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Eastern Europe countries must invest in the economic upturn-GfK
2013-08-13 00:00:00
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.


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: 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.

nt 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. GfK