Bancherul - BANCI / ENGLISH / Ernst & Young Eurozone Forecast: Where is Romania standing?

The Ernst & Young Eurozone Forecast (EEF) – Summer 2012 released today is based on the assumption that the Greek austerity program will proceed and that other Eurozone members such as Spain and Italy avoid further serious financial turbulence, said the bank in a statement.

If this happens some of the current risk aversion among financial markets, businesses and households will start to lift towards the end of 2012 although output in the Eurozone as a whole is forecast to contract by 0.6% this year. Any recovery in 2013 will be modest given the multiple headwinds facing the Eurozone with growth of 0.4% expected. As the pace of fiscal tightening starts to ease in 2014 and the world economy gathers pace, EEF forecasts that the Eurozone will post growth of 1.7% in 2014, and 2% in 2015 and 2016.

Marie Diron, senior economic adviser to the Ernst & Young Eurozone Forecast comments:
“For some the debate between austerity and growth is a straight choice, but this is a dangerous simplification. Given the exposure of banks around the Eurozone to sovereign debt, fiscal stability and the stability of the financial system are more deeply interconnected than ever. Therefore fiscal stability is a key part of a return to health in the banking sector, and the provision of finance for investment and growth.”

Indeed, elements of fiscal policy can be adjusted in a growth-friendly manner. The composition of government spending can be changed at the national level to spur growth shifting from current to capital expenditure. Those parts of the Eurozone that are more fiscally sound could relax their consolidation plans in order to boost domestic demand, helping spur activity elsewhere.

A second key component of a growth strategy has to be broadening trade with rapid-growth markets – Germany is already enjoying substantial growth in its capital goods exports to China and elsewhere, but other countries do not. The challenge is for Italy, Spain and others to follow.

On the other hand, in order to secure ongoing competitiveness in the EU periphery Germany in particular may need to accept higher wage and price inflation domestically. As a short-term solution, this stance is finding traction among German policy makers, but how durable this will be is uncertain.

As important as it is to fix the short term problems of the Eurozone, policy makers must not lose sight of the more fundamental longer term problems. Even when this period of uncertainty is finished and some sort of stability returns, Europeans will have to take a long hard look at their economic future. Productivity in much of Europe lags well behind other parts of the world and working practices are often outmoded. This combined with an ageing population poses some serious questions.

Where is Romania standing?

With the EU accounting for just over 70% of Romanian exports, the ongoing Eurozone crisis points to a weak outlook for net trade in the short term. Indeed, any growth in the next few quarters is expected to be driven primarily by domestic demand. Although consumer spending is likely to be restricted by households’ attempting to lower their debt burden, higher real incomes supported by easing inflation and the government’s planned increase in public sector wages will help to offset this. The current results coming out of the EEF modeling for Romania indicate consumer demand to grow by 1.3% in 2012 and 2.8% in 2013. Furthermore, EEF shows that investment is likely to be an important driver of growth for Romania, as the country needs a modern public infrastructure.