and inflation. Publication is timed to coincide
with Eurostat’s third release of quarterly national accounts.
Further economic analysis for each country (Germany, France, Italy) is available by:
- Ifo Konjunkturprognose, Ifo
Nikolay Hristov
+49 (0) 89 92 24 1225
- Conjoncture in France, INSEE
Nicolas Jegou
+33 (0) 1 41 17 59 63
- ISTAT
Roberta De Santis
+39 (0) 64673 3620
Next release: April 3, 2013 (date of Eurostat’s third release of quarterly national accounts)
Next forecast horizon: 2013 Q3
www.ifo.de www.insee.fr www.istat.it
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