Nuremberg, 22 July 2013 – Poor economic data and high unemployment continue to keep Europe on tenterhooks. The financial and economic crisis has not yet been overcome, despite the recession bottoming out in some European countries. These are the findings of the GfK Consumer Climate Europe survey, which provides an overview of the development of economic and income expectations and willingness to buy among consumers in 12 European countries.
Discussions in the European Union (EU) continued to be dominated by the financial crisis in the second quarter of 2013. As a result, the start of Croatia’s EU membership on 1 July was almost disregarded. The debates are increasingly focusing on the matter of how the immense debt mountains can be reduced. On this issue, there have so far been two rather different, irreconcilable opinions. On the one hand, Germany and other Northern European countries are arguing for a continued stringent austerity and consolidation course. On the other, Southern European countries and also the International Monetary Fund (IMF) are insisting that economy incentives should be provided in the short term, rather than cutbacks. In their view, a country’s economy must first gain momentum in order for its citizens to find employment and earn money before it can pay off debts and address structural measures.
At present, it seems that a combination of the two courses will be the result. Consequently, France and Spain have gained two extra years to bring their debt levels below the key deficit line, which has been set at 3 percent of gross domestic product (GDP). Italy is expected to be removed from the excessive deficit procedure, as are Hungary, Latvia, Lithuania and Romania. In light of their high unemployment levels, Brussels does not want to unduly burden these countries, but instead recognize their efforts. However, the European Commission (EC) is still insisting on structural reforms, especially in the labor markets, pensions systems and the economy in general.
In the meantime, there is now actually increased hope throughout Europe that there will be an end to the financial crisis in the medium term. The eurozone continues to be in recession, but in comparison with the final quarter of 2012, the economic situation has improved slightly. The European Central Bank (ECB) also sees signs of a gradual recovery from the end of the year, but it is not yet predicting a true upturn. There is a clear improvement in the early warning system values of the Purchasing Manager Index of the Markit Institute for all eurozone countries. The Purchasing Manager Index is regarded as a particularly reliable early indicator as the data is based on surveys and is therefore more up-to-date than official statistics. It includes hard data such as production, employment and prices.In France, the value has risen to 46.4 points, rather than the predicted 45.5 points. The indicator for Italy increased to 47.3 points in June, not the expected 46.2 points. Spain saw a particularly impressive improvement to 48.1 points, which is the highest value for 24 months and above the 45.5 points predicted. The United Kingdom’s indicator has now firmly settled above the 50-point mark, which signifies economic growth, and is currently at 51.3 points.
Germany: economy only slowly gaining momentum in 2013
The financial crisis has now also begun to have an impact on Germany. The economy only gained momentum very slowly at the start of the year. Growth was only 0.1 percent in the first quarter and, according to DIW forecasts, it is expected to be 0.5 percent in the second quarter. The stimulus for growth almost exclusively came from private households. The Deutsche Bundesbank has reduced its forecast for economic growth to 0.3 percent for this year. For 2014, it is expecting growth of 1.5 percent, down from the 1.9 percent that was still being forecast in December. However, there was a strong increase of 1.9 percent in exports in April. Recovery was even greater for imports, at plus 2.3 percent. This is attributable to high domestic demand, for which the stable labor market situation in Germany is a prerequisite. Although there is a slight increase again in unemployment following seasonal adjustment, the overall number of employed Germans continues to climb and will soon reach 42 million. This is above all because more people are on the labor market. First, Germans have new hope again of finding a job and second, around 600,000 more people have come to Germany than have left over the last two years. This immigration is above all from Eastern and Southern Europe, with those citizens coming to Germany to find work. To date it can therefore be summarized that the crisis has not (yet) cost Germany jobs, but has brought more people seeking employment to the country.
The major flooding is expected to keep the economy in Eastern Germany in recession at -0.2 percent in the second quarter, which would be the fifth consecutive quarter. The flooding has affected agriculture, construction and industry. Companies are unable to manufacture, shops cannot open and restaurants are unable to serve patrons. This is currently having a detrimental effect on growth, but not across the whole of Germany. However, the cleanup and rebuilding is likely to help the economy grow again in the second half of the year. Many private individuals will be forced to spend money replacing household items lost in the floods. Durable goods such as washing machines and fridges will particularly be in demand. Reconstruction efforts are also being supported by aid and the government has to invest in the infrastructure.
