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Ernst & Young Eurozone Forecast

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Dans notre rapport trimestriel, nous analysons l'état économique des 16 pays de l'Eurozone, les défis et les opportunités de la zone à l'heure de la reprise.Voir sur ey.com
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Ernst & Young
Eurozone Forecast
Spring edition
April 2011•
Foreword
Mark Otty
Area Managing Partner, Europe, Middle East, India and Africa
B ydefinitione v er yf or ecastisunc er t ain,andbusines sesha v elearned
t ot ak edecisionsunderunc er t aint y .Inthatsense ,w ear enotina
fundament allyne wen vir onmentwhenpr esentingthespring2011edition
o fourf or ecast.Ho w e v er ,Ibelie v ethattheunc er t aint yhasr eachedle v els
thatar eunpr ec edent edinm yo wne xperienc e .
I note that opinion on the Eurozone’s immediate We also continue to see a gap in the need to remember to offset possible monetary
outlook is sharply divided. Recent confidence performance between the south and the north policy mismatches with countercyclical fiscal
indicators have painted an almost euphoric — or between the core and the periphery — policy in order to avoid asset price bubbles
picture, with the Ifo business climate index in which is likely to be a source of future and their dire consequences.
Germany reaching an all-time high in February instability. Germany in particular is going
this year, while the European Commission’s through a strong economic recovery, helped We are continually following how the business
industrial confidence indicator suggests the by a competitive industrial sector, with community all over the world is responding to
Eurozone will experience a strong cyclical projected economic growth of 2.3% this the rapid changes in the markets. There is
recovery. The European Central Bank shares year. For the Eurozone average to be held an ongoing discussion with our clients on risk
this confidence in a robust recovery and has so significantly below the growth seen by assessments, business strategy, innovation
signaled a rise in interest rates to dampen Germany reflects some deeply negative and entrepreneurship, investment strategy
growing inflation concerns. performances in the periphery. Our forecast and how to build an operation that attracts
for Ireland suggests a contraction of 2.3% both good clients and the most talented people.
However, since we first issued the Ernst & Young this year, and for Greece of 4%. I also believe strongly in the work that we do
Eurozone Forecast, our perspective on the building bridges between governments and
Eurozone economy, has been, and continues One of the biggest challenges for European the business community. By offering thought
to be, different. We see an upturn of only governments is unemployment, particularly leadership and surveys that analyze
moderate strength. We stick to our main among young people — school and university governmental and macroeconomic trends,
forecast of a 1.5% growth in GDP this year, leavers. By 2015 we are forecasting the and how business leaders think about policy
unchanged from our last two forecasts, and level of unemployment to be well above decisions, we can create a basis for constructive
below last year’s actual growth rate of 1.7%. pre-crisis levels. This means around 14 million discussions leading to pragmatic decisions
The decline in growth rate has already people in Europe will be out of work. that stimulate growth, inside and outside
commenced in the fourth quarter of 2010, As unemployment rates for young people the Eurozone.
and has continued since. While the world are higher than those for other age groups,
economy has stabilized after the 2009 the lack of opportunities for this group is I encourage you to visit our dedicated
recession, the uncertainties facing the increasing concerns of a “lost generation” Eurozone website — www . e y . com/ eef — for
Eurozone economy remain. of workers. This lack of opportunities would additional information on the Ernst & Young
result in major long-term socio-political Eurozone Forecast and the 17 individual
The debt crisis within the Eurozone is likely problems. country forecasts it comprises.
