EU eyes gradual recovery in 2013

By bne IntelliNews November 8, 2012

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With stress receding since the summer, the European Commission expects the EU to return to moderate growth in the first half of 2013 as action by the US Federal Reserve and the European Central Bank (ECB) help financial tensions ease, it said in its autumn update of economic forecasts for the 27-member bloc.

"The EU economy has dipped back into contraction in the second quarter with further weakness expected in the second half of the year. Unemployment has risen and cross-country divergences have widened. Yet, compared with the situation before the summer, over the last few months financial tensions have somewhat abated," the Commission's European Economic Forecast Autumn 2012 states early on.

Of particular interest to the small, open and export-led economies in Central Europe will be the prediction that "as the current weakness of global demand is expected to be temporary, net exports are projected to provide some impetus for the recovery of investment, later spilling over to consumption."

The report suggests world growth outside the EU is set to "go through a soft patch rather than a prolonged period of weakness," and that overall it will recover somewhat in the course of 2013 to reach growth of 4% of GDP. "A further moderate acceleration is projected for 2014," it adds. "In line with global GDP, world trade growth has been decelerating through 2012, but is expected to recover gradually in 2013 and 2014."

That should help push anticipated gradual improvement within the EU on the back of the recent easing of tension on the financial markets thanks to central bank actions, it claims. "The full implementation of far-reaching policy measures announced over recent months and progress with the correction of imbalances should reduce financial stress in vulnerable Member States further and lead to a gradual restoration of confidence across the EU, which is necessary for investment and private consumption to return," the report continues hopefully.

Recovery in the EU is vital for the Central Europe states, with the European market constituting over 80% of demand for exports out of thee of the four Visegrad countries. Poland has been sending around 60% of its exports to the bloc, but is coming to rely on exports more heavily as domestic demand wanes.

That is likely to remain the case across the EU in the short term, the report suggests: "Domestic demand has made negative contributions to GDP growth for more than a year and is likely to do so also in the second half of 2012 and well into the first half of 2013." However, the bulk of CE exports into the EU head to Germany, which has been diversifying its export markets.

"The German economy," the report says, "is expected to slow down further in the second half of 2012, reflecting weaker economic activity in export markets and uncertainty weighing on investment, before accelerating moderately next year, thanks to relatively robust consumption and benign financial conditions."

However, the Central Europe states have plenty of challenges ahead, in the eyes of the Commission's analysts. Poland, until recently enjoying an apparent repeat of it immunity to crisis witnessed in 2008, is set to continue to suffer as it gets firmly caught up, the country's previous main guardian - domestic demand - now the victim of " external headwinds and the stagnation in the labour market..."

That will leave the country with 2012 GDP growth of 2.4%, the report suggests. After that, "deteriorating domestic moods" are likely to limit growth to 1.8% and 2.4% in the following two years.

The Czech Republic is in the same boat regarding domestic demand, only much further downstream, with ongoing austerity having long ago crushed consumer spending. With its export markets also slowing, the country is facing a contraction of 1.3% for 2012, the report predicts, and a slow recovery thereafter to 0.8% growth next year and 2% in 2014. "Against the background of continuing fiscal consolidation and increased economic uncertainty, weak domestic demand is expected to act as the main drag on growth in 2012 despite easier financial conditions. Real GDP growth is projected to bottom out in 2013 but is expected to remain below potential also in 2014," the analysts suggest.

While Hungarian consumer spending and exports are also suffering, investment declined for the fourth year in a row to a historically low rate if compared to GDP in 2012, while agricultural output has also slumped. That leaves the country facing a 1.2% contraction this year, to be followed by an extremely sluggish recovery of 0.25% in 2013 and just 1.25% the following year.

The Slovak consumer is also in the doldrums on the back of high unemployment and low wage growth, but the country has pushed to relatively skyrocketing GDP growth thanks to "a positive supply shock in the automotive industry," as the report terms it. The country's modern car plants have gained from the crisis as the cheap economical cars they turn out take on market share in both the struggling EU and emerging markets.

Thanks to that, GDP growth is forecast to decelerate only slightly from its rapid recovery from the 2008 crisis, to leave it at 2.6% in 2012. A temporary slowdown in export growth is foreseen in 2013 to quash growth to 2%, before it hikes back up to 3% the following year.

However, that robust performance will likely remain entirely dependent on exports. "A strong base effect, tightening credit standards and persisting uncertainty about the external environment are exerting a drag on private investment," the report notes. "In the absence of a major improvement in the labour market, real household disposable income is set to continue to fall and - together with persistently low consumer confidence - to have a negative effect on private consumption."

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