Eurozone to see 'fastest investment growth' since 2007 – EY


The Eurozone will continue its path to recovery next year boosted by capital investment at rates which have not been seen since 2007, according to the December 2015 issue of the EY Eurozone Forecast (EEF). 


After initially being led by consumer spending during 2014 and 2015, economic conditions within the Eurozone continue to rebound with Eurozone capital investment expected to underpin a steady recovery into the medium term. 


“Creating more jobs and encouraging those who are inactive to search for work will be key determinants of prosperity in the years ahead. Investment will help in this respect, but there remains a need for governments to do more to tackle the cost of employment in some major economies,” Ronald Attard, Country Managing Partner, EY Malta, said.

The EEF expects gross domestic product (GDP) growth of 1.5% in 2015, before picking up to 1.8% in 2016 and 2017. 
Growing exports and rebounding domestic demand mean that capacity constraints are emerging in a number of sectors, such as financial services, professional services and tourism and leisure.

In addition, better access to credit and low interest rates for the foreseeable future is driving increased loan demand. 
The EEF expects total fixed investment to grow by 2.4% in 2016 - the fastest rate since 2007 - accelerating to 3.1% in 2017. In 2018 and 2019, total fixed investment is expected to grow by around 2.5% a year. While this growth is at a slower rate than in the decade to 2007, much of the capital accumulation that took place during that period was in housing, meaning that a slower rate of investment growth does not necessarily mean slower potential growth.

Mark Otty, EY Area Managing Partner for Europe, Middle East, India and Africa, said: “As we move into 2016, the economic recovery of the Eurozone is looking more stable. Capital spending has begun to show an upturn as firms have become more confident in the
recovery and are seeing improved profitability. We should not forget however that growth will remain distinctly underwhelming into the medium - and even long-term.”

Tom Rogers, Senior Economic Adviser to the EY Eurozone Forecast, said: “Recent measures by the ECB to extend bond purchases and cut the deposit rate offer further reassurance of low borrowing costs for some time to come. This should boost loan demand further in 2016 and help drive the recovery in capital investment.”

Export prospects impacted by emerging markets slowdown

Additional capital investment should complement the competitiveness-enhancing reforms that have boosted exports from some Eurozone economies in recent years.

But the slowdown in emerging markets will weigh on prospects. Despite a lower exchange rate - aided by an extension of asset purchases by the ECB and expected monetary tightening in the US - and recovery in advanced economies, the EEF expects export growth to ease from 4.5% in 2015 to 3.7% in 2016 and 3.4% a year from 2017 to 2019.

Labor income to become key driver of household spending

Helped by the impact of lower oil prices, consumer spending has been the principal driver of growth in the Eurozone recovery so far. Looking ahead, although the EEF expects a more balanced recovery with investment spending and consumption making broadly similar contributions to growth, household spending will nevertheless remain crucial. Rebounding labor income will be the key driver of household spending, driven mainly by a pick-up in wage growth. The EEF expects consumer spending to grow 1.7% in 2015 and 1.6% in 2016 and over the medium-term, it expects spending growth of around 1.4% a year.

Looking ahead

With emergency austerity measures now largely in the past, governments are expected to ease their capital budgets. After falling for six consecutive years up to 2015, the EEF expects public investment to grow by 0.4% in 2016 and then gather pace to 3.2% by 2018, before easing gradually thereafter.