Eurozone GDP to stay below peak until 2016

Tim Wallace
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THE EUROZONE economy will spend eight years below its pre-financial crisis peak, analysts at EY predicted today, warning the scars from the crash will continue to drag on the currency unions’ growth for years to come.

By the end of 2017 the Eurozone’s economy will be three per cent above its previous peak, the analysts predicts – well behind the UK which will be eight per cent higher than its earlier peak, and the US at 20 per cent.

From 1997 to 2008, Eurozone growth averaged 2.3 per cent per year. From 2008 to 2016, it will average just 0.4 per cent.

Unemployment will keep rising until it hits 12.3 per cent in 2014.

And there is a chance the economy could slip into deflation, with prices falling and the debt burden rising in real terms.

“Deflation increases the level of debt in real terms and makes it harder to repay. So if the Eurozone were to slip into deflation, it could renew concerns about the solvency of the periphery and trigger a new phase of the crisis,” said the report.

“With inflation now very low, there is a risk that consumers will defer non-urgent purchases.”

French GDP will begin to recover next year, rising from 2013’s 0.2 per cent to 0.7 per cent in 2014 and 1.1 per cent in 2015.

But it will stick at this low level, edging up to just 1.4 per cent in 2017, EY forecast.

Germany will be similarly sluggish over the coming year, with growth stuck at 1.7 per cent in each year from 2014 to 2017.

And Italian GDP growth will not rise above 1.5 per cent.

Meanwhile the forecast warned the European Central Bank’s asset quality review and stress tests could in fact put further strain on the economies.

“If a bank has a viable business model, but is shown to need extra capital in a stress scenario, it should not be forced to bail-in investors or the cost of bank funding will rise sharply,” the report said.