European economic forecast 2014 by EACA

European Economic Forecast 2014

A special report by Dr Alina Elena Iosif

Contents Author Alina Elena Iosif lectures at the Bucharest Academy of Economic Studies (BAES) in Entrepreneurship, Negotiation Techniques and Public Procurement to Bachelor and Master students. Alina holds a doctorate in Business Administration for which her thesis focused on co-operation between the business sector and public authorities for the provision of services of general interest. During her PhD, she was invited to become a visiting researcher at the University of Barcelona, Spain. Her research interests focus on European policy and regional development. In 2013, she worked at the European Commission within the Directorate General for Regional and Urban Policy.

03 Introduction 04 Executive summary 05 Future perspectives on Europe 08 2014 perspectives on Western, Northern, 09 10 11 13

Southern and Eastern Europe - Real GDP growth - Consumer prices - Current account balance - Total investment, volume

14 16 17 18

- Total population - Total employment - Per capita employee compensation - Unemployment rate

19 20 22 24

Sector analysis - Automotive sector - Food/Alcohol - Financial services

26 References

European Economic Forecast 2014

Introduction Purpose This report is intended as a valuable support for EACA members to help them plan their activities for the year ahead. We have focused on macroeconomic indicators which provide information about the overall health of the economy, by synthesizing forecasts generated by recognised international institutions. Target audience The paper is aimed at business players who are interested in being aware of broad market trends and particularly at senior management of international advertising agencies. Structure This report contains an analysis of several relevant macroeconomic indicators at European and regional level (Western, Northern, Southern and Eastern Europe). It provides a snapshot of future perspectives on particular relevant sectors for advertising agencies (automotive, food/alcohol, financial services). Content The three major pillars of a macroeconomic analysis consist of national output measured by GDP (gross domestic

product), inflation and unemployment. Based on these indicators the current analysis covers both the overall and regional levels of the European economy. Finally, several short sector analyses are carried out in order to identify future trends. Methodology In preparing this report, we have used some of the most relevant data and reports published by trusted international institutions, such as the European Commission, the International Monetary Fund, the Organisation for Economic Co-operation and Development, the United Nations and by private companies. Based on these sources, the macroeconomic and sector analyses have been developed. A full bibliography is provided at the end of the report (page 26). Caveat The projected values are estimated according to current market performance and predictions and are therefore subject to potential variation in the coming years.

Executive summary Purpose of the report This report is mainly addressed to the senior management of international advertising agencies with an interest in the future business perspectives of Europe and its regions. The analysis of macroeconomic indicators in 2014 may be a valuable support for management considering whether to invest in a certain market in relation to the stability of the economy. Real GDP growth Countries from Northern and Eastern Europe register the highest real GDP growth values in 2014, meaning that they are expected to be the most prosperous. Moldova, Russia, Turkey, Kosovo and Latvia are situated at the top and are expected to have a real GDP growth of approximately 4%. Consumer prices In Western European countries, the annual % change in consumer prices is positioned at a low level of around 1.5%, followed by Northern and Southern countries with values between 2-3%. In the Eastern European countries, rates of around 5% are estimated. Exceptionally high predictions for consumer prices in 2014 are represented by Belarus (15.5%) and Russia (6.2%). Current account balance Most Western European countries are expected to have a current account surplus in both 2013 and 2014. A similar situation is expected in Northern Europe, apart from some countries already in

deficit, notably the UK with around 4% of GDP. In Southern and Eastern European countries, current account deficits are more common and in some cases may become even more worrying, for example in Kosovo, Montenegro and Moldova. Total investment In 2014, total investment in the EU is expected to increase by 2.5%. Public investment may remain subdued, while private investment should rebound, based on higher export growth, low financing costs, increasing profit margins and gradually fading uncertainty (European Commission, 2013). Total population Population growth in most European countries will be constant in 2014 compared to 2013. Most of the positive values occur in Western and Northern Europe with a less positive outlook in Eastern Europe. The countries that are expected to see the lowest total population growth rate in 2014 are Bulgaria, Latvia and Lithuania. Overall in Europe, the percentage of population residing in urban areas will reach a relatively high level of 73.78%. The urbanization rate may be a critical factor when deciding what kind of products to advertise in the area and what type of commercial communications to use. Total employment While GDP has recovered to an extent over recent years, the labour market is still remarkably weak. Northern Europe is the region that registers the

highest potential change in 2014, in stark contrast to Southern Europe. Countries which register a higher annual growth in employment may seem more attractive in terms of investment. Employee compensation Per capita employee compensation is expected to increase slightly in most European countries in 2014. Cyprus and Greece are the exceptions, registering negative rates for both 2013 and 2014. Unemployment rate Investors should be wary of countries with a high estimated unemployment rate, mainly in Southern Europe, as there is an issue of slow growth in those particular economies. Overall, the unemployment rate is set to remain high over the coming year, at around 11% in the EU. Sector analysis Automotive: the market is still below pre-crisis level. Food/Alcohol: two main trends have developed as a consequence of the crisis: on one hand, consumer preferences for essential food items, on the other, consumer interest in healthy food. Financial Services: Elevated risk aversion and deleveraging pressures are still the main barriers that banks have to overcome in 2014.

