EY Eurozone Forecast: Summer 2013 - Outlook for financial services

01 July 2013

With the eurozone economy expected to contract this year and unemployment forecast to reach a 12.7 per cent peak in 2014, there are clear challenges ahead for financial services. While NPLs were expected to peak this year, the ECB's AQR could push the peak out to 2015 in some markets.

Two contrasting sets of forces are at work  behind this forecast: on the upside, the focus of fiscal policy is  at last shifting from short-term austerity to  longer-term credibility. There is increasing acceptance among policy-makers that the pace of austerity should be slowed. Some countries have been given more time to reduce their budget deficits to 3 per cent of GDP. EY estimates that halving planned austerity measures would raise eurozone GDP by 1 per cent by the end of next year, with Greece and Spain benefiting most. On the downside, the outlook for emerging markets is cooling as the world adjusts to slower growth in China. This will limit the scope for eurozone economies to expand through exports. Recent developments in global exchange rates will also make it harder for eurozone companies to compete, as many emerging market currencies have been slipping against the euro. A sharp fall in the yen is hampering export prospects  by intensifying competition from Japan.

For these reasons, EY expects a slower bounce-back than previously envisaged.Slow recovery increases unemployment. A consequence of the delayed recovery has been high – and still rising – rates of unemployment. EY now forecasts unemployment to peak at 12.7 per cent early next year, rather than 12.2 per cent. This means EY is expecting an additional one million unemployed workers. As a result, private consumption will contract again this year, bringing further challenges for businesses. It also delays the reduction of private sector debt, which needs to fall before the economy can sustain robust growth. With so many people out of work, rising rates of youth and long-term unemployment bring particular concerns. Almost half of those unemployed have been without a job for more than a year. These workers become deskilled and detached from the labor market, hindering the eurozone’s medium-term growth prospects. There is also a risk of social unrest, as governments will face stiff protests against fiscal consolidation and other reforms that would cost jobs in the short term.

Slow recovery  lowers interest rates. A quarter-point cut in the European  Central Bank (ECB) refinancing rate in May reflected these poorer growth prospects. But cutting interest rates when they are already so low will do little to stimulate the economy. Neither will it address the wide disparity in corporate borrowing rates across the eurozone, which is so damaging for peripheral economies. The ECB has side-stepped this issue so far, but it has instead begun to encourage much-needed structural reforms.

With the shift in focus toward longer-term fiscal credibility, there is now more scope to improve competitiveness. Some of the countries hardest hit have already been forced to reform labor market regulation and social welfare systems. There are signs that the Eurozone will emerge stronger from the crisis.

Banking sector highlights

Insurance sector highlights

Asset management sector highlights

US and emerging markets

Press release

Full forecast

See also Asset Quality Review will extend Eurozone’s banking pain beyond 2013


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