The European economy weakened in 2012 and growth is expected to remain anaemic in 2013 with the Eurozone periphery remaining in deep recession. Nonetheless, a combination of economic, financial and policy reform is laying the groundwork for a more sustainable economic recovery, which we believe will start to emerge as the year progresses.
The current downturn is expected to fade during the year, with 2013 the low point of the five year forecasting period. With signs that the Eurozone crisis is lessening and expected improvements in global demand, confidence may start to build during the second half of the year, encouraging consumers and businesses to spend. This aggregate picture once again masks significant differences across Europe. Although no country is expected to be immune to this slowdown, Germany in 2013 is set to remain one of the better performers in the Eurozone, while those outside the currency areas are forecast to be relative outperformers, particularly Poland.
The European recovery is set to gain momentum and broaden from 2014 onwards, with all countries except Greece forecast to return to positive annual GDP growth. However, the pace of recovery is likely to be muted as activity is stymied by residual financial uncertainty, the disruption of extensive economic reform and continued deleveraging by governments, the banking sector and households. Weak recoveries are set to be most noticeable in the southern periphery of the Eurozone, where despite output levels now residing well below their pre-recession peak, no sharp bounce-back is forecast.