Future perspectives on Europe Based on assumptions formulated by the International Monetary Fund1 and presented in Figure 1, growth of gross domestic product (real GDP) is expected to reach 0.3 per cent in 2013 and is forecast to reach 1.5 per cent in 2014. The United Nations (2013) states that, with such a moderate growth rate, ‘many economies will continue to operate below potential and will not recover the jobs lost during the Great Recession’. Furthermore, the major problems that Europe has to confront consist of ‘high unemployment, continued deleveraging by firms and households, continued banking fragility, heightened sovereign risks, fiscal tightening and slower growth’ (United Nations, 2013). Unemployment rates remain high in most of the Member States of the European Union and in some cases have reached worrying levels, affecting as much as 1/5 of the work force. The measure adopted by most of the countries to increase economic growth and reduce unemployment consists of

creating ‘a mix of highly accommodative monetary policy (keeping policy interest rates near zero coupled with a wide variety of unconventional policies) with very tight fiscal policy, in an attempt to bring down budget deficits (United Nations, 2013). Further steps need to be taken, as this policy mix is still insufficient to re-invigorate the economy. The unemployment rate at European Union level is forecast to remain the same during both 2013 and 2014 (Figure 1). Specialists from the European Commission’s Directorate General for Economic and Financial Affairs (European Commission, 2013) specify that ‘external demand is set to remain the predominant growth driver, while multiple headwinds continue to weigh on domestic demand. In particular, balance-sheet adjustments in the public and private sectors, difficult financing conditions in several Member States, the under-utilisation of resources related to deep adjustment processes and unusually high uncertainty will abate only very gradually over the forecast horizon’.

Net exports are considered to be the main driver of GDP growth in the European Union this year but are expected to be replaced by domestic demand in 2014 (European Commission, 2013). Increases in domestic demand rely on restored business confidence and on easing the financing conditions applied to vulnerable countries. Higher household consumption may be supported by greater confidence among consumers and an increase in purchasing power due to further falls in inflation. Moreover, better labour market conditions could encourage consumer spending in 2014 (European Commission, 2013). Consumer price inflation is expected to average 2.2% at European level this year and to decline to 2% in 2014 (Figure 1). Due to a delayed response to changes in economic activity, the EU labour market is expected to become even weaker in the near future. Labour market conditions are deteriorating and job losses are still encountered in many Member States, raising the unemployment rate in the short term (European Commission, 2013).

1 All European countries apart from Russia, Ukraine, Belarus and Moldova which are included in 'Commonwealth of Independent States' category.

2014 perspectives compared to 2013 on macroeconomic indicators at the European Level

Real GDPa,b 2013 0.3% 2014 1.5%

Total populationa,c 2013 0.3% 2014 0.2%

Consumer prices (annual averges)a,b 2013 2.2% 2014 2.0%

Employmenta,c 2013 -0.4% 2014 0.4%

Current account balance (% of GDP)a,b 2013 1.5% 2014 1.4%

Europe at a glance

Total investment volumea,c 2013 -1.7% 2014 2.6%

Per capita employee compensationa,c 2013 2.0% 2014 2.2% Unemployment ratea,c,d 2013 11.1% 2014 11.1%

Figure 1 2014 perspectives compared to 2013 on macroeconomic indicators at the European level Source: own elaboration, based on data from International Monetary Fund and European Commission - DG for Economic and Financial Affaires.

a Annual % change b Apart from Russia, Ukraine, Belarus and Moldova which are included in 'Commonwealth of Independent States' category Source: International Monetary Fund, 2013. World Economic Outlook: hopes, realities, risks. Washington, p. 48. c All 28 member states of European Union (including Croatia) Source: European Commission- DG for Economic and Financial Affaires, 2013. European Economic Forecast. Brussels, p. 134, p. 140-142. d Number of unemployed as a percentage of total labour force. Based on European Commission estimates, several future perspectives on the main demographic and macroeconomic indicators at the level of European Union 27 for 2015 are presented in Figure 2.

2015 perspectives compared to 2010 on macroeconomic indicators at the EU Level Demographic projections

2010

2015

Fertility rate

1.59

1.61

male

76.7

77.6

female

82.5

83.3

Net Migration*

0.2

Child population (0-14*

15.6

Prime age population (25-54)*

42.7

41.8

Working age population (15-64)*

67.0

65.5

Elderly population (>65)*

17.4

18.9

Very elderly population (>80)*

4.7

5.3

Very elderly population (>80)**

7.1

8.0

Life expectancy at birth (yrs)

European Union Macroeconomic assumptions

2010

2015

Potential GDP (growth rate)

1.2

1.5

GDP per capita (growth rate)

0.1

Employment (growth rate)

0.5

Labour force assumptions

2010

2015

Working age population growth (20-64)

1.4

1.2

Employment rate (20-64)

68.6

70.1

0.3

Unemployment rate (20-64)

9.3

8.7

Figure 2 2015 perspectives compared to 2010 on macroeconomic indicators at the EU level *as % of total population **as % of working age population Source: own elaboration, based on data from European Commission - DG for Economic and Financial Affairs, 2012. The 2012 Ageing Report- Economic and budgetary projections for the 27 EU Member States (2010-2060), European Economy 2/2012, Brussels, p. 465.

2014 perspectives on Western, Northern, Southern and Eastern Europe

According to statistics published by the United Nations (Department of Economic and Social Affairs, 2011), Europe is territorially divided into the following four main groups: Western Europe: Austria, Belgium, France, Germany, Liechtenstein, Luxembourg, Monaco, Netherlands, Switzerland. Northern Europe: Channel Islands, Denmark, Estonia, Faeroe Islands, Finland, Iceland, Ireland, Isle of Man, Latvia, Lithuania, Norway, Sweden, United Kingdom. Southern Europe: Albania, Andorra, Bosnia & Herzegovina, Croatia, Gibraltar, Greece, Holy See, Italy, Malta, Montenegro, Portugal, San Marino, Serbia, Slovenia, Spain, TFYR Macedonia. Eastern Europe: Belarus, Bulgaria, Czech Republic, Hungary, Poland, Republic of Moldova, Romania, Russian Federation, Slovakia, Ukraine.

