s&p economic research: europe 2013: recession strikes again - feb 2013

Economic Research:

Europe 2013: Recession Strikes Again

EMEA Chief Economist:

Jean-Michel Six, Paris (33) 1-4420-6705; [email protected]

Media Contact:

Sharon L Beach, London (44) 20-7176-3536; [email protected]

Table Of Contents

The Real Uncertainties Are For 2014 And Beyond

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT FEBRUARY 25, 2013 1

1083448 | 301674531

Economic Research:

Europe 2013: Recession Strikes Again

At first glance, the latest European Commission (EC) estimates for GDP growth in Europe in 2013 appear close to the

projections Standard & Poor's released in December. After a 0.6% contraction last year, both the EC and our forecasts

see the eurozone experiencing another year of recession, whereas we both expect activity in the U.K. economy to

rebound modestly on the back of a gradual recovery in consumer demand and investment.

Looking specifically at the eurozone members, the EC's latest Feb. 22 forecast has Germany recovering more slowly

than our baseline forecast. Two explanations for the difference come to mind: Our December forecast was produced

before the release of results showing very weak performance in the fourth quarter of 2012 across the eurozone. This

was particularly apparent in Germany, where GDP contracted by 0.6%, which sets a lower starting point for 2013.

Also, while our forecast and the EC's have the same expected growth rate for consumer demand in Germany in 2013,

the Commission anticipates export growth to be weaker than us (3.3% versus 3.8% in our projections) and import

growth to be stronger (4.1% versus 3.5%).

Overview

• The European Commission's new forecasts for economic growth in the EU broadly agree with those we

published in December, predicting continued recession in the eurozone and modest recovery in the U.K. in

2013.

• Whereas the EC now anticipates a slower recovery for Germany and a deeper recession for Italy this year than

our baseline forecasts, it predicts a slightly stronger upturn in Europe in 2014 than we do.

• We believe these forecasts indicate that the adjustment process in the European economies still has some way

to go before we can hope to get back on a higher growth path.

For France and Spain, the EC's forecasts are very close to ours, whereas the EC expects a deeper recession in Italy

(-1.0% by the EC versus our -0.7%). Italy's poor fourth-quarter performance, when GDP contracted 0.9% in three

months, explains part of the divergence. More fundamentally, the Commission anticipates a larger decline in

consumption (-2% versus -1.5%) and lower export growth (2.1% versus 2.5%). Recent high frequency indicators, such

as the Purchasing Managers Indices and industrial production data tend to support the EC's more pessimistic view.

The EC forecasts also provide a stern estimate of the short-term growth prospects in The Netherlands, with GDP

contracting 0.6% compared with our overly optimistic prediction of a 0.3% rise. The sharp downturn in the local

housing market is severely affecting highly leveraged households, which we think will cause consumption to slump

1.7% this year.

Table 1

Comparison Of Standard & Poor's And The EC's Economic ForecastsGDP, annual percentage change


1083448 | 301674531

Table 1

Comparison Of Standard & Poor's And The EC's Economic Forecasts (cont.)

--European Commission-- --Standard & Poor's--

2012 2013f 2014f 2013f 2014f

Germany 0.7 0.5 2.0 0.9 1.4

France 0.0 0.1 1.2 0.1 1.1

Italy (2.2) (1.0) 0.8 (0.7) 0.8

Spain (1.4) (1.4) 0.8 (1.3) 0.7

Netherlands (0.9) (0.6) 1.1 0.3 1.2

Belgium (0.2) 0.2 1.5 0.4 1.0

Eurozone (0.6) (0.3) 1.4 (0.1) 1.0

U.K. 0.0 0.9 1.9 1.0 1.7

f-- Forecasts. Sources: Standard & Poor's, European Commission.

The Real Uncertainties Are For 2014 And Beyond

Beyond a few individual countries, we see a broad consenus on the outlook for Europe in 2013. However, the real

puzzle for forecasters is determining the long-term prospects for 2014 and beyond. After another year of recession,

how strong is a recovery in the region likely to be in the following years?

