Euroland economy remains weak despite easing of contraction
London, 12 MAR 2010 -- The latest economic analysis from PricewaterhouseCoopers (PwC) predicts a modest expansion in economic output in Euroland of 1% in 2010, with stronger growth likely in 2011.
The impact of the economic downturn on the individual Euroland economies has not been uniform. Germany, which is particularly trade sensitive, recorded a peak to trough contraction of 6.7% during the downturn that lasted four quarters. France, on the other hand, was less affected by weakening external demand, and economic activity only declined by 3.5%.
Underlying inflationary pressures remain subdued in Euroland, which should allow the European Central Bank to maintain a loose monetary policy for the majority of 2010. This should provide some support for growth, particularly if it is associated with a declining trend in the euro, which was relatively strong in 2008-9.
Recent retail volume sales point at particularly muted discretionary spending in the 16 country bloc. This is likely to have been caused by the high and rising unemployment rate, which is weighing heavily on household budgets and sentiment. Weak consumer spending will act as a major constraint to economic growth as it represents around 60% of the Euroland economy.
In the short term, Euroland manufacturing is likely to be boosted by the major destocking that has taken place. In addition, the relatively weak euro should help make Euroland exports more competitive and drive foreign demand.
A sustained and robust manufacturing recovery may also require, however, a recovery in orders from domestic Euroland markets, and the outlook for domestic orders currently appears uncertain, particularly now that stimulus measures such as the car scrappage schemes are being phased out.
Yael Selfin, Head of Macro Economic Consulting at PricewaterhouseCoopers, commented that:
“The speed of recovery in Euroland is likely to be dampened by a combination of uncertainty related to concerns over fiscal problems in a number of member states, a still relatively weak banking sector, rising unemployment, and the end of government targeted schemes to boost demand.”
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