This territorial division is used in the present report, in accordance with the available data sources. Several relevant indicators for capturing the health of national economies at regional level in Europe are analyzed within this section of the report. These are: real GDP growth consumer prices current account balance total investment total population total employment per capita employee compensation unemployment rates Most of the indicators are expressed as annual growth percentages in order to allow comparisons regarding performance over time and between countries of different size.

Real GDP growth (annual % change) Even though most European countries are currently in recession, the forecasts developed by the International Monetary Fund (2013) show positive results for real GDP growth in 2013. Moreover, in 2014, the forecast for the overall four main regions of Europe is even more optimistic compared to 2013 (Figures 3,4,5,6). 2014 estimates indicate a positive evolution of the economies of Western Europe, with levels of real GDP growth between 0.9 and 1.8 per cent annual change. The German recovery has slowed significantly, while Franceâ&#x20AC;&#x2122;s economy is stagnating.

Figure 3 Perspectives on Real GDP growth in Western Europe

Figure 4 Perspectives on Real GDP growth in Northern Europe

Figure 5 Perspectives on Real GDP growth in Southern Europe

Figure 6 Perspectives on Real GDP growth in Eastern Europe

Northern Europe includes growing economies, Latvia being the leader with a 4.2% annual change in real GDP growth for both 2013 and 2014. The UK recovery is progressing slowly, mainly due to weak external demand and ongoing fiscal consolidation (IMF, 2013, p. 46-47). Most of the countries predicted to fall into recession in 2013 are part of Southern Europe. Nonetheless, potential positive GDP estimates are presented for most of the Southern European countries in 2014. In 2012, Czech Republic, Hungary and Moldova fell into recession. The perspectives on these countries show that GDP growth is expected to remain subdued at 0.3%, 0% and 4% respectively in 2013, with a slight increase in 2014 for CZ of 1.6% and HU of 1.2%. These countries may be at risk of recession if further improvements are not seen at European level.

Source, Figures 3,4,5,6: own elaboration, based on data from International Monetary Fund, 2013. World Economic Outlook: hopes, realities, risks. Washington, p. 48, 66, 153.

Consumer prices2 (annual % change) A key factor in macroeconomic analysis is the inflation rate, or the rate at which prices rise. Inflation is primarily measured in two ways: through the Consumer Price Index3 (CPI) and the GDP deflator. The percentage changes in consumer prices at regional level in Europe in 2013 and 2014 are shown in Figures 7, 8, 9 & 10. The annual % change in consumer prices in most of the Western European countries is estimated at around 1.4% to 1.9% in 2014. The only exception is Switzerland, with a very low level of consumer price inflation of -0.2% in 2013 and 0.2% in 2014.

Figure 7 Perspectives on Consumer prices in Western Europe

Figure 8 Perspectives on Consumer prices in Northern Europe

Figure 9 Perspectives on Consumer prices in Southern Europe

Figure 10 Perspectives on Consumer prices in Eastern Europe

Compared to West European countries, Northern Europe is forecast to have higher annual % changes in consumer prices averaging between 2 & 4%. Sweden is predicted to register the highest increase from 0.3% in 2013 to 2.3% in 2014. Greece is expected to have negative annual % change in consumer prices in both 2013 and 2014, in stark contrast to Serbia with a 9.6% increase in 2013 and a lower increase of 5.4% in 2014. Overall, annual average inflation is expected to remain moderate in most Eastern Europe countries in 2014. Elevated rates are projected for Belarus (15.5%), Russia (6.2%) and Turkey (5.3%), mainly due to inflation inertia (IMF, 2013).

Source Figure 7,8,9,10: own elaboration, based on data from International Monetary Fund, 2013. World Economic Outlook: hopes, realities, risks. Washington, p. 48, 66, 157-158.

2 Movements in consumer prices are shown as annual averages. 3 ‘The CPI is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services’ (U.S. Department of Labour, 2004, p.6). The movements of the CPI are more useful to be expressed as percent changes than as changes in index points, due to the fact that ‘the index points are affected by the level of index in relation to its reference period, while percent changes are not’ (U.S. Department of Labour, 2004, p.15).

Current account balance4 (% of GDP) Current account balances5 (Figures 11, 12, 13, 14) have started to improve even in the less developed economies. Lower labour unit costs, rising productivity and trade gains outside the Eurozone area are among the factors positively influencing current account balances. The advantage of the more developed economies is represented by trade with faster-growing emerging market economies (IMF, 2013). In countries with a positive current account balance, there could be a positive balance of trade (exports exceed imports) and/or a surplus of savings over investments. In reverse, when the current account balance is in deficit, the economy registers a negative trade balance (imports exceeds exports) and/or investments are greater than savings.

Figure 11 Perspectives on Current account balance in Western Europe

Most of the Western European countries are expected to have positive current account balances both in 2013 and 2014. The highest level is predicted in Switzerland with approximately 12% of GDP. In contrast, France is predicted to see a negative current account balance of 1.4% of GDP in 2014. In Northern Europe, countries such as Finland, Iceland and United Kingdom are expected to register a deficit, while Denmark, Ireland, Norway and Sweden will see their balances in surplus. Figure 12 Perspectives on Current account balance in Northern Europe Source: own elaboration, based on data from International Monetary Fund, 2013. World Economic Outlook: hopes, realities, risks. Washington, p. 48, 66, 166-167.

