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Businesses need to plan for Europe’s ‘lost decade’ – EY

A man begs outside a shop in Athens as southern Europe experiences a bleak Christmas as the area worst hit by the eurozone debt crisis. Continued recessions are expected in Greece, Portugal, Italy and Spain next year. Photo: Reuters

A man begs outside a shop in Athens as southern Europe experiences a bleak Christmas as the area worst hit by the eurozone debt crisis. Continued recessions are expected in Greece, Portugal, Italy and Spain next year. Photo: Reuters

Despite early indications of improved stability in the eurozone next year, businesses need to plan for a European ‘lost decade’ as growth remains subdued and unemployment will continue to rise to close to 20 million, according to Ernst and Young’s Eurozone Winter Forecast.

Companies cannot assume growth will be driven by domestic markets

The outlook for the single currency union is certainly brighter than a year ago, but the forecast predicts eurozone GDP will shrink by 0.2 per cent in 2013. There will be a modest pick-up from 2014 to 2016 of 1.3 per cent a year.

Southern Europe is not expected to experience any growth until at least 2015. The forecast has lowered the assumption of Greece’s exit to five per cent from 15 per cent but insists that “no significant growth will return until the remaining doubts over the euro are removed”.

“More needs to be done by the European Central Bank and governments to extinguish remaining concerns,” the forecast points out.

“There are, however, encouraging signs that the policy mix is shifting from a sole focus on austerity towards measures designed to foster growth.”

Businesses and political leaders will continue to be faced by a “tough” operating environment – the peak in unemployment is not only expected to be higher but the momentum at which it will subside will be slower in the peripherals where the numbers continue to be staggering. In Greece, the rate of jobless is expected to rise above 28 per cent, in Spain to 26 per cent, and in Portugal to nearly 17 per cent.

In spite of ECB president Mario Draghi pledging in July that the Central Bank will do “what it takes” to preserve the eurozone, business and consumer confidence continued on their consistent downward trend.

Firms will remain in ‘wait and see’ mode and hold back on capital spending, recruitment, and merger and acquisition plans. Ernst and Young expects a decline of 1.2 per cent in fixed investment next year; as measures are taken to ensure the eurozone’s survival, business confidence is expected to improve and investment growth of 2.3 per cent should materialise in 2014.

Credit conditions will remain tight for the “foreseeable future” – bank-lending surveys show credit tightening will particularly impact SMEs. An easing of credit conditions is unlikely to occur until the eurozone economy starts growing again, which the forecast predicts will be in the second quarter of 2013.

The short-term outlook for the peripherals remains challenging as continued recessions are expected in Greece, Portugal, Italy and Spain next year. Ireland will see falling domestic demand but positive GDP growth. There are, however, glimmers of medium-term hope.

Considerable increases in productivity in Ireland and Spain have helped boost competitiveness which has been reflected in strong exports growth. These changes have, however, squeezed household incomes which will lengthen these countries’ domestic recessions.

The ECB is expected to hold interest rates until 2017. Inflation should halve from this year’s 2.5 per cent to 1.3 per cent in 2015.

“Business leaders must recognise that the current environment they are operating in is the new normal,” Ernst and Young area managing partner for Europe, Middle East, India and Africa Mark Otty said.

“Companies cannot assume that growth will be driven by their domestic markets. Growth will also have to come from cost-cutting, winning market share and exporting to more rapidly growing economies.”

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