to weigh on the economic performance of
Eurozone countries for several years, along In this relatively bleak context, one may
with the threat of a default, and further forget that membership of the Eurozone can
financial instability. The European Union remain attractive compared to the other
may have reached a political agreement to options available. On 1 January 2011,
resolve the crisis, but it is still not clear how Estonia, a state of 1.3 million, became the
all countries are going to secure a stable 17th Eurozone member state. I believe that
recovery, and how debt restructuring will Estonia serves as an example of a country
be avoided. We believe it would take a very that managed to get a grip on national debt
robust, and unfortunately very unlikely, and the budget, and that the country has
economic rebound for the Eurozone’s a lot to gain from joining such a large market
periphery to achieve a sustainable debt and benefiting from a relatively stable
position. currency. But the Estonian Government will
Published in collaboration withErnst & Young Eurozone Forecast
April 2011
Uncertain prospects puts higher demand on Eurozone business 2
Highlights 5
Should we worry about the rise in inflation? 6
Muted recovery still expected … 6
… and inflation concerns return to the fore 7
Food and energy drive inflation up … 7
… and headline inflation will stay above 2% in 2011 … 7
… but should fall back next year … 9
… as spare capacity is ample … 9
… especially in labor markets 9
Further tensions in Middle East and North Africa could push headline inflation up … 10
… but raising rates as a response would be a mistake 10
… as downside risks to growth dominate 11
Fiscal test to start in earnest … 11
… and banking sector needs to survive without ECB’s lifeline 13
Sovereign risks remain … 14
… as reform proposals are too timid 15
Can the Eurozone still attract new members? 15
Conclusions 15
Forecast for Eurozone countries 16
17 Eurozone countries 16
Germany 17
France 18
Italy19
Spain20
Netherlands21
Belgium22
Austria23
Greece24
Finland25
Ireland26
Portugal 27
Slovakia 28
Luxembourg 29
Slovenia 30
Cyprus 31
Estonia 32
Malta 33
Detailed tables and charts 34
Forecast assumptions 34
Eurozone GDP and components 35
Prices and costs indicators 36
Labor market 37
Current account and fiscal balance 38
Measures of convergence/divergence within the Eurozone 38
Cross–country tables 39
Ernst & Young Eurozone Forecast Spring edition April 2011 1Uncer tainprospectsputshigher
demandonEurozonebusiness
Thefindingsinthespring2011editionofErnst & Young’s Eurozone Forecastarewithout
doubtasoberinganalysisofthesituation.RecenteventsintheMiddleEastandthecatastrophe
inJapanincreasetheuncer taintiesthatbusinessisfacing.C ompaniesarew aitingt oseehow
thev ariouscrisese volve ,andthe yusethisw aitingtimet ostrengthentheirint ernalstructures
andtheirrelativecompetitiveposition.Businessleader swouldbewelladvisedt omonit or
theEuro zone ’ seconom ycontinuallyandindetail.
For the Eurozone, our central scenario is one of a disappointing We think it is unfortunate for the ECB to raise interest rates
recovery — less than we would have expected at this stage of the at this juncture, as this policy poses risks to the Eurozone’s
cycle. But there are a number of present day threats that could economic recovery.
knock even our central forecast of a 1.5% increase in GDP for 2011.
The catastrophe in Japan, the unrest in the Middle East, possible The decision of the 11 March Eurozone summit to extend the size
overheating in the emerging markets and the continued evolution of the European Financial Stability Facility (EFSF) was welcome.
of the Eurozone’s debt crisis are all significant events in their own But its remit remains restricted, particularly on the purchase of
rights. It is impossible to give a precise estimate of how they will government bonds. A number of proposals on economic governance
affect the Eurozone in their combination. have been made, which go in the right direction but fall short of
a significant move toward fiscal transfers. This underlines the fact
There are also opportunities for the Eurozone that might come that, as yet, there is no all-encompassing crisis resolution path.
from a more rapid expansion than currently envisaged in the shift Individual member countries remain keen to limit their own
in resources into green technologies, or into services to cater for financial exposure, but the multitude of solutions they offer do
aging populations. On balance, however, the downside risks are not constitute a coherent approach that could explain how and
dominant. when debt sustainability is likely to be achieved in the Eurozone’s
peripheral countries.
In this environment, we see very little probability of a sustained
increase in inflation, beyond the commodity price effects that The same goes for the efforts to resolve the ongoing banking crisis.
are currently lifting headline inflation rates. The rise in oil and Last year’s stress tests suffered credibility when Irish banks were
commodity prices will affect headline inflation throughout this year, bailed out only a few months after passing the tests with glory.
but the biggest impact on the economy will be through lower The new tests remain essentially unchanged in the most important
economic growth, not higher core inflation rates. Looking at supply dimensions — no stress test of banks’ banking books for sovereign
chains and the continued slack in labor markets, it is hard to see default, and still unrealistically optimistic assumptions about house
where inflationary pressure might arise. price developments in the Eurozone’s peripheral countries.
