Is a stable period of recovery lying ahead?

After consumer spending fuelled growth in 2014 and 2015, investment is likely to take of in 2016 and the years to follow. With more sources of growth such as consumption and investing contributing to economic growth, the economy is likely to recover and to grow more stable after years of volatility and turbulence, says Ernst & Young in the December edition of their Eurozone forecast “A broadening recovery points to a brighter future”. Overall, EY expects the Eurozone to growth by 1.5 percent per year on average until 2018.                                                                                                       

EY expects total fixed investment to reach 2.4 percent in 2016 and 3.1 percent in 2017. Capital investment is expected to grow by 2.5 percent per year. With the previous increase in consumption and increased exports, firms will need to expand their production as capacity constraints have been reached. Combined with low interest rates as guaranteed by the ECB’s policy, loan demand is likely to increase.

Additional investments in production will also trigger additional labour demand and enhance productivity, says EY in the report. Wages are expected to growth from 2016 onwards, resulting in additional consumer spending although at a lower growth rate. While consumer spending increased in 2015 by 1.7 percent, EY expects it to grow by 1.6 percent in 2016 and 1.4 percent in the medium term.

Besides spending, exports are also going to grow slower. With 4.5 percent export growth in 2015, export growth is expected to growth by only 3.7 percent in 2016 and 3.4 percent the year after.
Although government spending is still negatively affected by austerity programs, government investing is likely to increase by 0.4 percent in 2016 and gather pace to rise by about 3.8 percent until 2018. Previously, government investing fell in six consecutive years. 

Investors can profit from this recovery, especially in Southern Europe. “It is in these relatively smaller and weaker economies – at a certain stage in their history – that you can find attractive companies of different sizes and in different sectors, which can potentially rebound and grow faster by benefitting from the recovery of their domestic markets,” says François Gobron, portfolio manager at Generali Investments, in an interview with altii.