UBS warns the rebound for southern European nations could be about to fade

  • Portugal grew at about 2.7 percent in 2017, Spain rose 3.1 percent and Italy about 1.5 percent. However, the economic drivers behind such performances have started to fade, UBS warned.
  • Poor demographics, a strong euro and the ECB move away from its ultra-loose monetary policy could pose problems to the southern economies.
Venice, Gondola on Grand Canal, Italy.
Sylvain Sonnet | Getty Images
Venice, Gondola on Grand Canal, Italy.

Southern European countries have surprised in recent years with growth rates above the euro area average, but the sun might stop shining in these economies soon, UBS analysts warned in a note Monday.

Following years of economic troubles in the wake of the sovereign debt crisis of in 2011, Portugal, Spain and Italy have managed to turnaround their economies. Portugal grew at about 2.7 percent in 2017, Spain rose 3.1 percent and Italy about 1.5 percent. However, the economic drivers behind such performances have started to fade, UBS warns.

"The economic recovery in Italy, Spain and Portugal has been helped not only by favorable external conditions, but fostered by structural reforms and positive credit and fiscal impulses. However, these factors are beginning to fade, causing GDP (gross domestic product) growth to decelerate gradually," analysts at the bank said in a report Monday.

"We think growth in these three countries will gradually revert toward their meager potential economic growth rates," the analysts highlighted, suggesting GDP will fall to below 1 percent in Italy and below 1.5 percent in Spain and Portugal.

The forecasts are based on poor demographics, a strong euro and the European Central Bank's (ECB) move away from its ultra-loose monetary policy.

These southern economies saw many young people leaving during the crisis, raising further pressure on public finances. Costs associated an older population can limit the government's ability to invest.

At the same time, the fact the ECB is likely to gradually raise interest rates, it will mean that these peripheral nations could face higher debt financing when borrowing money from the markets. This will also limit their available spending budgets.

Their economic recoveries have also been boosted by increased exports. But given that the euro currency has gotten stronger, such an economic driver could be at risk. A higher euro will make European products less attractive abroad as they become more expensive to purchase.