The European Central Bank (ECB) has already signaled a rise in A further risk is the impact of the various austerity programs on
interest rates, possibly as early as April — although the impact of the economic growth. This, in our view, tends to be widely underestimated
Japanese earthquake may force a delay. ECB officials have confirmed in national capitals. European governments tend to assume the world
remains unchanged as they pursue a solitary austerity program, market expectations of a year-end policy interest rate of 1.75%.
but this assumption breaks down if everybody does the same.
And finally, we have yet to understand the longer-term impact of
the 2009 recession. This is particularly important for future What do leading business representatives think about Europe’s
investment decisions by companies. It is likely that some economic possibilities of attracting investments? Ernst & Young is following up
activity has been lost for good; for instance, construction sectors the developments in the Eurozone with a survey on Europe as
that will not return to pre-crisis levels for many years or manufacturing a market for locating, investing and growing, and how Europe
sectors that have shifted production to other locations. On our compares with other regions. In connection with the World
projections, unemployment will remain at above pre-crisis levels Investment Conference, 25-27 May in La Baule, France, we will
at least until 2015, which augurs increasing social tensions ahead. publish the 2011 edition of the European attractiveness survey.
A strategic corporate planner, when faced with such an extreme Learnmoreonwww .ey .com/ attractiveness
set of uncertainties, would have to take all these developments
2 Ernst & Young Eurozone Forecast Spring edition April 2011into account. We are already observing a trend that companies The debate about the corporate tax rate in Ireland is particularly
are putting off large strategic investments and focusing on smaller important in this context. A rise in corporate tax rates, as demanded
projects, for example, investments in productivity-enhancing by France and Germany, would destroy probably the main chance
technologies. We expect to see this trend continuing. Ireland has to increase its future economic growth — a precondition
for solvency. Ireland, with its skilled workforce and a strong network
Excessive restraint exercised by the corporate sector may in itself of high-tech companies, is uniquely placed to benefit from inward
contribute to the crisis, but it would be wrong to advocate a strategy investments from US companies. If Irish tax rates were forced to
to completely disregard risks in the pursuit of reward. There is go up, it would be hard to see which alternative strategies the country
a strong case for companies to use this crisis to rethink their global could deploy to achieve solvency.
strategies and diversify away from the Eurozone. There is however,
in our view, scope for strategic investments within the Eurozone, Simple tax base harmonization may, however, be different,
in sectors with big growth potential. One important sector is and Ireland may find it acceptable to agree to the EU’s proposals
renewable energies, such as solar power plants and wind parks. on the understanding that the actual tax rate remains sacrosanct.
A trend we have been observing, and are expecting to continue, To conclude, we see a set of uncertainties on the Eurozone
has been vertical supply chain integration, which is what we would market that the business community should take into account
expect when business decision-makers are becoming more for strategic planning:
risk-averse.
• The expected rise in interest rates decided by the ECB
A particular factor to watch is the development of corporate taxes. • Failure from EU policy-makers to agree on an all-
Policy-makers have so far avoided raising corporate taxes to reduce encompassing resolution path to solve the debt crisis
their deficits. This is undoubtedly good news from the perspective • The austerity programs’ impact on economic growth
of the corporate sector. But there is concern that this trend may
be changing. The European Commission’s most recent proposals Understanding the economic development, long term and short
for a unified tax base are certainly justified from the perspective term, and being proactive are key factors for successful companies
of an internal market, especially to help smaller companies operating in the Eurozone. We note that they are keeping track of
operate in other European Union(EU) countries. But one has compliance issues, continuously improving their performance,
to watch out that these changes will not produce higher overall strengthening their ability to compete by investing in enhanced
corporate tax charges. The measures, as designed by the European technique and competences, and securing their operations and
Commission (EC), would not have such an effect, but a final growth by choosing a vertical supply chain strategy.
compromise may only be possible if taxes were raised to overcome
political opposition.