4 Percent of GDP. 5 â&#x20AC;&#x2DC;The current account balance is defined by the sum of the value of imports of goods and services plus net returns on investments abroad, minus the value of exports of goods and services, where all these elements are measured in the domestic currency. When an economy's balance on Current Account is in surplus in a period (i.e. sum of credit entries exceed debit entries), the economy can be regarded as a net creditor to the rest of the world. It shows the extent to which an economy is saving more than it is investing, and is providing such resources to the rest of the world. Conversely, if the balance is in deficit (i.e. sum of debit entries exceed credit entries), the economy is a net debtor. It shows the extent to which the economy is saving less than it is investing, and is drawing on the resources of the rest of the world to meet the requirements from current consumption and investmentâ&#x20AC;&#x2122; (Census and Statistics Department Hong Kong, 2001).

Most of the Southern European countries are forecast to have a current account balance deficit. If sometimes a low negative current account balance is an indication of prosperity, there are some countries with significant deficits, such as Kosovo, Montenegro, Albania, Serbia, Bosnia and Herzegovina, which merit cautious attention. As with Southern Europe, most of the Eastern European countries are predicted to have a current account balance deficit. The average deficit is between -2% and -5% of GDP in 2013 and 2014. The lowest extreme of around -10% of GDP is projected for Moldova, followed by Ukraine with c. -8% of GDP and Turkey with around -7% of GDP. Figure 13 Perspectives on Current account balance in Southern Europe

Figure 14 Perspectives on Current account balance in Eastern Europe Source: own elaboration, based on data from International Monetary Fund, 2013. World Economic Outlook: hopes, realities, risks. Washington, p. 48, 66, 166-167.

Total investment6, volume (% change on preceding year)

Total investment includes both public and private investment. As the European Commission (2013) states â&#x20AC;&#x2DC;total investment is projected to be mainly driven by EU co-financed public sector projectsâ&#x20AC;&#x2122; in 2013. In the case of private sector investment, the evolution is gradual in relation to the economic recovery and easing of financing conditions. In 2014, total investment is expected to increase by 2.5% in the EU. Public investment may remain subdued, while private investment may rebound based on higher export growth, low financing costs, increasing profit margins and gradually fading uncertainty (European Commission, 2013).

Western Europe Even though the growth rate predictions on total investment for most of the Western European countries in 2013 are on the negative side, in 2014 the situation appears better. The exception is Austria, which is expected to register positive values both in 2013, of 1.1% and 2014, of 2.5%. Germany is predicted to have the highest growth rate in total investment of 3.9% in 2014. The most impressive recovery in total investment is expected for The Netherlands which will end 2013 with -3.3% and may reach a level of 1.6% in 2014. Northern Europe High levels of total investment are predicted for Estonia, Latvia and Lithuania, which may register growth rates between 6 and 8% in 2014. In the case of Denmark, the growth rate is expected to go down from 2.5% in 2013 to 0.7% in 2014.

Southern Europe The predictions on total investment for most of the Southern European countries show negative growth rates in 2013. The situation will change in 2014, when positive growth rates are registered, for example, by Croatia, Greece and Portugal. Cyprus will maintain its high negative growth rates of -29.5% in 2013 and -12% in 2014. Eastern Europe Czech Republic, Hungary and Poland are the Eastern European countries that are expected to have negative growth rates in 2013 and positive growth rates in 2014. Romania may register the highest level of 5% of total investment from all the countries in Eastern Europe in 2014. The predictions for Bulgaria and Slovakia show a growth rate of 3% in 2014.

Source: own elaboration, based on data from European Commission- DG for Economic and Financial Affaires, 2013. European Economic Forecast. Brussels, p. 134.

6 Refer to the 28 Member States of the European Union.

Total population (% change on preceding year) According to Cohen (2010) the four major trends regarding population are: the world population will continue to grow; it will grow at a much slower pace than previously; it will become older; it will be increasingly urban. The population growth rate for almost each country which is part of Western Europe in 2013 and 2014 tends to remain constant. The highest population growth rate of 1.6% in 2014 is registered by Luxembourg. Trends in total population in Northern Europe in 2014 are similar to those in 2013. Estonia is predicted to pass from negative with -0.1% in 2013 to the 0% level in 2014. The negative trend in total population evolution of Latvia and Lithuania will be maintained in 2014.

Figure 15 Perspectives on Total population in Western Europe

Figure 16 Perspectives on Total population in Northern Europe

Figure 17 Perspectives on Total population in Southern Europe

Figure 18 Perspectives on Total population in Eastern Europe

The predictions for total population for half of the analyzed countries within Southern Europe show that the 0% level will be reached in 2014. Croatia is predicted to register a decrease, while Malta and Portugal will reach the 0% level in 2014 from negative values registered in 2013. Cyprus records the highest value of +1%. Bulgaria with a population growth rate of -1% both in 2013 and 2014 represents the most worrying situation from Eastern Europe. Also with negative rates, but smaller, are Hungary, Poland and Romania. 2015 future perspectives on total population and percentage of population residing in urban areas in each region of the Europe by county are presented in figure 19. In terms of absolute value, the highest level of population is expected in Eastern Europe, while the highest percentage of population residing in urban areas is registered in Western Europe.

Source: own elaboration, based on data from European Commission- DG for Economic and Financial Affaires, 2013. European Economic Forecast. Brussels, p. 140.

