International business report

Could Europe’s economic recovery be good news for SA?

Europe is recovering from economic problems caused by the sovereign debt crisis

New research from Grant Thornton reveals that Europe is recovering from economic problems caused by the sovereign debt crisis.  This turnaround will hopefully stimulate increased trade with South Africa.

But FITCH and S&P’s downgrade of South Africa’s sovereign credit rating to “negative” and “BBB-” respectively in June 2014 means South Africa is in for a daunting journey in the months ahead.

The first of May 2014 was the tenth anniversary of the accession of the first ten countries to the European Union. It has expanded over the years and today, the EU comprises 18 countries.

According to Grant Thornton’s International Business Report for 2014, entitled The Future of Europe, the Eurozone is expected to post modest growth in 2014, as unemployment and debt levels continue to creep downwards, while measures of consumer and business confidence are rising.  The majority of European businesses are open to more integration within the European Union (EU), but attitudes in Germany and France have hardened.

The findings of the annual report show that 93% of businesses in the Eurozone area want to see the euro survive and three in four (75%) say that entry into the single currency has benefited their organisation. Business optimism has also risen across the Eurozone from 8% to 25% over the past three months.

Yves Mersch, member of the executive board of the European Central Bank said during a presentation in May this year: “The European Union, despite its shortcomings, remains respected and influential. It also remains an aspiration for non-members and maybe even in other ways, an inspiration.”

However, while support for the euro amongst business leaders remains strong, support for further European integration appears to be waning in France and Germany, the architects of the EU project. When asked whether they would like to see further integration between member states, the IBR report reveals that businesses in France and Germany were markedly less positive compared with this time last year: in Germany, 55% of firms are now open to further economic integration, down 20 percentage points from this time last year (2013: 75%); in France, support has dropped 12 percentage points to 57% (2013: 69%).

“The recovery in Europe is good news for South Africa as the continent is one of our largest trading partners,” says Edward Dreyer, partner and International Business Centre director at Grant Thornton Johannesburg.  “And despite Germany’s negative sentiment towards greater eurozone integration, the country is a principal international trading partner with South Africa, accounting for 7% of our exports and 11 % of imports, as are the United Kingdom and Netherlands.

“The fact that Europe is upbeat and showing recovery from its economic woes will hopefully have a knock-on effect on this country,” he says.  “It should have a positive impact on demand for our goods and raw materials.

“There is talk of South Africa heading into recession – indeed, some economists believe we’re in one already.  We therefore need every bit of trading activity possible to move our GDP forward and stimulate the economy.”

South Africa would be set to benefit if European countries start looking further afield for business opportunities outside Europe.

“As a net exporter of goods there’s an urgent need for us to boost imports to close the gap,” says Dreyer.  “We are the EU’s largest trading partner in Africa and several European businesses looking towards expansion into Africa choose to do it from this country.”

The IBR Future of Europe report also highlights that while business support for further EU integration has wobbled in France and Germany, it is picking up elsewhere.  Support for greater economic integration is increasing in a number of economies including Ireland (50% last year to 77% this year), Poland (54% to 67%) and Italy (56% to 61%). In Ireland, 95% of businesses are now open to further integration, up from 68% this time last year.

Dreyer added: “There’s no doubt that the picture across Europe is much brighter now than it was twelve months ago. And perhaps nowhere is this turnaround more evident than in Ireland, where the bailout programme has ended and business optimism has rocketed. There’s also improvement in other troubled economies like Portugal and Spain, both of whom are turning to exports again in a bid to exit recession.

“However, the recovery is fragile – Europe is not out of the woods just yet. Deflation is a growing concern, as is the plight of youth unemployment which is still unacceptably high. The situation in the Ukraine is also creating uncertainty. Against this backdrop, a loss of support at the heart of Europe’s business community is to be avoided at all costs if growth is to continue and the region is to strengthen.”

Full report – “Future of Europe” by Grant Thornton can be downloaded at the following link: