Euro Area recovery expected to strengthen

Based on the assumptions of continued monetary stimulus, more moderate fiscal restraint and an improving external environment, the EUROFRAME Group of ten European research institutes expects the recovery in the Euro Area to gradually strengthen and broaden this year and next. Real GDP is forecast to rise by 1.3 and 1.6 per cent in 2014 and 2015, respectively.

Exports are projected to accelerate markedly, and external trade is forecast to continue to contribute significantly to economic growth. Domestic demand is expected to gradually improve with investment being the main driver on the back of improving sentiment and low interest rates. Private consumption on the other hand will remain sluggish as real personal disposable income growth should remain slow.

Given the large amount of economic slack in the Euro Area on aggregate, consumer price inflation is expected to remain low in 2014 at 1.2 per cent, before rising to 2 per cent next year as the economic recovery proceeds. Unemployment should gradually decline, although it will remain unacceptably high in many countries for an extended period of time.

Fiscal policy is expected to be less of a drag on economic activity over the forecast horizon than in recent years. The ECB is firmly committed to stemming deflationary pressures and keeping monetary policy accommodative for quite some time to come. The EUROFRAME Group assumes short term rates do not rise before the end of 2015.

With an improving economic outlook for the Euro Area, the EUROFRAME Group forecasts an improvement in the economic situation of Central and Eastern European countries in 2014 and 2015. Growth in the region will be driven to a large extent by the Polish economy, which is forecast to grow by 2.6 percent in 2014 and by 3.0 percent in 2015. The main drivers of this acceleration in growth will be domestic demand (both consumption and investment). The contribution of net exports will remain positive, though at lower levels due to growth in imports.

Czech Republic and Croatia that have been suffering from a recession are expected to return to a stable growth path in the forecast period. In the Czech Republic growth will be driven by private consumption but also muted by imports resulting from increased demand. In Croatia GDP is forecast to increase slightly, by 0.5 per cent in 2014. In Hungary, GDP growth is expected to speed up gradually to 2 percent in 2015. The EUROFRAME Group also forecasts that the regional labour market will show a slight improvement in 2014.

The publication:
Economic Assessment of the Euro Area, Winter 2013/2014, EUROFRAME, January 2014.

For additional information:
Research director Markku Kotilainen, tel. +358 9 609 90206, mob. +358 50 351 1192, markku.kotilainen@etla.fi
www.euroframe.org

ETLA, The Research Institute of the Finnish Economy, is the Finnish member of the EUROFRAME Group that comprises ten distinguished European research institutes, including CASE (Poland), CPB (The Netherlands), DIW Berlin (Germany), ESRI (Ireland), The Kiel Institute for the World Economy (Germany), NIESR (United Kingdom), OFCE (France), PROMETEIA (Italy) and WIFO (Austria).