2015 Perspectives on Total Population (thousands) and Percentage of Population residing in urban areas

Europe 742,067

190,494 80.9%

73.78%

Southern Europe 157,446 68.9%

Western Europe

Northern Europe 101,892 79.7%

Eastern Europe

Albania

3,258

57.6%

Austria

8,463

68.5%

Channel Islands

Andorra

85.1%

Belgium

10,867

97.6%

Bosnia & Herzegovina

3,716

50.4%

France

64,413

Croatia

4,361

59.0%

Germany

100.0%

11,492

62.4%

100.0%

61,241

69.1%

Netherlands

16,850

84.7%

Isle of Man

Malta

423

95.4%

Switzerland

7,814

74.0%

Montenegro

634

292,236 69.7%

155

31.8%

Belarus

9,441

76.6%

Denmark

5,647

87.5%

Bulgaria

7,252

75.3%

87.8%

Estonia

1,337

69.7%

Czech Republic

10,634

73.4%

81,471

74.5%

Faroe Islands

42.0%

Hungary

9,903

71.3%

Liechtenstein

14.3%

Finland

5,450

84.2%

Poland

38,357

60.7%

Luxembourg

543

86.3%

Iceland

339

94.2%

Republic of Moldova

3,453

50.5%

35 100.0%

Ireland

4,732

63.4%

Romania

21,240

52.9%

50.4%

Russian Federation

142,229

74.5%

Latvia

2,210

67.7%

Slovakia

5,506

54.6%

64.1%

Lithuania

3,252

67.6%

Ukraine

44,222

69.7%

10,702

63.2%

Norway

5,054

80.5%

Turkey*

77,003

75.1%

94.2%

Sweden

9,647

85.8%

Serbia

9,807

57.8%

United Kingdom

63,935

80.1%

Slovenia

2,053

49.8%

47,532

78.0%

2,073

59.8%

Gibraltar Greece Holy See Italy

Portugal San Marino

Spain TFYR Macedonia

Monaco

Source: own elaboration, based on data from United Nations - Department of Economic and Social Affaires, 2012. World Urbanization Prospects: The 2011 Revision, CD ROM.

Figure 19 2015 Perspectives on Total Population (thousands) and Percentage of Population residing in urban areas * Statistical data for Turkey is not included in the Eastern Europe total nor the European total

Total employment (% change on preceding year) Overall, the forecast for the labour market in 2014 is slightly more optimistic for most of the European Union countries than the estimates for 2013. But visible improvement in the EU labour market is expected to happen at the end of 2014 when the reallocation of resources from the non-tradable to the tradable sector in vulnerable Member States will occur (European Commission, 2013). Netherlands is the country that maintains a negative percentage of employment in both 2013 and 2014, while the other Western European countries stabilize between +0.5 & 1% in 2014. Luxembourg is the best economy in terms of employment, registering a 1.3% increase in 2014.

Figure 20 Perspectives on Employment in Western Europe

Figure 21 Perspectives on Employment in Northern Europe

Figure 22 Perspectives on Employment in Southern Europe

Figure 23 Perspectives on Employment in Eastern Europe

United Kingdom, Lithuania and Latvia are the Northern European economies that are expected to register an above 1% change in employment in 2014. The countries with a lower level of employment in 2014 are Denmark, Finland and Sweden. The employment prospects for most of the Southern European countries in both 2013 and 2014 are not optimistic, showing mainly negative values. Low levels of variation in employment are also encountered in Eastern European economies, which register values between -0.2 and 0.8% change in 2014.

Source: own elaboration, based on data from European Commission- DG for Economic and Financial Affaires, 2013. European Economic Forecast. Brussels, p. 141.

Per capita employee compensation7 (% change on preceding year)

Western Europe Positive and increasing growth rates between 1.1% and 3.1 % are predicted for all the Western European economies in 2013 and 2014. A decline in employee compensation from 2.4 % in 2013 to 1.1% in 2014 is presumed for Belgium. A similar situation, but with a smaller difference of 0.2% is expected in Austria. Conversely, Germany and Luxembourg should see growth rates of 3.1% & 3% respectively. Northern Europe The growth rates in per capita employee compensation are positive for both 2013 and 2014 in Northern Europe. The growth rates start from 0.3% in 2013 and 0.2% in 2014 in the case of Ireland and go up to 5.7% in 2013 and 6.1% in 2014 in the case of Estonia. This indicator is predicted to increase for almost all the Northern European countries, apart from Lithuania and Ireland which are expected to register slightly lower levels in 2014 than in 2013.

Southern Europe Predictions for employee compensation in Southern Europe vary from country to country, starting with the lowest levels in Cyprus and Greece, both registering negative values for 2013 and 2014 and ending with the highest levels estimated for Croatia with 4.2% in 2013 and 3% in 2014. Eastern Europe The European Commission (2013) estimates similar growth rates for the Eastern European countries as for Northern Europe. The highest increase in per capita employee compensation is expected in Hungary - from -0.4% in 2013 to 5.4% in 2014. Romania is expected to have the highest growth rates of 5.5% in 2013 and 5.9% in 2014.

Source: own elaboration, based on data from European Commission- DG for Economic and Financial Affaires, 2013. European Economic Forecast. Brussels, p. 142.

7 Refer to the 28 Member States of the European Union.

Unemployment rate (number of unemployed as a % of total labour force) European Commission (2013) estimates indicate that the ‘labour market performance differs widely across Member States’ and that there are large growth differentials visible both in 2013 and 2014. ‘Unemployment rates are expected to range between 5% in Austria and 27% in Spain and Greece’. The highest unemployment rates in Western Europe are predicted for France with around 10% and Belgium with 8% in both 2013 and 2014. Austria, Germany and Luxembourg are expected to have the lowest unemployment rates at around 5% and to be considered among the most attractive countries for the labour force.

