European Economic Forecast EUROPEAN ECONOMY 1|2013 Economic and Financial Aff airs Winter 2013 The European Economy series contains important reports and communications from the Commission to the Council and the Parliament on the economic situation and developments, such as the European economic forecasts and the Public finances in EMU report. Unless otherwise indicated the texts are published under the responsibility of the Directorate-General for Economic and Financial Affairs of the European Commission to which enquiries other than those related to sales and subscriptions should be addressed. Legal notice Neither the European Commission nor any person acting on its behalf may be held responsible for the use which may be made of the information contained in this publication, or for any errors which, despite careful preparation and checking, may appear. More information on the European Union is available on the Internet (http://europa.eu). ISBN 978-92-79-28344-4 doi: 10.2765/3931 © European Union, 2013 Reproduction is authorised provided the source is acknowledged. European Commission Directorate-General for Economic and Financial Affairs COMMISSION STAFF WORKING DOCUMENT European Economic Forecast Winter 2013 EUROPEAN ECONOMY 1/2013 ABBREVIATIONS ii Countries and regions EU European Union EA euro area BE Belgium BG Bulgaria CZ Czech Republic DK Denmark DE Germany EE Estonia EL Greece ES Spain FR France IE Ireland IT Italy CY Cyprus LV Latvia LT Lithuania LU Luxemburg HU Hungary MT Malta NL The Netherlands AT Austria PL Poland PT Portugal RO Romania SI Slovenia SK Slovakia FI Finland SE Sweden UK United Kingdom HR Croatia JP Japan US United States of America BRICS Brazil, Russia, India, China and South Africa CEE Central and Eastern Europe CIS Commonwealth of Independent States EFTA European Free Trade Association MENA Middle East and North Africa ROW Rest of the World Economic variables and institutions BCS Business and Consumer Surveys CDS Credit Default Swaps EDP Excessive Deficit Procedure ESI Economic Sentiment Indicator Euribor European Interbank Offered Rate GDP Gross Domestic Product GNI Gross National Income HICP Harmonised Index of Consumer Prices iii Libor London Interbank Offered Rate NAWRU Non-Accelerating Wage Rate of Unemployment PMI Purchasing Managers' Index REER Real Effective Exchange Rate SGP Stability and Growth Pact VAT Value-Added Tax CPB Centraal Planbureau, the Netherlands Bureau for Economic Policy Analysis ECB European Central Bank EFSF European Financial Stabilisation Facility EMU Economic and Monetary Union ESM European Stability Mechanism Fed Federal Reserve, US IMF International Monetary Fund NFI Non-financial institutions OBR Office for Budget Responsibility, UK OECD Organisation for Economic Cooperation and Development WTO World Trade Organisation Other abbreviations BLS Bank Lending Survey CFCI Composite Financing Cost Indicator DSGE Dynamic stochastic general equilibrium [model] FDI Foreign Direct Investment FLS Funding for Lending Scheme, UK FY Financial year LFS Labour Force Survey LTRO Longer-Term Refinancing Operation MRO Main Refinancing Operations OMT Outright Monetary Transactions SME Small and medium-sized enterprises QUEST Quarterly Estimation and Simulation Tool, DG ECFIN's DSGE model VERP Voluntary Early Retirement Pension, Denmark Graphs/Tables/Units a.a. Annual average bbl Barrel bn Billion bps Basis points lhs Left hand scale pp. / pps. Percentage point / points pts Points Q Quarter q-o-q% Quarter-on-quarter percentage change rhs Right hand scale SAAR Seasonally-Adjusted Annual Rate tn Trillion y-o-y% Year-on-year percentage change iv Currencies EUR Euro ECU European currency unit BGN Bulgarian lev CNY Chinese yuan, renminbi CZK Czech koruna DKK Danish krone GBP Pound sterling HUF Hungarian forint HRK Croatian kuna ISK Icelandic krona LTL Lithuanian litas LVL Latvian lats MKD Macedonian denar NOK Norwegian krone PLN Polish zloty RON New Romanian leu RSD Serbian dinar SEK Swedish krona CHF Swiss franc JPY Japanese yen TRY Turkish lira USD US dollar CONTENTS v Overview 1 PART I: Economic developments at the aggregated