Bankingsect orper spectives
P olicyandregulat oryrisks requirements mean that scarce liquid assets a move toward central clearing and more
One of the principal objectives of the will be tied up for regulatory purposes. The standardized contracts. In addition, bank
financial authorities, as they consider the impact of these changes will be exacerbated balance sheets are likely to contract further
reforms needed to prevent recurrence of when the ECB and other liquidity suppliers as they become increasingly constrained by
the financial crisis and the Basel III reforms, start to withdraw the extraordinary support tougher capital and liquidity requirements.
is that banks should be financially more they have provided in response to the crisis. But bank lending, particularly to small
resilient. Basel III will be adopted in Europe businesses, has a critical role to play in
through the implementation of the Capital The main impact for banks will be a significant supporting economic recovery in Europe,
Requirement Directive (CRDIV). In practice, reduction in their profitability. Many banks and is being strongly encouraged by
this means there will be much more — and are now publicly reducing their RoE (return governments. Banks need to take a more
higher-quality – capital as well as tough new on equity) targets and questioning the strategic approach to managing their balance
liquid asset requirements, and European viability of some business lines – in particular, sheets so that they can deploy their scarce
banks will need to increase their capital; in derivatives, where capital weights for capital and liquidity profitably and, therefore,
some private sector estimates for this have trading assets are increasing severalfold continue to attract new investment capital,
been as high as €1 trillion. The new liquidity and the authorities are mandating as well as meeting political demands.
Ernst & Young Eurozone Forecast Spring edition April 2011 3Unc er t ainpr o spect sput shigherdemandonE ur o z onebusine s s
Another key plank of the global regulatory The restructuring of these institutions and management to focus on the key business
reform program is that bank failure segments is under way and will continue issues that cut across all of the different
(particularly for large institutions) should through 2012. In some cases, this has streams of change, and in finding real
be made more manageable, with losses happened in response to specific remedies opportunities, through synergies and
being the responsibility of creditors rather required by the EU's competition authorities. efficiencies, to cut implementation costs
than taxpayers, and with the authorities The consolidation of weak institutions, with significantly — perhaps by as much as 30%.
focusing on reducing the systemic impacts further actions taken to separately manage
of a large bank failure, protecting only those "good" and "bad" asset books, will continue. In addition to responding to the profitability
functions that are critical to the wider In addition, pressures on profitability challenges with a relentless focus on costs,
economy. Banks’ new board resolution throughout the sector, driven, in part, by the banks will need to find new sources of
proposals will give the authorities powers increased capital and liquidity requirements, revenue growth. New customer propositions
to take control of failing institutions under will require a real focus on costs. that can help to rebuild consumer trust and
special insolvency regimes. The recovery Consolidation can be a route to achieving loyalty are likely to be important. Equally,
and board resolution plans that are now considerable cost savings. many institutions are looking at whether
being required of the larger banks will geographical diversification would allow
provide more clarity on how a bank should However, a countervailing force to these them to access growth opportunities that
respond to a financial crisis, and how the consolidation trends would be the regulatory may not exist in Europe; for example, in
authorities could achieve their policy goals authorities’ stated desire to increase emerging markets that were less directly
in the event of a failure. New forms of competition in the banking sector. The crisis impacted by the crisis.
convertible capital are likely to play a role has concentrated the financial services
in this. It is possible that the authorities will industry and, consequently, it has exacerbated Balancingst ak eholder s 'demands
require banks to take pre-emptive steps to the "too big to fail" problem. In some The stakeholders in the banks — governments
simplify their organizational structures to countries, the authorities are keen to and European bodies, regulatory authorities,
enable the execution of board resolutions encourage a diverse spread of ownership shareholders, ratings agencies, boards —
that would allow the carve-out of critical models and new entrants who will challenge are all becoming more demanding of the
functions, while the remainder of the group the incumbent major players. executive team. They want to see that the
would enter normal insolvency. Banks must banks understand and are responding to their
pitch these new resolutions at a level that E ff ectivedecision-makingprocess agenda to continue to encourage growth,
the regulators are comfortable with or The banks’ boards and senior management become more resilient, regain acceptable
face demands for yet higher capital and are acutely aware of the constrained profitability and manage risk so that the
liquidity buffers. environment in which they currently operate. institutions are sustainable. There is a need
But they still have not adapted their for strong engagement with this diverse
In addition to these very significant financial governance and decision-making processes group of stakeholders, with clear messages
regulation developments, the EC has to this new reality. A more strategic from the banks about how they are changing
proposed a host of new regulatory initiatives approach to balance–sheet management is their business and operating models, and the
aimed at increasing the resilience and needed from the banks — with capital, trade-offs that they are having to make.
transparency of markets and the protection liquidity, leverage, bank levy and other taxes Internal and external assurance mechanisms
of retail consumers, which will affect retail being core inputs in decision–making need to be robust to give comfort in the
banking businesses. throughout organizations. personal and corporate accountability that
comes with this engagement.