The EC projections assume, as we do, a gradual improvement in Europe's external environment, with growth in the

U.S. and in emerging markets gaining speed. But it remains to be seen how fast the structural reforms implemented in

the various European countries will affect their overall competitiveness and therefore allow them to reap the benefits

of this improvement. Furthermore, it's not yet clear how much damage the current recession has inflicted on potential

growth. In particular, the lack of investment in most economies since the beginning of the downturn in 2009 is likely to

handicap those economies in the near future.

Starting with that second aspect, data for the change in global factor productivity (GFP) since 1999 highlight some

striking trends. GFP combines capital and labor productivity; it is a key variable affecting potential growth. As table 2

shows, GFP growth trends have varied considerably between countries in the past 14 years.

Table 2

Ratio Of Global Factor Productivity To Total EconomyCumulative % change 1999-2012

Eurozone (17 countries) 2.3

Germany 6.5

Ireland 12.2

Spain 0.2

France 1.1

Italy (3.4)

Portugal (0.6)

Source: European Commission AMECO database.


1083448 | 301674531

Economic Research: Europe 2013: Recession Strikes Again

While GFP growth has been robust in Germany and in Ireland, it has been weak in Spain and in France, and negative

in Italy. The drop in Italy's GFP presents a serious threat to the longer term growth prospects of that economy.

Meanwhile, the recovery in external demand from the second half of 2013 should provide a somewhat uneven lift to

growth across the region. The EC projections for export growth in 2014 are generally slightly more optimistic than

ours, but do reflect the uneven performance across the region, with Germany rising 6%, Spain 5.7%, France 4.7%, and

Italy and The Netherlands 3.9%.

The EC GDP growth projections for 2014 appear more bullish than ours, with the eurozone growing 1.4% (1% in our

forecast) and the U.K. 1.9% (1.7%). Nevertheless, they point to a very slow improvement in the various countries'

current account balances and a continued rise in government debt-to-GDP ratios in most cases (table 3).

Table 3

EC Projections As Of February 2013Current account balance (% of GDP)

2012e 2013f 2014f

Germany 6.3 6.0 5.6

France (1.9) (1.6) (1.8)

Italy (0.7) 0.6 0.8

Spain (1.9) 1.0 2.5

Netherlands 8.2 8.6 8.9

Belgium 1.5 2.0 1.9

U.K. (3.7) (3.1) (2.0)

General government gross debt (% of GDP)

2012e 2013f 2014f

Germany 81.6 80.7 78.3

France 90.3 93.4 95

Italy 127.1 128.1 127.1

Spain 88.4 95.8 101

Netherlands 70.8 73.8 75

Belgium 99.8 100.8 101.1

U.K. 89.8 95.4 97.9

e-- Estimate, f-- Forecasts. Source: European Commission.

Overall, the EC's new set of economic forecasts for the EU and the eurozone appear close to those we published in

December, although they anticipate a slightly stronger upturn in 2014. More fundamentally, they illustrate that the

adjustment process in the European economies still has some way to go before we can hope to get back on a higher

growth path.


1083448 | 301674531

Economic Research: Europe 2013: Recession Strikes Again

S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P

reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites,

www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription) and www.spcapitaliq.com

(subscription) and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information

about our ratings fees is available at www.standardandpoors.com/usratingsfees.

S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective

activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established

policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process.

To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain

regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P

Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any

damage alleged to have been suffered on account thereof.

Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and

not statements of fact. S&P's opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase,

hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to

update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment

and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does

not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be

reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives.

No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part

thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval

system, without the prior written permission of Standard & Poor's Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be

used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or

agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not

responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for

the security or maintenance of any data input by the user. The Content is provided on an "as is" basis. S&P PARTIES DISCLAIM ANY AND ALL

EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR

A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT'S FUNCTIONING

WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no

event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential

damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by

negligence) in connection with any use of the Content even if advised of the possibility of such damages.

Copyright © 2013 by Standard & Poor's Financial Services LLC. All rights reserved.


1083448 | 301674531

s&p economic research: europe 2013: recession strikes again - feb 2013

Economy & Finance