Why MNCs should keep a close eye on South Europe

The once weakest and riskiest region within Western Europe, South Europe (Italy, Spain, Greece, and Portugal) saw growth in 2009 and 2012 contracting by 4.2% in 2009 and by 3.2%, respectively. Since then, the economic panorama has changed for these countries, and South Europe will grow by 1.8% YOY in 2017 exceeding Western Europe growth offering stable opportunities and a chance to offset possible slow growth elsewhere.

South Europe accounts for nearly half of eurozone’s population, with Italy and Spain the largest markets in this portfolio. Positive market conditions aren’t solely associated with improving fundamentals, the declining unemployment and the reviving credit growth, but also with the subsiding political risks compared to the past few years. Additionally, despite the economic pain of the 2008/9 financial and 2012/3 debt crises, the sub-region has been recovering since then, enjoying a cost advantage over traditional Western Europe markets and more moderate competition overall. Therefore, MNCs should be confident of their investments in these markets and continue seizing the business opportunities they offer.

South Europe forecasts

Source: Frontier Strategy Group analyst

The Iberian Peninsula leads the expectations for this year, with Spain anticipated to grow by an impressive 3% YOY – the strongest growth momentum currently for a developed market– and Portugal by 2.2% YOY. Consumer demand remains the fundamental driver of this growth, underpinned by solid tourism flows. Industrial exports, namely vehicles, and machinery will continue to complement growth even with cost-competitiveness easing on an appreciating euro against the US dollar from H2 2017 and into 2018. Spain (to a greater extent than Portugal) has successfully addressed banking sector weaknesses through consolidations and restructuring, allowing bank lending to rise in 2017 after eight years in contraction.

While market conditions are also improving in Italy and Greece, because of a pick-up in manufacturing coupled with less political risk, improvements are rather minimal compared to Spain and Portugal. Regarding Italy, manufacturing output has been robust in H1, led by export growth, generating new jobs. Moreover, no early general election in 2017 has decreased political uncertainty and postponed a possible shock to the banking sector from the threat of a populism surge. Recent bail-outs of Italian banks have strengthened the banking sector, and although political uncertainty remains ahead of the 2018 elections and populism is increasing, the Italian banks are better able to absorb any potential renewed pressures than before. Overall, Italian credit growth has improved, and any pressure to the Italian banking sector is now unlikely to result in a full-blown banking crisis – as had been a worry in late 2016.

Even conditions in Greece, one of the historically most troublesome markets within MNC’s Western European portfolio, have improved in H1, creating the foundation for stability for businesses. Greece has successfully concluded the bail-out review in July getting disbursed € 7.7 billion from creditors, averting a downside scenario and increasing optimism. Likewise, the public sector is accelerating outstanding payments to the private sector, with B2G clients benefiting the most. However, austerity in the form of tax hikes in 2017 and 2018 will continue to depress consumer demand, affecting B2C firms’ performance.

Overall, the business opportunities provided by South Europe appeal to a broad spectrum of MNCs:

  • For B2C firms, price sensitive consumers will remain the norm for South Europe. B2C MNCs will make the most out of the tourism sector and by increasing investment in their digital strategy will manage to capture the strengthening consumer demand
  • Spain and Portugal are emerging from austerity and will provide fruitful opportunities for healthcare MNCs, while persistent austerity in Italy and Greece will make the introduction of OTC products a more viable strategy going forward
  • For B2B MNCs, manufacturing momentum is expected to continue, and firms should consider investments in supply chain to increase efficiencies and stay one step ahead of competition
  • Technology MNCS will continue to enjoy interest for their products, especially in cyber security and cloud solutions, and increased marketing efforts by emphasizing differentiation of their products will give them a competitive advantage in the region

For more information, clients can access our recently published Quarterly Market Review: Western Europe – Q3 2017 on South Europe, and listen to the podcast on FrontierView here.

Not a client? Listen and subscribe to FSG’s Emerging Markets Insights channel on iTunes or Stitcher. You can also read our related blog posts, Has Western Europe become free of political risk for MNCs? and Western Europe lingering concern: What MNCs need to know about Italy, or purchase the EMEA Outlook for 2017 from our online store.

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