level 5 The EU economy: Gradually overcoming headwinds 7 1. The double disparity of the EU economy 8 2. The external environment 9 3. Financial markets in Europe 10 4. The EU economy 13 5. Risks 27 PART II: Prospects by individual economy 31 Member States 33 1. Belgium: Sluggish growth and ongoing fiscal consolidation 34 2. Bulgaria: Slow recovery ahead 36 3. The Czech Republic: Anaemic consumption and a fragile labour market 38 4. Denmark: Gradually gaining traction 40 5. Germany: Gradual recovery following a temporary setback 42 6. Estonia: Growing strongly, in tune with the other Baltic States 44 7. Ireland: Easing financing conditions and a modest growth recovery 46 8. Greece: Conditions set for emerging from turbulence 48 9. Spain: Net exports only source of growth over forecast horizon 50 10. France: Postponed recovery weighs on public finance 52 11. Italy: Economic recession bottoming out in mid-2013 54 12. Cyprus: Prolonged recession and deleveraging ahead 56 13. Latvia: Strong growth amid low inflation and robust public finances 58 14. Lithuania: Steady growth ahead 60 15. Luxembourg: Less manufactures made in Luxembourg 62 16. Hungary: Slow economic recovery weighs on public finances 64 17. Malta: Growth gradually gaining pace 66 18. The Netherlands: Housing market adjustments impose a drag on economic activity 68 19. Austria: Embarking on a moderate upturn 70 20. Poland: Flying on one engine 72 21. Portugal: Negative growth surprise could signal delayed recovery 74 22. Romania: Domestic demand drives modest recovery 76 23. Slovenia: Double-dip and on-going adjustment delay consolidation 78 24. Slovakia: Growth temporarily weakens as external boost tails off 80 25. Finland: Domestic demand remains main growth driver 82 26. Sweden: From lacklustre growth towards a gradual recovery 84 27. The United Kingdom: Green shoots on the horizon 86 vi Acceding Countries 89 28. Croatia: Staying in the economic doldrums 90 Candidate Countries 93 29. Candidate Countries: Recovering after the double-dip? 94 Other non-EU Countries 97 30. The United States of America: Growth restrained by fiscal uncertainties 98 31. Japan: Near-term growth expected but long-term challenges remain 100 32. China: Growth picks up and rebalancing makes some headway 102 33. Russian Federation: Commodity-fuelled growth with modernisation pending 104 Statistical Annex 109 LIST OF TABLES 1. Overview - the winter 2013 forecast 1 I.1. International environment 9 I.2. Composition of growth - EU 15 I.3. Composition of growth - euro area 16 I.4. Labour market outlook - euro area and EU 23 I.5. Euro-area debt dynamics 27 LIST OF GRAPHS I.1. Real GDP, EU 7 I.2. HICP, EU 7 I.3. World trade and Global PMI manufacturing output 10 I.4. Ten-year government-bond yields, selected euro-area Member States 10 I.5. Bank lending to households and non-financial corporations, euro area 11 I.6. Net changes in credit standards and credit demand for loans to non-financial corporations, euro area 11 I.7. Economic Sentiment Indicator and PMI Composite Output Index, EU 14 I.8. Quarterly GDP growth, EU and euro area 14 I.9. Global demand, EU exports and new export orders 15 I.10. Equipment investment and capacity utilisation, EU 17 I.11. Private consumption and consumer confidence, EU 22 I.12. Current-account balances, euro-area and Member States 22 I.13. Employment growth and unemployment rate, EU 23 I.14. Employment expectations, DG ECFIN surveys, EU 24 I.15. HICP, euro area 25 I.16. Inflation breakdown, EU 25 I.17. Producer Price Inflation and survey inflation expectations, EU 26 I.18. Budgetary developments, EU 26 vii I.19. Euro area GDP forecasts - Uncertainty linked to the balance of risks 28 LIST OF BOXES I.1. Abating event risks and improved sentiment in financial markets 12 I.2. Non-residential investment in the EU 18 I.3. Some technical elements behind the forecast 29 [...]