European Economic Forecast EUROPEAN ECONOMY 7|2012 Economic and Financial Aff airs Autumn 2012 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 978-92-79-22855-1 doi: 10.2765/19623 © European Union, 2012 Reproduction is authorised provided the source is acknowledged. European Commission Directorate-General for Economic and Financial Affairs COMMISSION STAFF WORKING DOCUMENT European Economic Forecast Autumn 2012 EUROPEAN ECONOMY 8/2012 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 Libor London Interbank Offered Rate iii MTO Medium-Term Objective NAWRU Non-Accelerating Wage Rate of Unemployment OIS Overnight Index Swaps PMI Purchasing Managers' Index REER Real Effective Exchange Rate RWA Risk-Weighted Assets SGP Stability and Growth Pact VAT Value-Added Tax CBR Central Bank of Russia CPB Centraal Planbureau, the Netherlands Bureau for Economic Policy Analysis EBA European Banking Authority ECB European Central Bank EFSF European Financial Stabilisation Facility ESM European Stability Mechanism Fed Federal Reserve, US IMF International Monetary Fund NBR National Bank of Romania NFI Non-financial institutions OBR Office for Budget Responsibility, UK OECD Organisation for Economic Cooperation and Development PBoC People's Bank of China S&P Standard and Poor's WTO World Trade Organisation Other abbreviations BCA Budget Control Act, US BLS Bank Lending Survey COLA Cost-of-living allowance / Cost-of-living adjustment CP Convergence Programme DSGE Dynamic stochastic general equilibrium [model] FDI Foreign Direct Investment FLS Funding for Lending Scheme, UK FX Foreign Exchange FY Financial year JPA Job Protection Act, Hungary LFS Labour Force Survey LTRO Longer-Term Refinancing Operation MBS Mortgage-Backed Securities MRO Main Refinancing Operations OMT Outright Monetary Transactions PAYG Pay As You Go [pension scheme] PPP Public-Private Partnership QE Quantitative Easing QUEST Quarterly Estimation and Simulation Tool, DG ECFIN's DSGE model SOEs State-Owned Enterprises VERP Voluntary Early Retirement Pension, Denmark Graphs/Tables/Units a.a. Annual average bbl Barrel iv bn Billion bps Basis points lhs Left hand scale rhs Right hand scale pp. / pps. Percentage point / points pts Points Q Quarter q-o-q% Quarter-on-quarter percentage change y-o-y% Year-on-year percentage change SAAR Seasonally-Adjusted Annual Rate Currencies EUR Euro ECU European currency unit EMU Economic and Monetary Union 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 7 The EU economy: Sailing through rough waters 9 1. A mild recovery ahead amid continued structural adjustment 10 2. The external environment 11 3. Financial markets in Europe 14 4. The EU economy 16 5. Risks 28 PART II: Prospects by individual economy 47 Member States 49 1. Belgium: Fiscal consolidation amid a subdued growth outlook 50 2. Bulgaria: Domestic demand sustaining growth 52 3. The Czech Republic: Low consumption weighs on the economy 54 4. Denmark: Muted growth in a phase of adjustment 56 5. Germany: Robust consumption despite uncertain environment 58 6. Estonia: Returning to balanced growth 61 7. Ireland: The road to recovery is still challenging 63 8. Greece: Fiscal consolidation in the midst of internal adjustment 65 9. Spain: Deep adjustment continues 67 10. France: One more year of flat growth before recovery 70 11. Italy: Uncertainty and tight financing conditions delay recovery 73 12. Cyprus: Deep recession to prevail over the forecast horizon 76 13. Latvia: Growing fast again 78 14. Lithuania: Growth continues at a slower pace 80 15. Luxembourg: Approaching a crossroad 82 16. Hungary: Fiscal challenges amidst subdued growth prospects 84 17. Malta: Resilient labour market underpins gradual demand recovery 87 18. The Netherlands: Slowly emerging from the doldrums 89 19. Austria: A gradual return to normality 92 20. Poland: Growth slows down as domestic demand falters 94 21. Portugal: Faster-than-expected rebalancing