Figure 24 Perspectives on Unemployment rate in Western Europe

Figure 25 Perspectives on Unemployment in Northern Europe

Figure 26 Perspectives on Unemployment in Southern Europe

Figure 27 Perspectives on Unemployment in Eastern Europe

The least attractive countries in Northern Europe in terms of labour market, due to a high unemployment rate around 13%, are Ireland and Latvia. The average unemployment rate within the region is approximately 8% both in 2013 and 2014. The South is the most problematic region of Europe in terms of unemployment, registering values around 26% for Greece and Spain in both 2013 and 2014. Croatia, Cyprus and Portugal are estimated to be in a similar position, as they are expected to register an upward trend in unemployment in 2014. In most of the Eastern European countries, the unemployment rate estimated for 2014 is broadly the same as 2013. The Czech Republic and Romania are expected to have the lowest unemployment rates of approximately 7%. Slovakia is the worst hit, with unemployment forecast at 14.5% in 2014.

Source: own elaboration, based on data from European Commission- DG for Economic and Financial Affaires, 2013. European Economic Forecast. Brussels, p. 141.

Sector analysis

This section of the report presents brief analyses of three main sectors in terms of future perspectives. The sectors selected are among the most advertised on various channels, namely: Automotive Food and alcohol Financial services

Automotive According to OECD (2013) the automotive sector was one of the main sectors affected by the 2008-2009 recession and ‘car demand in the OECD is still 11% below its pre-crisis level’. Furthermore, ‘demand for new cars in advanced OECD countries is expected to remain subdued’ (OECD, 2013). The LMC Automotive (2012) perspectives on car sales in Western Europe look similar to the predictions of Roland Berger (2013), namely an upward trend starting in 2013, but at a slow pace (Figure 28, Figure 29). The sales of passenger vehicles at Western European level has started to improve in 2013, reaching positive growth of 4% in 2014. 6% growth is expected in Western Europe by 2015. Figure 28 West European* Car Sales from 1987-2018

In 2012, the UK was the only major automotive market to achieve growth, driven largely by private consumers (PwC, 2013). This positive trend is not expected to be maintained throughout 2013 (PwC, 2013). OECD (2013) concurs, stating that, in the UK, sales demand is expected to drop, partially due to higher oil import prices generated by recent currency depreciation. Once the economy improves and unemployment declines, growth in car demand should return (PwC, 2013).

* In Western Europe the following countries are included: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and United Kingdom.

Source: LMC Automotive, 2012. Global Car & Truck Forecast- Brochure [pdf] Available at: http://www.lmc-auto.com/default/assets/LMC-brochure-GCAT-Web-Nov-20121.pdf [Accessed 19.08.2013], p. 2.

Figure 29 Perspectives on the global sales of passenger vehicles (growth rates*) in Western Europe *including light commercial vehicles; year-on-year growth rate Source: own elaboration, based on data from Roland Berger, 2013. Rightsizing Europe – The European car crisis and implications for automotive suppliers [pdf] Available at: http://www.rolandberger.com/media/pdf/Roland_Berger_Automotive_Supplier_Europe_E_2013 0328.pdf [Accessed 17.08.2013], p. 5.

Germany is also experiencing a significant drop in car sales as demand is lately adjusting to fundamentals, but with an expected average stabilization of sales in 2013 and 2014 (OECD, 2013). The forecasts of Autofacts predict ‘a slight decline of 1.38% in 2013, while the outlook is expected to improve in 2014 (+2.8%) and 2015 (+4.0%) respectively (PwC, 2013). More optimistically, Deutsche Bank Research (2013) predicts that Germany will have a noticeable increase in new car registrations in 2014. Due to low growth perspectives and an estimated increase in unemployment, average car sales in France and Spain are expected to decline over 2013-2014. Car sales in Italy are predicted to stabilize, though at a lower level than that registered before the crisis (OECD, 2013). Predictions by Deutsche Bank Research (2013) indicate that these ‘markets are not going to contract more strongly than in the past few years’.

As the car market in Western European countries is mostly saturated, the tendency in future years will be focused on replacement needs (Deutsche Bank Research, 2013). In Europe, but mainly in Southern Europe, as corporate investment activity is not expected to recover until 2014, car purchase stimuli from the commercial sector are likely to remain limited for some time (Deutsche Bank Research, 2013, p.3). Overall in the EU-15, new car registrations in 2013 are expected to end their downward trend and even to increase by 5% in 2014 (Deutsche Bank Research, 2013). In the longer term, the potential for the Western European car market is mainly related to the negative demographic trend in Europe (Deutsche Bank Research, 2013).

moment, manufacturers are trying to attract customers with discounts and incentives, but care should be taken not sacrifice margins for sales (Nair, 2013). Consequently, demand for cars is influenced both by the macroeconomic environment and industry-specific factors, such as substantial discounts and favourable financing conditions, which define the European automotive market as a buyer’s market (Deutsche Bank Research, 2013).

