European market update


Despite greatly improved financial conditions over the past nine months following the European Central Bank's charter to do “whatever it takes” to save the euro, the Eurozone remains mired in recession. Output declined by 0.2% in the first three months of 2013 from its level late last year, the sixth consecutive quarter of negative growth. GDP rose by just 0.1% in Germany, the biggest economy in the euro area and declined by 0.2% in France, the second biggest. Falls in southern Europe were much bigger, with GDP declining by 0.5% in Italy and Spain and 1.3% in Cyprus.

Forecasts from the European Commission in early May showed annual Eurozone GDP shrinking by 0.4% in 2013, following a contraction of 0.6% in 2012. The economic reverse will be much deeper on the periphery of the single-currency countries than in its core. Cyprus will take over from Greece as the worst performer this year as Cyprus's GDP is forecasted to contract by 8.7% in 2013. The Baltic states will continue to shine. The economy tipped to prosper the most within the 17-country euro area is Estonia's, whose GDP will rise by 3% in 2013. Within the 28-nation European Union (EU), Latvia which is expected to join the euro next January will be the star performer, with its GDP increasing by 3.8%.

Unemployment in Germany was 5.4% in March 2013, whereas in Greece and Spain it was around 27%. The gap is even bigger for young people. In Germany the youth jobless rate was 7.6% in March whereas it was 56% in Spain and reached 64% in Greece in February. These figures overstate the blight of youth unemployment because many young people are in full-time education and so do not count as part of the labour force (the denominator of the unemployment rate). But they highlight the disjuncture between northern and southern Europe. Even so, there has been more rebalancing in the periphery than is sometimes appreciated. Current-account deficits which had ballooned in the first decade of the euro have narrowed.

Greek debt will reach 175% of GDP by the end of this year, an untenable burden. Although Greece is being helped by interest deferral and maturity extension along with very low interest rates, it needs a further restructuring, this time of official debt. Italy's debt burden continues to rise, to 131% of GDP this year, and debt in Ireland and Portugal is forecast to reach 123%.

Expectations of the construction market in Western Europe are forecasted to be one of the slowest growing regions globally, with growth averaging only 1.0%pa, much slower than the average growth in GDP for 2012-25. The construction market in Western Europe has struggled with further falls in output over the last 12 months. Output is expected to fall by an average of 0.3% pa 2012-15, as Europe continues to deal with budget deficits and austerity, including reductions in public spending programs on infrastructure.

The outlook for new infrastructure in Western Europe remains weak, despite governments in Western European countries looking to spend on infrastructure to revive flagging economies. The need to decommission around 150 ageing nuclear reactors in Western Europe and the need to build new energy capacity will remain a longer-term problem, although development of new nuclear reactors is expected in the UK. The emergence of infrastructure funding from Asia and Middle East could help provide alternative funding.

With population levels stagnant or declining in some Western European countries, the outlook for housing remains weak in some countries. Spending on healthcare is one consequence of an aging population, offset by weaker consumer spending. Economists have forecasted above average growth for Western Europe in four out of the nine countries, including Belgium, Netherlands, Sweden and UK. Growth is over twice as high as the average for Western Europe in the UK, reflecting housing and infrastructure deficits relative to growing population. Italy's growth is slow as debt is significantly higher than other major Western European economies and population is stagnant and ageing.

After subdued growth in 2013, momentum is expected to build in the UK as household purchasing power recovers, world trade picks up and corporate confidence strengthens. Meanwhile, a weaker pound, as a result of further quantitative easing, will provide a boost to competitiveness but it will also result in inflation remaining higher for longer, hence dampening consumer spending.

Rider Levett Bucknall

60 New Broad Street
London EC2M 1JJ
United Kingdom

Telephone: 0044 1707 800455
Fax number: 0044 1707 395037


Andrew Reynolds
Head of Europe
Charles O’Loughlin
Quantity Surveyor