Economic expectations: 1.1 points
Income expectations: 36.2 points
Willingness to buy: 36.5 points
France: government sticking to consolidation course
In the second quarter, France most likely returned to growth of 0.1 percent. The economy had decreased by 0.2 percent in each of the previous two quarters. However, for 2013 as a whole, the EC is once again predicting a decline in economic output of 0.3 percent. It looks set to rise again by 0.8 percent in 2014.
Positive indications are coming from the manufacturing sector. In April, companies’ production was 2.2 percent higher than in the previous month. This is the highest increase since August 2009, but is not sufficient on its own. There continues to be room for improvement in the ability of French companies to compete. The economy is suffering from falling productivity growth, low profit margins and a weakening export situation. Unemployment is climbing to new record highs every single month. It is currently 10.4 percent, which is the highest it has been in 15 years. If French overseas territories are included, registered unemployment even rises to 10.8 percent. Experts are demanding that the French government intensifies its efforts to implement reforms that have been initiated over the last six months. The country must follow through on the reforms that have already been in force in Germany and the United Kingdom for a number of years. The French have had to break away from being exceptionally well cared for by the state and assume greater responsibility themselves. Society has only been willing to engage in such a major change as compelled to by globalization to a limited extent. It is not just the opposition parties, but also a proportion ruling in government who have been against the reforms and demanded an end to the austerity drive. Tens of thousands of French demonstrators have protested against the government’s current path, disregarding the fact that the success of these reforms would ensure a higher number of jobs, improved prospects for younger people and greater purchasing power in the long term. The government is sticking to its consolidation policy. For the first time since the fifth republic was founded in 1958, the draft budget put forward in June proposes a reduction in public spending from the previous year’s amount. In 2014, the government intends to implement year-on-year cuts of €1.5 billion. Half of these savings will be found by reducing payments to French regional authorities, and the other half from cutting the spending of ministries and public facilities. In contrast, an extra €1 billion will be made available to employment policy. Other areas which will not be affected by the cuts include education, justice and security as well as poverty reduction.
Economic expectations: -48.7 points
Income expectations: -57.4 points
Willingness to buy: -42.2 points
UK: numerous restructuring measures planned
The UK government intends to adhere to its austerity path. An initial draft budget for 2015/16 proposes savings of €13.6 billion. At the same time, investments amounting to billions are planned to cushion the blow of the austerity package. The UK economy is heavily dependent on the financial markets and has yet to recover from the 2008 crash. Unemployment remains high and growth is low. In order to stimulate the stagnant economy again, and above all small and medium sized companies, the UK government has launched an internship initiative to encourage more companies to train specialists themselves. A government business bank based on the German Kreditanstalt für Wiederaufbau (Reconstruction Credit Institute, KfW) will provide loans to small and medium sized companies. Exports will increasingly be promoted through state guarantees. The government is also planning a major privatization program. In the coming years, up to half of the 21 companies where the government has a shareholding will be wholly or partly privatized. Just the government stake in Urenco, the world’s second-largest provider of nuclear fuel, is expected to generate GBP 3 billion (€3.5 billion). Shares in the national Royal Mail postal service will also be sold.
Economic expectations: -9.7 points
Income expectations: -20.2 points
Willingness to buy: -29.5 points
Italy departure from austerity drive
Italy is stuck in the longest recession for decades. Economic power fell by 0.5 percent at the start of year. The third largest economy in the eurozone has therefore been shrinking for seven consecutive quarters, which is the worst since records began in 1970. Unemployment is also rising further, reaching 12 percent in April. The situation is particularly concerning when it comes to younger people, with more than 38 percent of Italians under the age of 25 currently without a job. The lasting recession has now had an immense impact on everyday life. Millions of Italians are no longer able to buy basic essentials and are having to dip into their savings to pay normal living costs. One in five cannot pay to heat their home. Meat has become a luxury item. Less than half the population now takes a vacation. The government has drawn the necessary conclusions and announced that it is not introducing cuts or tax increases this year. Germany also intends to help the eurozone’s third largest economy. As is the case for Spain, Italy will also be receiving aid for small and medium sized companies. The German government will be providing local small and medium sized companies with loans in order to help boost the economy.