K eytrendsforrestructuring Similarly, a consolidated approach to
In many countries, the banking sector managing the huge volume of regulatory
continues to have vulnerable individual changes that the industry faces over the
institutions and segments that have required next few years will bring significant benefits.
support from their governments or the EU. This can be achieved by allowing
4 Ernst & Young Eurozone Forecast Spring edition April 2011Highlights
Should we worry about the rise in inflation?
•We expect the Eurozone economy to Eurozone economy. Although there are bank except at shorter maturities.
grow by 1.5% this year, a much slower some bottlenecks that restrict supply There is a risk that some institutions will
rate than one would typically expect at forming in some sectors and countries, face significant difficulties in accessing
this stage of the economic cycle. This there is generally a lot of spare capacity. funding as a result. Restructuring of
has been our view for some time and Unemployment rates are also high and the Eurozone banking sector is ongoing,
it is supported by recent developments. expected to remain so for some time. but it is as yet unclear as to whether
What has changed over the past few By 2015, we are forecasting the level these measures are enough to solidify
months, though, is the renewed rise in of unemployment to be just below the banking system and make it
inflation. Should we worry about 14 million, well above pre-crisis levels. a contributor to growth rather than
the risk of inflation getting too high? This points to little pressure on wages a restraint.
Is there a danger that sharply rising and hence little risk that inflation
inflation could derail the recovery? becomes out of control.
•Eurozone governments agreed a set of
reforms at two summits in March.
•The European Central Bank (ECB) •Further tensions in the Middle East could The European Financial Stability Facility
has voiced concerns about inflation and push oil prices much higher, which would (EFSF) will be made permanent with
has suggested that it is likely to raise raise headline inflation. But the negative its effective size increased. Some
interest rates in April. Is the ECB right implications that this would have for economic coordination measures have
to be so concerned about inflation? growth (in the Eurozone and the world also been agreed. But the more
Strong demand from emerging markets economy) imply that non-energy significant proposals, such as issuing
and supply disruption associated with inflation would probably go down. some “Euro-bonds” or allowing some
the Middle East and North Africa crisis form of debt restructuring, have been
are likely to keep commodity prices high, rejected. Short of significant steps toward
and imported prices will therefore keep •Moreover, besides uncertainty closer fiscal union, imbalances and
inflation above target for a while yet. surrounding the Middle East, downside crises similar to the ones we have just
VAT increases in a number of countries risks to growth still dominate. They seen will remain significant problems.
will also lift headline inflation up relate first to the implementation of
throughout most of this year. But the fiscal tightening which we believe will
chances that this will translate into have a more negative impact than •In this relatively bleak context, one may
broader-based price pressures are low. governments appear to expect. But forget that the Eurozone can remain
Assuming that commodity prices do not fiscal tightening on such a scale in so attractive. On 1 January 2011, Estonia
increase much from current levels, once many countries at the same time has became the zone’s 17th member. Joining
the effect of VAT increases falls out of probably never happened before, and the Eurozone offers gains related to
the inflation rate, we expect inflation to we could prove too optimistic. easier access to a large market and
drop back to below 2% next year. stability of the currency. But the Estonian
government will need to remember
•2011 will also likely see a change in to offset possible monetary policy
•We believe that raising interest rates the way the ECB provides liquidity, mismatches with countercyclical fiscal
at this stage is a mistake. This is because with banks restricted in the amounts policy in order to avoid asset price
there is a large amount of slack in the that they can borrow from the central bubbles and their dire consequences.
Ernst & Young Eurozone Forecast Spring edition April 2011 5Shouldweworryabouttheriseininflation ?
Mut edrecoverystillexpect ed… This rather muted forecast is nevertheless a fairly benign scenario
Eurozone GDP increased by 1.7% in 2010. We expect the Eurozone in three main respects. First, we assume no further escalation to
economy to grow more slowly this year, by around 1.5%, a much tensions in the Middle East. Second, we assume that the financial
lower rate than one would expect at this stage of the economic market environment is benign as fiscal adjustment proceeds further
cycle. By the end of 2011, the level of economic activity will still be and governments take some decisions that reassure investors as
significantly below its pre-crisis peak. Similarly, we expect regards their ability to avoid and deal with future sovereign debt
employment to bottom out this year, with the number of jobs by crisis. Third, our central forecast assumes that the Eurozone banking
the end of 2011 about 200,000 below the pre-crisis peak. sector restructures gradually and avoids widespread disruptions.