... to take over as the main driver of further strengthening GDP growth Table 1: Overview - the winter 2013 forecast Real GDP 2011 Inflation Winter 2013 forecast 2012 2013 2014 Winter 2013 forecast 2012 2013 2014 2011 Unemployment rate 2011 Winter 2013 forecast 2012 2013 2014 Belgium 1.8 -0.2 0.2 1.5 3.5 2.6 1.6 1.5 7.2 7.3 7.7 7.7 Germany Estonia Ireland Greece Spain France Italy Cyprus Luxembourg Malta... to be below their long-term average and are expected to be decreasing 17 European Economic Forecast, Winter 2013 (Continued on the next page) 18 Economic developments at the aggregated level Box (continued) (Continued on the next page) 19 European Economic Forecast, Winter 2013 Box (continued) (Continued on the next page) 20 Economic developments at the aggregated level Box (continued) … and consumption... acceleration in global activity in 2013, global trade is expected to pick up slowly Projections for nonEU trade are for an increase of around 4½% in 2013 and around 6% in 2014 9 European Economic Forecast, Winter 2013 respectively Assumptions for other commodity prices remain broadly unchanged from the autumn forecast, though metal prices are expected to recover in 2013 3 Recent survey data point to... recession of two consecutive quarters of declining 13 European Economic Forecast, Winter 2013 output largely thanks to exceptional factors in the UK (7) A gradual stabilisation is expected for 2013 … At the beginning of 2013, readings of sentiment indicators suggest that both the EU and euro-area economies are bottoming out in the first quarter In January, the Economic Sentiment Indicator (ESI) and the PMI... Another reduction to 3½% in the EU and 2¾% in the euro area is projected in 2013 The adjustment in the structural budget balance is 3 European Economic Forecast, Winter 2013 projected to advance at a slightly slower pace this year Despite the ongoing fiscal consolidation, debt-to-GDP ratios are still forecast to increase in 2013 due to the more negative contribution of real GDP growth and – in the case... employment in 2013 is projected to decrease by ½% in the EU and by ¾% in the euro area The unemployment rate is set to climb higher in both areas and to remain at elevated levels over the forecast horizon Annual growth in labour productivity slowed down over the first half of 2012 and survey indicators point to continuing weaknesses in the near future 23 European Economic Forecast, Winter 2013 Overall,... households, firms, banks and sovereigns in several Member States to strengthen their balance sheets and bring down debt to sustainable levels is likely to constrain the 15 European Economic Forecast, Winter 2013 dynamics of domestic demand over the forecast horizon In particular, the substantial easing of financial market tensions over the last months has not yet translated into a significant improvement in... to the ECB, 305 counterparties decided to exercise an option to repay EUR 140.6 bn of funding received through the first 3-year LTROs in late 2011 and early 2012 11 European Economic Forecast, Winter 2013 (Continued on the next page) 12 Economic developments at the aggregated level Box (continued) Moreover, access to finance seems to be a limiting factor particularly for small and medium-sized enterprises... Uncertainty stemming from the sovereign-debt crisis and increasing unemployment fears are 21 European Economic Forecast, Winter 2013 likely to have led households to increase their precautionary savings (15) External rebalancing is progressing … The ongoing external adjustment in several Member States amid a difficult economic and financial environment will shape the recovery across countries Structural... year In 2014, consumer prices are forecast to increase by 1.7% in the EU and 1.5% in the euro area In response to the substantial reduction in tail risks and financial market stress risks to the growth outlook have become more balanced but continue to be tilted to the downside In contrast, risks are balanced for the inflation outlook 7 European Economic Forecast, Winter 2013 1 THE DOUBLE ECONOMY DISPARITY . 1: Overview - the winter 2013 forecast Real GDP Inflation Unemployment rate Winter 2013 Winter 2013 Winter 2013 forecast forecast forecast 2011 2012 2013 2014. European Economic Forecast EUROPEAN ECONOMY 1 |2013 Economic and Financial Aff airs Winter 2013 The European Economy series contains