Economic expectations: 9.3 points
Income expectations: -25.2 points
Willingness to buy: -49.0 points
Spain: considerably lower unemployment in May and June
In Spain, sunshine and shadow are extremely close together. Unemployment fell quite markedly in both May and June. According to the Spanish Ministry of Employment, the total number of unemployed fell by 98,000 in May, which is its greatest drop in 16 years. However, this decline is due to seasonal effects as more staff are always required in restaurants and tourism over the summer months. The ultimate sustainability of this reduction remains to be seen in the autumn. In May, the President of the Government, Mariano Rajoy, managed to convince his European partners to expand the deficit goal by 2 points for 2013, from the 4.5 percent originally planned to 6.5 percent. Nevertheless, according to EU estimates, the Spanish economy will decrease by 1.5 percent in consequence of the austerity measures. Like Italy, Spain is seeking out opportunities for privatizing state-owned assets in order to top up the rather empty government coffers. One of the projects completed by Madrid’s local government was to negotiate a three-year deal with Vodafone which allows the UK telecommunications giant to rename a metro line and a metro station. The metro station and the line itself now include Vodafone in their name. Other projects in this direction include the sale of savings banks taken over by the state to local or international banks.
Economic expectations: -24.4 points
Income expectations: -31.5 points
Willingness to buy: -25.8 points
Portugal: troika and government agree new austerity program
The economic output of Portugal continues to drop. In the first quarter, it fell 0.4 percent on the previous quarter and was down 4.1 percent on the previous year’s figure. For the year as a whole, experts are predicting -2.3 percent. A slight improvement in economic output is only expected next year. Unemployment remains at a high level, currently amounting to 17.8 percent. However, there is also positive news. In the last few months, the business climate and consequently also the mood of Portuguese business owners have improved quite considerably. The fifth consecutive increase was registered in May and the indicator is currently at -3.2 points. In addition, the Portuguese government has agreed a new austerity program with the troika, which comprises the EU, the ECB and the IMF. Among other features, this involves reducing public sector employment by 30,000 jobs, extending the working week from 35 to 40 hours and raising the retirement age from 65 to 66 years. These measures aim to generate national budget savings of €4.8 billion by 2015. Consequently, Portugal will successfully reduce the budget deficit to 5.5 percent of GDP by the end of year, 4 percent in 2014 and finally below the 3-percent line in 2015. The agreement between Portugal and the troika paved the way for the next credit tranche payment of €2 billion. However, the population is now tired of new austerity packages constantly being introduced. For months, they have been demonstrating for the measures to ease up. Some ministers are also no longer willing to follow the stringent austerity path of Prime Minister Pedro Passos Coelho and have stood down.
Economic expectations: -43.0 points
Income expectations: -43.7 points
Willingness to buy: -43.2 points
Greece: government wants to cash in government shareholdings
The situation in Greece continues to be difficult. The country has been in recession for six consecutive years. It is expected that economic recovery will fall by between 4.2 percent and 4.5 percent this year in comparison with 6.8 percent for 2011 and 6.4 percent for 2012. Unemployment is twice the EU average and currently at around 27 percent. This is three times higher than before the financial crisis hit in 2009. Young Greeks under 25 are even more strongly affected, with almost two in three unable to find a job. However, Greece is making excellent progress in reducing its national deficit. In the first three months of 2013, the budget deficit was €330 million (down from €1.7 billion in the previous year). According to EC predictions, the deficit will fall below the 3 percent threshold again by 2014 and the debt mountain will be slightly reduced. By 2022, it is intended for the debt ratio to be below 110 percent of GDP. However, this will barely suffice for stabilization. The country is hopelessly overindebted. Financial experts predict that the necessary easing will only be brought about through a second debt cut.