Therefore, as explained in this report, we continue to see the risks
Figure 1 to our forecasts as skewed to the downside.
R ecoveriescompared
As was the case in 2010, GDP growth in the Eurozone is expected
100 = Trough
to be driven mainly by exports this year, which we forecast to rise
114
Forecast by 6.4% after almost 10% growth last year. In our baseline forecast,
112 Early 1970s world growth remains robust, driven by both emerging markets
and the US. Meanwhile, private consumption and investment are
110
only expected to post moderate growth as household incomes and
108 business profits increase slowly and doubts about the resilience of Early 1990s
2008-10 the recovery persist. 106
104
That the Eurozone recovery would be weak has been our view for
102 Early 1980s some time and has been supported by recent developments.
In the last quarter of 2010, real GDP only increased by 0.3% quarter
100
on quarter, which masked a sharp divergence in performance.
98 Economic activity increased in the core Eurozone, with GDP growth
Q-5 Q-3 Q-1 Q1 Q3 Q5 Q7 Q9 Q11 Q13
at 0.4% in Germany and 0.6% in the Netherlands, for instance, while
Source: Oxford Economics it declined or rose only marginally in the periphery (for example,
-1.4% in Greece, -1.6% in Ireland and +0.2% in Spain).
Table 1
Source: Oxford EconomicsF orecastoftheEuro zoneeconom y(annual percentage changes unless specified)
2010 2011 2012 2013 2014 2015
GDP 1.7 1.5 1.7 2.0 2.0 2.0
Private consumption 0.7 0.8 1.1 1.4 1.5 1.6
Fixed investment -0.8 1.4 3.0 3.6 3.7 3.6
Stockbuilding (% of GDP) -0.2 -0.1 0.1 0.2 0.2 0.3
Government consumption 0.7 0.2 0.4 0.7 1.0 1.2
Exports of goods and services 10.6 6.4 5.8 6.3 6.0 5.4
Imports oervices 8.7 5.2 5.5 6.2 6.0 5.6
Consumer prices 1.6 2.3 1.9 1.8 1.8 1.8
Unemployment rate (level) 10.0 10.0 9.7 9.4 9.0 8.6
Current balance (% of GDP) -0.6 0.0 0.0 0.1 0.2 0.2
Government budget (% of GDP) -5.9 -4.5 -3.5 -2.7 -2.1 -1.7
Government debt (% of GDP) 83.3 85.8 86.6 86.2 85.2 83.7
ECB main refinancing rate (%) 1.0 1.3 2.3 3.1 3.5 3.9
Euro effective exchange rate (1995 = 100) 120.8 119.4 117.0 116.0 114.9 114.1
Euro/US dollar exchange rate ($ per €) 1.33 1.36 1.28 1.25 1.24 1.23
6 Ernst & Young Eurozone Forecast Spring edition April 2011…andinflationconcernsreturnt othef ore Figure 3
What has changed over the past few months, though, is the UKBrentoilprice
renewed rise in inflation. In December 2010, Eurozone inflation
2005 = 100
exceeded 2% for the first time since late 2008 and it increased 250 Forecast
further in January, to 2.3%. Should we worry about the risk of
inflation getting too high? Is there a danger that sharply rising
200
inflation could derail the recovery?
150 F oodandenergydriveinflationup…
The rise in inflation has been accounted for by three main factors.
First, a number of governments have had to raise VAT rates in
100 Real price
order to reduce the budget deficits. By the beginning of this year,
we estimate that the increase in VAT rates contributed around
50 ½ percentage point (ppt) to headline inflation. Second, energy
price inflation increased to 12% in January, thereby raising headline
Nominal price
inflation by around 1.2ppt. Third, unprocessed food inflation, 0
1985 1990 1995 2000 2005 2010 2015
at 2.2%, added another 0.2ppt. Food and energy products make up
Source: Oxford Economicsmost of the fastest rising price categories.
Figure 2 Food prices have surged as a result of strong demand from emerging
Highestinflationr at es markets, poor weather conditions and export bans. Ongoing robust
demand from emerging markets is expected to keep pressure on
December 2010, % year prices until new crops come onto the market, which in many cases
Petrol will not be until 2012.