towards net exports 97 22. Romania: Modest recovery ahead 99 23. Slovenia: Deleveraging needs delay recovery 101 24. Slovakia: Economy still resilient but losing pace in 2013 103 25. Finland: Growth losing pace, but labour market remaining strong 105 26. Sweden: Slowdown but no recession 107 27. The United Kingdom: Subdued growth amid continuing uncertainty 109 Acceding Countries 113 28. Croatia: Little growth but some fiscal consolidation 114 vi Candidate Countries 117 29. The former Yugoslav Republic of Macedonia: From a moderate recession to an investment driven recovery 118 30. Iceland: Recovery on track amid risks and uncertainties 120 31. Montenegro: Seeking the restoration of the lending channel 122 32. Serbia: Recession followed by a sluggish recovery 124 33. Turkey: Growth slows down and rebalances away from consumption 126 Other non-EU Countries 129 34. The United States of America: Subdued growth amid looming fiscal uncertainties 130 35. Japan: Recovery stalling after the solid first half of 2012 133 36. China: Mixed signals for the short term, while structural challenges remain 135 37. EFTA: Resilience put to the test 137 38. Russian Federation: Continuing on a moderate growth path 140 Statistical Annex 145 LIST OF TABLES 1. Overview - the autumn 2012 forecast 1 I.1. International environment 12 I.2. Main features of the autumn 2012 forecast - EU 17 I.3. Main features of the autumn 2012 forecast - euro area 18 I.4. Composition of growth - EU 20 I.5. Composition of growth - euro area 21 I.6. Labour market outlook - euro area and EU 23 I.7. General government budgetary position - euro area and EU 27 I.8. Euro-area debt dynamics 28 LIST OF GRAPHS I.1. Real GDP, EU 9 I.2. HICP, EU 9 I.3. Current-account imbalances, euro area 10 I.4. Multi-speed real GDP growth in the EU, annual growth rates (weighted) 11 I.5. World trade and Global PMI manufacturing output 12 I.6. Commodity-price developments 13 I.7. Real GDP growth in EU, non-EU advanced and emerging economies 13 I.8. Ten-year government-bond yields, selected euro-area Member States 14 I.9. Stock-market indices, euro area 15 I.10. Bank lending to households and non-financial corporations, euro area 15 I.11. Net changes in credit standards and credit demand for loans to non-financial corporations, euro area 16 vii I.12. GDP growth and its components, EU 16 I.13. Economic Sentiment Indicator and PMI Composite Output Index, EU 17 I.14. Real GDP growth , EU, contributions by Member States 18 I.15. Equipment investment and capacity utilisation, euro area 19 I.16. Construction investment and building permits, euro area 19 I.17. Private consumption and consumer confidence, euro area 20 I.18. Global demand, euro-area exports and new export orders 21 I.19. Current-account balances, euro area and Member States 22 I.20. Employment growth and unemploment rate, EU 23 I.21. Employment expectations, DG ECFIN surveys, euro area 24 I.22. HICP, euro area 25 I.23. Inflation breakdown, EU 26 I.24. Producer Price Inflation and survey inflation expectations, EU 26 I.25. Budgetary developments, euro area 27 I.26. General government revenues and expenditure, EU 28 I.27. Euro area GDP forecasts - Uncertainty linked to the balance of risks 29 LIST OF BOXES I.1. Ongoing adjustment in the euro-area periphery 30 I.2. Assessing the impact of diverging financing conditions within the euro area 34 I.3. The role of expectations and confidence indicators in short- term forecasting 37 I.4. Euro-area labour markets: less resilience and more divergence ahead? 39 I.5. Forecast errors and multiplier uncertainty 41 I.6. Some technical elements behind the forecast 45 [...]