During the troika’s last visit to Greece, the government had tried to push through postponing the required public sector job cuts until autumn. At first, 2,000 civil servants were to lose their jobs by the end of June, and the same again by the end of the year. By the end of 2014, a total of 15,000 employees will have been made redundant. The Greek government also recently closed down the state broadcaster ERT, with all employees losing their jobs. The government had feared that, in the middle of the crucial tourism seasons, mass protests would once again break out. It is expected to be a record breaking year for Greece, with tourism numbers reaching around 17 million overall. For this reason, VAT is being reduced from the current 23 percent in the restaurant business to 13 percent. The tourism industry is responsible for around 15 percent of overall economic growth.
Athens is still lacking an estimated €1 billion of the money it has to repay to international lenders by the end of the year as part of the rescue package. For this reason the government is now intending to sell off public property to increase funds. The sale of the port of Piraeus is likely to bring it a big step closer to its target. In addition, there is talk of privatizing the Greek railway. Other privatization projects which the country may consider to reach its goal involve the port of Thessaloniki, the 6 percent government shareholding in telecommunications company OTE and a share of around one third in Greece’s largest oil refinery, Hellenic Petroleum. Also, the Greek Government and the Trans Adriatic Pipeline (TAP) project have agreed the Host Government Agreement. TAP will be one of the largest sources of foreign direct investment in Greece and is anticipated to create some 2,000 direct and up to 10,000 indirect new jobs across a number of industries.
Economic expectations: -33.9 points
Income expectations: -41.5 points
Willingness to buy: -29.6 points
Austria: economy stagnating and unemployment rate rising
Austria continued to record stagnating economic growth and rising unemployment in the second quarter of 2013. The last significant rise was registered in the first quarter of 2012, when growth increased by 0.5 percent. It has since fluctuated between -0.1 percent and +0.1 percent. According to official statistics, unemployment was 6.7 percent in May, which is an increase of 9 percent compared with May 2012. Alongside the Czech Republic and Germany, Austria was also affected by the torrential rain and widespread flooding. It is not yet possible to estimate the impact of the floods. However, the affected states will be expecting consequences in the medium term. For example, the tourism industry is likely to suffer in the respective regions this summer. Many hotels and restaurants will not be able to open and companies that were damaged in the floods have not yet been able to resume production. On the other hand, investments will be necessary in the coming months. Those affected will have to replace household items lost in the floods and money will be invested in the renovation of houses and flats. The government must also spend money to restore the infrastructure. As is the case for Germany, it is likely that the disaster will initially cause a setback for economic development. However, over the course of the year, the necessary investments will help stimulate a revival.
Economic expectations: -6.9 points
Income expectations: -3.2 points
Willingness to buy: 11.6 points
Eastern Europe: countries must invest in economic upturn
Developments in Eastern European countries demonstrate how difficult it is to strike the right balance between austerity and investment. In the past, the predominantly ex-Communist countries have focused steadfastly on saving. However, the policy of cuts has most recently been used to the detriment of these countries. In the first quarter of 2013, growth was minimal in Poland and the downturn in the Czech Republic quite strikingly deteriorated. In contrast, Hungary worked its way out of recession, but disregarded the austerity dictate from Brussels in the process.
Bulgaria was successful in its austerity drive. The government of the poorest EU country implemented an overall spending cut in public administration of 15 percent. This considerably improved the financial situation of the country. Public debt is currently almost 20 percent of GDP. The budget deficit is less than 2 percent of economic output. Conversely, unemployment has climbed to double-digit values and economic growth has stagnated, with around 20 percent of the population now living in poverty as a result. Following the election, the new prime minister immediately announced measures for stimulating the economy and combating poverty. He intends to break away from the previous government’s austerity policy and help the destitute population by initially putting the domestic economy back on the right track. The first declared measures include raising winter fuel allowances and increasing maternity leave payments. Pensions and salaries of civil servants will also be raised. In addition, a reform of electoral law has also been initiated.
The Czech Republic continues to be in recession. The economic output of the country fell by 1.3 percent in the first quarter of 2013. Unemployment is currently 7.3 percent. In order to stimulate the economy, the IMF recommended that the country temporarily abandons its stringent austerity path and instead invests in the economy to bring it back on track for growth. However, the Czech government has opted to remain on its chosen course. This year, it intends to reduce new debt to below the 3 percent threshold for the first time in 15 years.
