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Depreciated euro and lower oil prices to strengthen recovery in Europe

29.01.2015

Economic researchers expect the euro zone to recover at moderate speed with a growth of 1.5% in 2015 and 2% in 2016. Persistent low oil prices worldwide would have a substantial positive impact on growth ofup to an additional one percentage point.

The EUROFRAME Group, an association of leading European economic research institutes, forecasts the recovery in Europe to strengthen gradually in 2015 and 2016. Key factors are persistently low interest rates, the depreciation of the Euro, low inflation and low inflationary expectations, high liquidity in the financial markets, and reduced crude oil prices. Uncertainty with respect to the crisis in Greece and the conflict in Ukraine remain significant risks and could again derail the recovery in economic sentiment in the Euro Area.

The economy in the Euro Area is projected to grow by 1.5 per cent in 2015 and 1.9 per cent in 2016, compared to 0.8 per cent in 2014. World economic growth is expected to accelerate to 3.7 per cent and 3.8 per cent, respectively (2014: 3.3 per cent). The situation in the Euro Area labour market will improve only slightly. The unemployment rate, which decreased marginally to 11.5 per cent in 2014, is forecast to gradually decline further in 2015 and 2016 to 10.9 and 10.6 per cent, respectively.

If growth remains persistently low or investors' expectations about the QE-Program of the ECB were to be disappointed, investor sentiment may tilt, hitting equity and bond markets in advanced economies and possibly emerging economies’ currencies.

The EUROFRAME forecast assume increasing oil prices up to averaging 65 and 70 dollars per barrel (North Sea Brent) this year and next. On this assumption,the rate of annual average inflation is expected to fall to -0.2 per cent in 2015 and inch up to 1.0 per cent in 2016. The impact on economic growth from a permanent fall in oil prices is significant across oil-importing advanced economies. World GDP growth could be raised by as much as 0.5 percentage points in 2015 and 2016. In the Euro Area and in the US the effect could be even higher, around 0.7 and 1.3 percentage points, respectively. The positive impact on GDP growth is greater in the US than the Euro Area due fundamentally to US output being more oil intensive.

There are a number of risks that could change the outlook for the Euro Area significantly including uncertainty with respect to Greek political and economic developments and the Ukrainian crisis still far from being settled. The forecast assumes a gradual diminishing of tensions. Any renewed escalation of the crisis could depress the recovery in economic sentiment in the Euro Area still further and for a more prolonged period of time.

Growth in the euro area remained sluggish in 2014 at 0,8 per cent. The tentative recovery from recession that had started in 2013 again lost momentum in the course of last year. While the economy worldwide in 2014 did not grow quite as strongly as envisaged, it has still increased by 3.3 per cent. Emerging economies with high exposure to international financial were severely hit by the deterioration of the expectations of less favorable financing conditions, while bad weather conditions in early 2014 weighed on growth in the US.

The EUROFRAME network was founded 1998 by ten independent Research Institutes throughout Europe as an initiative for improved forecasting and macroeconomic analysis in the European Union. The Kiel Institute for the World Economy (IfW) is one of the founders.

Summary of Key Forecast Indicators for Euro Area

   2014   2015   2016 Output Growth Rate    0.8    1.5    1.9Inflation Rate (Harmonised)    0.5   -0.2    1.0Unemployment Rate  11.6  10.9  10.6Govt, Balance as % of GDP   -2.4   -2.0  -1.7

The complete study can be found here.

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