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Highlights from Cembureau’s 4Q14 economic report

World Cement,


Annual GDP figures for 2014 resulting from 4Q data continued to reveal a mixed picture across the EU, but also a clear improvement in general macroeconomic conditions and better economic growth expectations. In the EU as a whole, real GDP growth reverted to positive territory (1.3% after zero in 2013), as well as in the euro area, albeit a lower rate (0.8%, after the 0.5% recession in 2013). Economic performances varied considerably across the Member States, ranging from 4.8% in Ireland (mainly a further bounce back from the recession of previous years, supported by the international financial assistance programme) and 3.3% in Hungary and Poland, to -0.5% in Italy and Croatia and -2.8% in Cyprus. The latter three all experienced a third consecutive yearly recession, and were also the only three EU countries in recession in 2014 (compared to twelve in 2013.). Among the major EU economies, real GDP in Spain went reverted to positive growth after three consecutive yearly recessions (1.4%). In Germany GDP continued to grow but at a moderate rate (1.5%), whilst in France it almost stagnated (0.4%).

A short-term outlook based on the latest quarterly figures shows that economic growth gained momentum in most countries in 4Q14. This was a somewhat strange combination of negative inflation rates and very low nominal GDP growth rates that resulted in positive real growth rates. The deflationary scenario continues (-0.5% in January 2015 in the EU28; negative rates in all Member States – however, a 0.6% annual HICP growth rate is foreseen for 2015). Unemployment remains around record highs in many Member States (9.9% in December 2014, the peak still being Spain with 23.7%). Confidence amongst consumers and business remained at low levels in 4Q14 in historical terms, as did domestic demand.

However, the latest European Commission forecast outline improved macroeconomic conditions and more positive economic sentiment for the next quarters, resulting in better GDP predictions for 2015. Real GDP growth is expected to accelerate in most Member States, particularly in Spain (2.3%) and France (1%), with Italy back to growth (0.6%), whilst Germany and the UK are expected to record the same performance as in 2014 (1.5% and 2.6% respectively). Just as in 2013 and 2014, US economic growth is expected to outperform any other comparable EU economy (with a GDP growth rate of 3.5%).

There are mainly three positive factors that have materialised in late 2014/early 2015 which raised expectations for economic recovery to gain ground:

1. The ECB’s Asset Purchase Programme (APP), recalling the Quantitative Easing (QE) previously launched by the FED and the BOJ, announced on 22 January and starting in March this year running until September 2016 as announced by President Draghi. It consists in the purchase of assets for a value of at least €1.14 trillion (8.4% of EU GDP), including sovereign debt, asset-backed securities and covered bonds, which is expected to boost aggregate demand via these channels:

a) Acceleration of inflation, i.e. rise in asset prices (bonds, shares, equities, housings) held by households and investors.

b) Fall in the €/US$ nominal exchange rate (towards parity) – the € has already depreciated vs the US$ by 16.9% since June 2014 – which should benefit exports, although EU exports have proved relatively less elastic to exchange rate developments in recent years.

c) Interest rates at record lows, extremely supportive of business investment. Government bond yields at record lows and lower interest debt burden imply that Member States would have relatively larger room for expansionary policy, i.e. expenditure in public infrastructure. 
There are several estimates regarding the potential expansionary impact of the QE on the European economy, but there is general consensus concerning a 0.4 to 0.7% increase in the EU’s real GDP in 2015 thanks to the contribution of QE to EU growth.

2. Oil prices, which are at record lows, and which are likely to continue around these levels for most of 2015, and have resulted in a 43.4% fall (in nominal terms) since June 2014. This is expected to significantly contribute to lower energy and electricity costs for the industrial sector.

3. The “Jobs, Growth and Investment package” (so-called “Juncker Plan”), which aims at mobilising existing resources for private and public investment over the next three years (2015 – 2017) up to €315 billion, may have a potential expansionary impact on infrastructure and civil engineering expenditure.

On the other hand, the EU’s economic performance over the first two quarters of 2015 may be hampered once again by certain tensions regarding government bond yields (albeit being offset by the announcement of the above ECB’s APP) due to the dispute surrounding the possible restructuring of Greek sovereign debt. Moreover, political tensions are likely to persist (Ukraine and Middle East), and some slowdown is likely to continue in emerging economies that are relevant for EU exports.

This is part one of a two-part report. Part two can be read here. Written by Cembureau and adapted to World Cement's house style. The full report can be downloaded here.

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