Economic expectations: -16.3 points
Income expectations: -7.7 points
Willingness to buy: -13.7 points
Economic expectations: -21.3 points
Income expectations: 8.4 points
Willingness to buy: -28.1 points
Economic expectations: -10.7 points
Income expectations: -19.3 points
Willingness to buy: 2.6 points
Economic expectations: -16.1 points
Income expectations: -5.3 points
Willingness to buy: -22.5 points
Economic expectations: following departure from austerity drive, Italians hopeful of economic recovery
Consumers in Germany, Italy, Spain and the United Kingdom are confident of an economic recovery by the end of the year. However, in Eastern Europe, economic expectations have stagnated at a low level. Hope of an upturn is only returning very slowly in both Portugal (-43.0 points) and Greece (-33.9 points). At -30.4 points in May, the indicator value for Greece was the highest it had been since April 2010. France continues to battle against the downturn and will first have to endure tough reforms before its economy returns to growth. Accordingly the country also registered the lowest economic expectations, with the indicator at -48.7 points. The level of pessimism is similar among consumers in Portugal (-43.0 points) and Greece (-33.9 points). The most positive view of economic development over the next few months is (currently) held by Germans (1.1 points), Austrians (-6.9 points) and Bulgarians (-10.7 points).
In Italy, the economic expectations indicator increased markedly to 9.3 points. In May, it was still -32.3 points. However, a number of changes to the survey methodology are the principal reasons for this improvement. Consequently, it is not really possible to compare the current data with earlier results. Even so, it should not be entirely discounted that Italians have found new hope. The new government recently announced that it was abandoning the strict austerity path and does not intend to introduce tax increases or further cuts this year. Italians hope that this will provide sufficient stimulus for the economy allowing the country to work its way out of recession, particularly as the initiated reforms have actually improved many of the general conditions. For example, there has been a significant improvement in the competitiveness of Italian companies.
Consumers in Spain are also cherishing the hope that the economy is now recovering and the stringent efforts to save are finally having a lasting impact. The indicator is currently at -24.4 points, which is the highest value since February 2012. For many months now, Spain’s reforms and austerity efforts have been praised by the troika, comprising the EC, the ECB and the IMF. But the recession has not yet been overcome. After -1.4 percent in 2012, economic output of the country is again expected to fall this year, by around 1.5 percent. Debt continues to rise and the government must persist with its strict savings policy. Summer brings with it jobs in the tourism industry. Although unemployment is at a record value of around 27 percent, the number registering as unemployed in May was considerably lower than had been expected. The whole of Spain hopes that a good tourism season will help the country will work its way a little further out of the economic downturn.
Together with the troika, the Portuguese government has determined a new savings program to help the economy gain momentum again in the medium term. As part of this, the working week will rise from 35 to 40 hours and the retirement age will be increased to 66. These measures should contribute towards reducing the national deficit below the EU threshold of 3 percent by the end of 2015. Despite ongoing protests against the government’s savings measures, consumers are evidently confident that the recession can be overcome in the medium term. Economic expectations remain rock bottom at -43 points. However, the indicator value has recovered from its lowest point of -57.1 points in September 2012 and stabilized over the last few months. The trend is slightly upwards.
Income expectations: French are preparing for tough times
In most countries, consumers’ income expectations have stabilized, but they remain at a relatively low level. Following a small dip in March, income expectations improved again in Germany. Only France continues to see a steady deterioration. French consumers are anticipating the largest income losses resulting in the lowest indicator value in Europe, at -57.4 points. The situation is slightly better in Portugal (-43.6 points) and Greece (-41.4 points). Germans (36.2 points), Czechs (8.4 points) and Austrians (-3.2 points) anticipate rising or at least stable income.