Due to the high youth unemployment rate in Europe, some experts predict that first-time buyers will continue to be kept out of the market (Nair, 2013). For the

Food and alcohol The global Food & Beverage industry is expected to reach EUR 5.27 trillion8 by 2014 compared to EUR 4.14 trillion in 2008. Europe holds the leading position in the global market (IMAP, 2013). Food demand in Europe (which mainly includes developed countries), is reacting more quickly to population growth and changes in lifestyles than to income changes or prices, as is the case in developing economies. Changes in lifestyle associated with high incomes are generating an increase in the demand for diets based on value added processed products, convenience foods and meals prepared and eaten outside the home (OECD-FAO, 2013). A similar view is expressed by IMAP (2013) which identifies the following growth drivers of the Food & Beverage industry: In developed countries, rising health consciousness, increasing need for convenience foods; In developing countries, population growth, favourable demographics, rising income levels. Most EU countries with a developed economy show a preference for packaged food, compared to developing countries which are more attracted to buying raw materials. But as income rises, the tendency in developing countries is to consume more and more packaged food products (IMAP, 2013).

and more apparent. On one hand, falling prices are associated with crop agriculture which is reacting to large suppliers and stock replenishment generated by high prices in recent years. On the other hand, high feed costs and reduced livestock inventories and production are causing high and increasing prices for livestock products (OECD-FAO, 2013). Overall, the prices of agricultural products are expected to rise over time, although the pace of the increase still remains uncertain (OECD-FAO, 2013). This increase may be determined by high production costs which lead to a slower production growth and hence rising demand for products. As the food retail business is mainly influenced by consumer preference, the recent crisis has generated a global slowdown. Consequently, two main trends have developed, on one hand consumersâ&#x20AC;&#x2122; preference for essential food items, and on the other, consumer interest in healthy food. Consequently, the first tendency refers to the consumers who are more careful with prices and prefer frozen foods which are cheaper and can be cooked at home easily, and the second to consumers who are demanding healthy products regardless of price (IMAP, 2013).

Food suppliers global warming, urbanization population, bio-fuel competition Food prices commodity dependence, subsidies and taxes on land, carbon path FOOD and NUTRITION SECURITY

Food access retail distribution, transport policy Facilities institutional, retail and domestic kitchens Nutrition education knowledge and skills, health professionalsâ&#x20AC;&#x2122; training Marketing messages and claims, label information including nutrient profiling, pricing strategies, placement

Figure 30 Current concerns on food and nutrition security Source: own representation, based on data from World Health Organization, 2013. WHO European Region Food and Nutrition Action Plan 2014-2020 (Draft) version 1.1 [pdf] Available at: http://wphna.org/v2/wp-content/uploads/2013/03/13-03-09-WHO-2014-2020-Draft-actionplan-draft.pdf [Accessed 19.08.2013], p. 18.

Some current concerns on food and nutrition security, expressed by the World Health Organization (WHO) (2013), are presented in Figure 30.

According to OECD and FAO (2013) the difference between the global crop and livestock sectors will become more 8 The sums were calculated according to the parity USD/EUR of 0.753 for the month of August 2013, by using InforEuro accessible at: http://ec.europa.eu/budget/contracts_grants/info_contracts/inforeuro/inforeuro_en.cfm

In terms of the promotion of foods, the World Health Organization (2013) identifies as leading categories of food being advertised HFSS9 foods such as â&#x20AC;&#x2DC;soft drinks, sweetened breakfast cereals, biscuits, confectionery, snack foods, ready meals and fast food/quick service outlets, with television remaining the dominant medium for advertising. A future policy interest at international level is to promote food reformulation through nutrient profiling to offer a clearer picture of what kind of food products should be promoted. Consequently, WHO (2013) is elaborating a framework manual with guidelines for the development or adaptation of nutrient profile models. The alcohol industry principally includes the beer, cider, ale, wine and spirits markets. The global alcoholic drinks industry is expected to reach EUR 0.75 trillion in 2014 equivalent to a volume of 210 billion litres. The European Union is positioned at the top of the market with 57% of world alcohol consumption (BusinessVibes, 2013). Anheuser-Busch InBev is the biggest alcohol producer with over 20% of the global market volume (BusinessVibes, 2013).

The global beer market is currently the leading segment of the alcohol industry, with almost 56% of overall market value. In terms of volume, it is predicted to exceed 160,000 million litres in 2014 compared to 148,000 million litres in 2009, while the market value is expected to top EUR 374 billion10 by 2014 (BusinessVibes, 2013). According to BusinessVibes (2013), the global wine market is forecast to exceed 26 billion litres by 2015. Apart from traditional regional leaders in Europe such as Italy and France, the growth potential is more evident in developing nations such as Russia over recent years. The global cider industry value is set to surpass EUR 1.88 billion11 by 2015 with the UK as the worldâ&#x20AC;&#x2122;s biggest and most rapidly expanding market. This expansion is based on aggressive marketing, increased demand from young consumers (18+) and rising disposable incomes (BusinessVibes, 2013). The EU represents almost 48% of the global spirits marketâ&#x20AC;&#x2122;s overall value which is expected to reach EUR 230 billion12 in 2015, a 17% increase over five years. Whisky is the overall leader with over 26% market share (BusinessVibes, 2013).