Vegetables
Figure 4
Electricity, gas
W orldf oodprice
Personal effects (jewelry etc.)
2005 = 100
Tobacco
200 Forecast
Fruit
180
Fish
Real price
Insurance 160
Coffee, tea and cocoa
140
Average
0 2 4 6 8 10 12 14 16 18 120
Source: Oxford Economics, Haver Analytics
100
Nominal price …andheadlineinflationwillsta yabove2%in2011… 80
International developments mean that the price of energy and food
60 is likely to remain high for some time. Even under the assumption
1985 1990 1995 2000 2005 2010 2015
that tensions in North Africa and the Middle East do not escalate
Source: Oxford Economicsfurther, concerns over oil and gas supply and thereby risk premiums
on the price of these commodities will probably stay high for much of
this year. We expect oil prices to come down from the current levels As a result of these factors, Eurozone inflation will probably
of around US$110–US$115/barrel gradually, toward US$95/barrel increase from its current levels over the next few months and
by the end of this year (Box 1 explains the assumptions about the remain above 2% throughout 2011.
international environment, and in particular commodity prices,
underpinning our forecast).
Ernst & Young Eurozone Forecast Spring edition April 2011 7Shouldw ew orr yabouttheris einin flation ?
Box 1
F orecastassumptions—int ernationalen vironmentandcommodit yprices
should help non-residential investment Our forecast for the Eurozone is conditional The shift in economic weight toward emerging
on a number of assumptions for the markets will continue, with growth in these growth. Fiscal policy is still accommodative
and will contribute to growth in private international environment, regarding world economies expected at 6% this year, after
GDP and trade, commodity prices and 6.6% in 2010, and averaging around 6% per consumption, despite fairly limited
improvements in the labor market. Upside exchange rates. Here, we explain these annum in 2012–15. China and India would
assumptions. lead the emerging markets’ growth league risks to this forecast relate to faster
table with growth rates of 8%–9% per year. investment spending than we currently
After a robust recovery in 2010, with world Currently, the main concern for these envisage. Downside risks relate to the
countries is the risk of overheating. housing market that has yet to rise, and the GDP growth estimated to have reached 3.9%
(at market exchange rates), the outlook The economies are already operating at labor market that has been sending only
or beyond capacity, and price pressures mixed signals so far. is clouding over again. Our baseline forecast
assumes no further escalation of political are being felt in goods and services as well
as property and stock markets. Monetary A significant source of uncertainty and social tensions in the Middle East and
North Africa. As these economies tend to authorities have responded by tightening surrounding this forecast stems from
policy but are caught in a dilemma whereby the global commodity price environment. be relatively small in goods and financial
markets, the disruptions to the world higher interest rates encourage capital Under the assumption of no escalation in
inflows and put upward pressure on their the crisis in the Middle East and North Africa, economy beyond their impact on oil prices
are limited. It also assumes that, after some currencies. So far, however, we think that, oil prices should gradually fall later this year,
in general, the policy response has been once risk premiums are reduced. We expect short-term disruptions, the Japanese
economy recovers from the earthquake and appropriate and that inflation is likely to oil prices to average US$107/barrel in 2011
remain under control. and around US$95 in 2012. Non-oil tsunami. On this basis, we expect world GDP
to rise by 3.5% this year (at market exchange commodity prices should also fall back as
In the US, we expect GDP growth of 3.2% supply is increased, both in food and metals rates; 4.3% in purchasing power parity (PPP)
terms)and close to 4% (4.5% in PPP terms) this year, after 2.8% in 2010 and around markets. After an increase of 17.6% in 2011,
3.4% on average in 2012–15. Large cash we forecast non-oil commodity prices on per year in 2012–15.
balances of US non-financial corporations average to fall by around 7% in 2012.
Figure 5 Figure 6
GlobalGDPgrowth Oilprice ,nominal
US$ basis points % year
140 6 Forecast Forecast
5
120
4
100 3
2
80
1
60
0
-1 40
-2
20
-3
-4 0
1999 2001 2003 2005 2007 2009 2011 2013 2015 1999 2001 2003 2005 2007 2009 2011 2013 2015
Source: Oxford Economics Source: Oxford Economics
8 Ernst & Young Eurozone Forecast Spring edition April 2011

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