In France, it is increasingly acknowledged that comprehensive reforms are needed on the labor market and in society overall if there is to be any hope of economic recovery. The government only recently announced a new austerity program which will help tackle debt and reduce spending by €1.5 billion in 2014 compared with 2013. For the population, this means higher taxes and contributions, longer working hours for the same pay and a later start to retirement. Adding to this, unemployment is increasing to new record values month after month. At present, the unemployment rate is 10.4 percent in France. Consequently, French income expectations are only moving in one direction: down. In May, the indicator reached the lowest value ever recorded, -60.8 points. In June, the value only increased a little and is currently at -57.4 points.
Income expectations in the Czech Republic have markedly recovered since the beginning of the year. In January, the indicator was still -32.4 points, but it has now risen to 8.4 points. A key factor in the recovery of the indicator is certainly the positive developments on the labor market in recent months. The unemployment rate has fallen by 0.5 percentage points since March. According to national Czech figures, unemployment was 7.5 percent in May. At the end of June, Minister Petr Nečas was forced to stand down following a number of scandals. Consumers are now placing their hope in soon having a new government which will be able to implement the necessary reforms. In addition, the IMF is advising the country to abandon its previously strict austerity course and instead focus on generating incentives to stimulate new economic growth.
In Greece, the strong austerity measures are beginning to have an impact. The economy continues to be in recession, but the negative growth figures are improving. In addition, reforms aimed at making the economy competitive again are beginning to take effect, although this is not yet mirrored in a falling unemployment rate. But the summer season is around the corner and looks set to attract around 17 million tourists – more than ever before. Greeks therefore have the legitimate hope that the labor market will improve over the summer months at least. A further beacon of hope for Greeks is the debate about a further debt cut. Many experts reflect that without such measures the country will not be able to survive in the long term. These various aspects are causing consumers to expect slight increases in income. The indicator is currently at -41.4 points and is stabilizing. It has been on a steady recovery trend since last September, when it reached a low of -57 points.
Willingness to buy: Austrians badly affected by floods
In most European countries, citizens are still obliged to keep close control of their money and budget very strictly. Germans (36.5 points), Austrians (11.6 points) and Bulgarians (2.6 points) are quite spend-happy. In contrast, consumers are focusing on drastically saving in Italy (-49.0 points), Portugal (-43.2 points) and France (-42.2 points).
The United Kingdom is one of the few economies in Europe which registered growth in the first quarter. According to the British Chambers of Commerce, it was up 0.3 percent. Growth of 0.9 percent is forecast for 2013 as a whole. Other economic experts are predicting growth to be even higher. Correspondingly, the Purchasing Manager Index increased to 51.3 points in May and therefore signified a return to growth. Various government reforms aim to boost the economy again. Unemployment has also been largely stable for around one year and is currently at 7.8 percent. In view of these factors, the British are once again taking a more optimistic view of the future. Although consumers are still not keen on investing in high-value products, the mood has improved significantly. Willingness to buy has recovered from its interim low in August 2012 (-51.5 points) to -29.5 points at present. This is the highest value since December 2010.
Following a considerable recovery in willingness to buy in Austria until May (24.1 points), it tumbled to 11.6 points in June. This is primarily attributable to the severe flooding, which predominantly hit Austria, the Czech Republic and Germany at the beginning of June. Rivers overflowing their banks and mudslides on mountain slopes have caused considerable devastation in the small Alpine country. It is not yet possible to predict the full consequences of the flooding. However, the impact on tourism regions, in particular, is likely to be significant. Hotels and restaurants affected by flooding cannot open for business. Companies are also not able to produce. Austrians will have to replace many of their household items and renovate their homes, in some cases entirely rebuilding them. This leaves little financial scope for other investments. By the second half of the year, this necessary spending will provide a boost to the economy.
One of the poorest countries in Europe also continues to struggle with poor economic data. In the first quarter of 2013, GDP in Romania increased by 0.7 percent quarter-on-quarter and 2.6 percent year-on-year. However, unemployment continues to rise. According to Eurostat, it is currently 7.5 percent. Inflation is also rising. At present, it is 4.4 percent and is therefore one of the highest in Europe. This is having an impact on the willingness of Romanians to buy. Many are already reliant on fruit and vegetables from their own garden and they are particularly affected if food prices then also rise. Money does not go much beyond the everyday essentials. Accordingly, the indicator is low at -22.5 points.
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