... half of 2012 and lost further momentum in recent months on the back of weakening economic activity, notably in the euro area and Japan Non-EU trade is expected 11 European Economic Forecast, Autumn 2012 Table I.1: International environment (Annual percentage change) Autumn 2012 forecast 2012 2013 2014 Spring 2012 forecast 2012 2013 (a) 2009 2010 2011 19.2 -3.1 2.4 1.8 2.1 2.3 2.6 2.0 2.1 5.7 -5.5 4.5... the end of this year … with equipment investment expected to recover over the forecast horizon … The decrease in equipment investment that set in Table I.3: Main features of the autumn 2012 forecast - euro area (Real annual percentage change unless otherwise stated) Autumn 2012 forecast 2012 2013 2014 Spring 2012 forecast 2012 2013 2009 GDP Private consumption Public consumption Total investment Employment... growth is forecast for 2014 Slowly improving labour market conditions, rising purchasing power and higher consumer confidence should help to prop up household consumption and shift growth drivers more toward domestic demand Moreover, some initial effects Table I.2: Main features of the autumn 2012 forecast - EU (Real annual percentage change unless otherwise stated) Autumn 2012 forecast 2012 2013 2014... pervasive interconnections within the EU and especially the euro area, no country is expected to power ahead in a permanent decoupling 3 European Economic Forecast, Autumn 2012 The German economy 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... annual rate of only 1.0% (adjusted), mainly reflecting the deterioration in economic and housing market prospects and, in a number of euro-area countries, the need to deleverage following past excesses Loans to non- 15 European Economic Forecast, Autumn 2012 financial corporations shrank by 0.5% (by 0.2% in July) reflecting weakening economic activity and the associated higher credit risk (see Graph I.10)... consumption and investment growth However, oil producers benefited to some extent from recent oil price hikes 13 European Economic Forecast, Autumn 2012 After policy tightening in 2011, monetary and fiscal policy has again shifted to an expansionary stance in order to counteract the current growth slowdown Economic activity in emerging market economies (and developing countries) is thus expected to reaccelerate... prices, annual percentage change 17 European Economic Forecast, Autumn 2012 of structural reforms are expected to become visible in 2014 Overall, real GDP is projected to grow by around 1½% in 2014 The negative output gap is expected to widen until 2013 and to shrink only in 2014 This has to be seen against the background of low estimates for potential GDP growth in 2012- 13 (around ½% for the euro area... HICP index (monthly) (rhs) HICP index (annual) (rhs) Figures above horizontal bars are annual inflation rates European Economic Forecast, Autumn 2012 1 A MILD RECOVERY AHEAD AMID CONTINUED STRUCTURAL ADJUSTMENT Graph I.3:Current-account imbalances, euro area 300 Since the second half of 2011, economic growth has been weakening in both the EU and the euro area In both areas real GDP is around ½% below... housing market was still burdened by a stock of 676.038 unsold new housing units and in the first quarter of 2012 still about 3000 more units were completed than sold according to statistics of the Spanish ministry of public works (Ministerio de Fomento) 19 European Economic Forecast, Autumn 2012 Private consumption constrained by negative income and employment developments… declining for several quarters,... 5.5 3.2 -0.7 1.0 3.6 -2.5 -0.4 4.6 -3.4 -1.7 0.2 -0.9 -2.2 0.2 0.1 -0.7 0.7 0.9 1.3 0.6 0.2 21 European Economic Forecast, Autumn 2012 the course of 2013 and with Member States benefitting from a lower effective exchange rate and gains in competitiveness, a gradual rebound in export growth is expected over the forecast horizon Export growth in 2013 as a whole is predicted to accelerate modestly to around . European Economic Forecast EUROPEAN ECONOMY 7 |2012 Economic and Financial Aff airs Autumn 2012 The European Economy series contains. European Commission Directorate-General for Economic and Financial Affairs COMMISSION STAFF WORKING DOCUMENT European Economic Forecast Autumn 2012