9 Foods high in saturated fats, trans-fatty acids, free sugars or salt 10,11,12 The sums were calculated according to the parity USD/EUR of 0.753 for the month of August 2013, by using InforEuro accessible at: http://ec.europa.eu/budget/contracts_grants/info_contracts/inforeuro/inforeuro_en.cfm

Financial services The situation of the Financial Services Industry at global level, expressed by total deposits and total loans, is presented in Figure 31. Total deposits reached EUR 58.8 trillion13 in 2009 and are expected to follow an upward trend, reaching EUR 82.15 trillion14 in 2014. A similar trend is also predicted for total loans which are projected to reach EUR 86.75 trillion15 in 2014. According to the data registered by the European Commission (2013) on credit flows and credit standards, the new bank conditions for funding need to be visible in the market by ‘increasing credit supply and an easing of lending conditions across countries’. Elevated risk aversion and de-leveraging pressures are still the main barriers that banks have to overcome in the short to medium term. Based on the EIF Corporate Operational Plan 2013-2015, financial institutions across all EU eligible countries may benefit from different products and mandates represented by the SME Guarantee Facility, SME transaction securitisation, Risk Sharing Instrument facility, microfinance activity and guarantees to business through EIF local mandates (EIF, 2013).

Figure 31 Total deposits and total loans at the world level

“The financial services sector remains the principal mechanism for distributing investment capital to the wider economy and it now needs to play a vital role in the economic recovery. There is a sense that the industry as a whole is close to turning a corner, however the forecast is divided between north and south, and also between systemically important financial institutions (SIFIs), which continue to strengthen, and smaller national banks, for whom the near-term outlook is less certain.” declared Andy Baldwin, Head of Financial Services, Europe, Middle East, India and Africa (EMEIA) at EY (EY, 2013).

Source: Deloitte and Investment Support and promotion Agency of Turkey, 2010. Turkish Financial Services Industry Report [pdf] Available at: http://www.invest.gov.tr/en-US/infocenter/ publications/Documents/FINANCE.INDUSTRY.PDF [Accessed 22.08.2013], p. 5.

2013 is expected to be the last year of asset shrinkage in the Eurozone and 2014 is predicted to be much healthier, as mentioned by Marie Diron, Senior Economic Adviser to The Eurozone Financial Services Forecast (EY, 2013). Lending to businesses and households is forecast to fall by 0.5% across the Eurozone in 2013, but is expected to start to grow again in 2014 at a rate of 2.9%. Lending in Spain is forecast to contract by 5.1%, in contrast to positive growth of 0.8% in Germany and 0.6% in France (EY, 2013). As a result of the rise in Non-performing loan (NPL) rates in the peripheral economies, NPLs in the Eurozone will

13,14,15 The sums were calculated according to the parity USD/EUR of 0.753 for the month of August 2013, by using InforEuro accessible at: http://ec.europa.eu/budget/contracts_grants/info_contracts/inforeuro/inforeuro_en.cfm

peak at a Euro-era high of 7.2% in 2013. NPL rates are already declining in France, Germany and The Netherlands this year, but will climb to a peak of 10.2% in Italy and are forecast to reach 12.8% in Spain (EY, 2013). Insurers should take note if the Eurozone does not shrink in 2013 and grows by 1.7% in 2014, which is faster than the 1.1% baseline forecast. Consequently, inflation would rise to 2.8% by the end of 2014, causing the European Central Bank to increase interest rates from 0.75% to 1.25% in 2015, rather than keep them on hold until the middle of 2017. Ten-year Eurozone government bond yields would rise from 3.4% in mid-2014 to 4.7% by the end of 2015 (EY, 2013). Growth in life insurance premiums is now expected to be subdued, forecast at 1.6% in 2013, and then growing by c.2.6% a year until 2017. Sales in Italy and Germany declined for the second year running and sales in France declined sharply in part due to competition from banking products (EY, 2013).

In 2007, hedge funds and funds of funds managed 50% more money than multi-asset funds, but by the end of 2017 multi-asset funds are forecast to manage 40% more assets than the other two types. Multi-asset funds have benefited from the demand for smaller pension funds wishing to outsource asset allocation (EY, 2013). Starting from the paradigm that the purchasing process is moving towards online channels and that face to face interaction at a bank branch is therefore less and less common, advertisers and agencies should be rethinking their strategic priorities in 2014 and beyond, a view expressed by leading commentators on the sector: “A strategic priority for 2014 will be to find ways to leverage social media and mobile for growing share of wallet through deepening customer relationships” Chris Skinner, Financial Services Club (Bank Marketing Strategy, 2013).

“There is a great opportunity for marketers to use tools like Vine, Instagram, Twitter, Facebook and Google or to develop a mobile app to solve a problem, make life easier and of course engage with the customer as they map the digital customer journey.” Elizabeth Dias, financial services and retail marketing manager at Perficient (Bank Marketing Strategy, 2013). “The future reduction in (bank) branches across the globe will require digital marketing acumen and ‘gamification’ and social media marketing will also play a big role here, as will the importance of ‘onetouch’ mobile marketing.” Alex Bray, London-based retail channel director at Misys (Bank Marketing Strategy, 2013).

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Disclaimer This Document has been prepared for information purposes relating to economic perspectives in 2014. This Document does not purport to be all-inclusive nor to contain all information that a prospective investor may require in deciding whether or not to invest in Europe or in any particular region of Europe. No representation or warranty, express or implied, is or will be made in relation to the accuracy or completeness of this Document or any other written or oral information made available to any perspective investor. The information contained herein was prepared based on publicly available information sources at the time that this Document was prepared. In particular, no representation or warranty is given as to the achievement or reasonableness of future projections, targets and estimates, if any. Under no circumstances should this Document itself or any modified version be published or sold by any third party in return for a fee. Reproduction is authorized, except for commercial purposes, provided that suitable acknowledgment of EACA as source.

Author: Dr Alina Elena Iosif iosif.alinaelena@gmail.com Editor: Dominic Lyle European Association of Communications Agencies Brussels, Belgium Tel: (32-2) 740 07 10 www.eaca.be

October 2013