After several years of low growth and high unemployment, the European economy may finally have found some footing. In May, the European Commission revised up its forecast for European Union growth in 2015 to 1.8 percent, from 1.7 percent in February.
This came on the heels of a rapid oil price decline, and the announcement of monetary stimulus from the European Central Bank that has helped lower the Euro against other currencies, boost exports, and guide the Eurozone to faster growth than the U.S. in the first quarter 2015.
However, the EU still has a long way to full recovery and is not without concern. Chief among them might be the prospect of a Greek exit from the Eurozone. As the Commission was raising the prospects for the full EU, it was lowering Greece’s growth prospects dramatically to 0.5 percent from 2.5 percent last fall. Meanwhile, unemployment levels and debt burdens remain high across the continent.
To get another view of the direction of Europe’s economy, we asked three questions of five leading economists who study Europe about what they see in the months ahead.
Chris Williamson, Chief Economist, Markit
Mark Zandi, Chief Economist, Moody’s Analytics
Blu Putnam, Chief Economist, CME Group
Keith Savard, Senior Managing Economist, Milken Institute
Athanasios Orphanides, Professor of Global Economics, MIT; Former Governor, Central Bank of Cyprus
What is your growth outlook for the EU given the events in the first half of the year?
Chris Williamson: The region look set for a decent year, with the Eurozone recovering, enjoying growth of perhaps 1.5 percent to 2 percent, alongside a continued U.K. economic upswing, with growth of at least 2.5 percent as business bounces back after the weak start to the year.
Mark Zandi: EU economic prospects for the next 2-3 years are as bright as they have been since the Great Recession. Lower oil prices, less fiscal austerity, and most importantly, the European Central Bank’s quantitative easing program, should boost growth. The biggest threats to this optimism are a Greek exit from the Eurozone and U.K. exit from the EU. But these threats seem to have a low probability.
Blu Putnam: Despite the on-going Greek drama, the economies of the Eurozone appear to be gaining some modest traction, possibly enough for 1.5 percent to 2 percent real GDP growth in2015, after three years of stagnation. The two primary factors for more positive growth are (1) the export sector which has benefitted from a weaker euro and (2) improving corporate credit conditions which follows the credit contractions experienced as an unintended consequence of last year’s bank stress tests.
Keith Savard: I would expect real GDP growth for 2015 to be about 1.8 percent (1.5 percent for the Eurozone). It seems unlikely that there would be a noticeable acceleration in economic activity in the second half of the year given the many structural problems that confront members of the EU.
Which economic indicators will be the ones to watch for the remainder of 2015?
CW: A Eurozone recovery will likely require a combination of low oil prices (and therefore low inflation) and a weak euro for it to gain robust momentum, meanwhile the U.K. requires business investment to pick up to ensure its impressive upturn remains in place. The PMIs will inevitably be the most important indicators to watch to gauge how the recoveries are faring.
KS: The most telling indicator for the remainder of 2015 will be credit growth. The extension of credit by banks, which is showing signs of life, indicates that banks’ balance sheet repair is in full swing and that there is growing demand for investment by firms as well as a greater appetite for consumption.
MZ: Indicators of credit growth are most important to gauging how the EU economy will do. Without consistent positive growth in household and nonfinancial corporate credit it is hard to see the EU economy growing consistently. Fortunately, the ECB’s QE program appears to have lifted bank lending and bond issuance.
BP: The most important indicator of progress in the Eurozone economies will be the performance of the euro. A slow rise against the U.S. dollar would be suggestive of improving economic conditions and relative calm regarding the outcome of a restructuring of Greek debt. A weakening of the euro toward parity with the U.S. dollar would suggest Europe is slipping back into stagnation and financial uncertainty.
What event will be key in the second half of the year in determining Europe’s growth path?
Athanasios Orphanides: How Germany decides to deal with Greece seems to me the key driver in Europe, in the end. That is the key to whether the common currency area maintains any chance of survival in the long term. Given the track record of Chancellor Merkel’s government since the beginning of the crisis it is difficult to be optimistic.
CW: The Greek debt talks will most likely continue to be the single-most important factor in determining stability in the region, though the Spanish general election – due by the end of the year – could also prove a major event given the rising popularity of the anti-austerity movement.
KS: In my view, there is no single event that will be key in determining Europe’s growth path. What will be important is how politicians mange the situation in Greece and relations with Russia. Confidence in the ECB’s handling of QE also will be crucial as policymakers try to make headway with other pressing issues like labor and financial market reforms.
MZ: The key to second half growth is whether the Greeks are able to secure more loans from the IMF and EU. Without more financial help, Greece may be forced from the euro area, which will be disruptive to financial markets and the EU economy, at least through the remainder of the year.
BP: The most important event for Eurozone growth in the second half of the year may turn out to be a return to modest growth in the U.S. after a weak Q1 2015, coupled with a relatively smooth transition to non-zero short-term interest rates in the U.S. The abandonment of the zero-rate policy in the U.S. would signal a newfound confidence in the U.S. and global economy from the Federal Reserve. Much more critical than events in Greece, Europe needs a steadily growing U.S. to keep its modest economic recovery on track.