Group Economic Research

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1 Group Economic Research Summary of macroeconomic forecasts GDP Growth Inflation Curr. Account / GDP Fiscal balances / GDP % e 216 e e 216 e e 216 e e 216 e Advanced United States Japan United Kingdom Euro Area Germany France Italy Spain Portugal Emerging China India Brazil Russia World Source : BNP Paribas Group Economic Research / GlobalMarkets (e: estimates & forecasts) In the US, the economy is running at 2.5% annual path, while the unemployment rate is falling toward 5%, time for monetary policy to become less accommodative. Although lower oil prices and stronger dollar weigh on headline inflation, the first rate hike is likely to occur by end-215 With low inventories, low real interest rates, upswing in prices and optimistic surveys, the housing market will continue to do well, supporting private consumption Corporates are still largely self-financing their capital spending (high margins) and investment is likely to keep healthy. Main risk : fall in oil prices to dampen capex in the energy sector. In the euro zone, the recovery has been on a good track until mid-215 (growth close-to +1.5% annual path), but the perspective of a Grexit has dampened business surveys as well as market prices recently. In Germany, the expected IfO index is down for the third month in a row in June, suggesting that activity might become less dynamic for a while. 1 US GDP growth and composite ISM 2 EMU GDP growth and composite PMI GDP, q/q, ann. [L] ISM composite [R] Some pay-back after the very strong GDP number printed by the end of last year. Yet, the US activity keeps on a solid trend and may have rebounded in Q GDP, q/q, ann. [L] PMI composite [R] The PMI indexes were good until June, in line with a 1.5% to annual rate of growth in GDP

2 Group Economic Research /// OECD Countries /// Eco Charts /// 9 July 215 Summary of financial forecasts Interest rates ######## ######## ######## End of period, % Q1 Q2 Q3e Q4e Q1e Q2e Q3e Q4e e 216e US Dol. Fed Funds Libor 3m $ T-Notes 1y Euro. A. ECB "Refi" Euribor 3m Bund 1 ans OAT 1y BTP 1y R-Uni BoE Base rate Gilts 1y Japon BoJ Ov ernight JGB 1y Exchange rates End of period Q1 Q2 Q3e Q4e Q1e Q2e Q3e Q4e e 216e USD EUR / USD USD / JPY EUR EUR / GBP EUR / CHF EUR / JPY Source : BNP Paribas Group Economic Research / GlobalMarkets (e: Estimations, prév isions) 3 US, interest rates vs nominal GDP growth 4 Euro area, interest rates vs nominal GDP growth US nominal GDP growth, y/y Fed funds rate 1y bond yield - Forecast Far below the natural rate implied by GDP growth Euro area nominal GDP growth, y/y ECB "refi" rate German 1y bond yield - Forecast Stick to zero for the foreseeable period 5 Euro Area, spreads of Italy and Spain vs Germany 6 Euro area, euro-dollar vs interest rates differential Spain, 1y gov. rates spread with Germany Italy, 1y gov. rates spread with Germany Forecast EBC s purchases to put a cap on spreads, 3M EUR-USD rates spread Euro vs dollar [RHS] 1.5% 1..5%. -.5% Forecast

3 Group Economic Research /// OECD Countries /// Eco Charts /// 9 July 215 The US economy 7 US, housing market, strong recovery ahead 8 US, investment cycle vs corporate profits Housing starts, x1 [L] NAHB [R] The NAHB index still suggests housing starts will continue to gain momentum Nonfinancial corporate, fixed investment (% value added) [L] Nonfinancial corporate, net profits (% value added) [R] Corporate investment continues to recover, in the wake of high profit margins 9 US, retail sales not booming, but robust 1 US deleveraging, a concern for China? Private consumption, 3m/3m, ann. [L] Retail sales, vol., 3m/3m, ann. [R] 15% 1 - car sales -5% (adjusted to scale) % Private consumption (read the left scale) is very robust, thanks to the pick-up in employment and the fall in energy bill. 5% US, households debt ratio (%gross income) -L- China, exports (% GDP) -R US households are still reducing their debt to income ratio, a process that weighs on Chinese exports US, no concern for inflation neither deflation 12 US, no concern for inflation neither deflation CPI Core y/y CPI Headline, y/y - - Energy Energy is largely responsible for the decrease in inflation rate. Core inflation (excluding food and energy) is rather stable and below, which is the official target. CPI Core, y/y [LHS] Unit labor costs, y/y [RHS] No particular concern on wage front. However, at 5.5% in Feb. the unemployment rate is moving closer to the NAIRU as computed by the Fed.

4 Group Economic Research /// OECD Countries /// Eco Charts /// 9 July 215 The US economy 13 US, non-farm payrolls vs unemployment rate 14 US, labour force participation rate Monthly change in nonfarm payrolls (x1) [L] Unemployment rate [R] Nonfarm payrolls have come stronger recently The trend is now close largely above +2K jobs (net) per month, allowing the unemployment rate to fall further 9% 7% 5% Participation rate % of total population Part of the fall in the unemployment rate is explained by the historical low rate of labour force participation (workers getting older or simply discouraged don t apply for a job ) 15 US, corporate credit, back to pre-crisis level 16 US, mortgage loans, far from pre-crisis level Credit to corporate*, net flows, an $bn [L] Banks tightening credit, % [R] Credit conditions are loose and flows to corporate (loans & bond issues) are back to their pre-crisis level Mortgage credit., net flows $bn an. [L] Banks tightening credit, % [R] which is not the case for mortgage loans. They have recently stopped to contract, after a five year period of slump. But lending activity for house purchases is still very weak US, narrowing budget deficit 18 US, narrowing current account deficit Budget balance % GDP On the fiscal front, brakes are coming off owing to improved receipts. The federal budget deficit is shrinking rapidly. Current account balance % GDP Current account deficit is closing at a time when the US economy is recovering, a rather unusual story.

5 Group Economic Research /// OECD Countries /// Eco Charts /// 9 July 215 The US economy 19 US, Fed funds rate and inflation 2 US, real Fed funds rate and unemployment rate Fed funds Core CPI, yy - Negative real Fed - funds rates Fed funds rates have been negative in real terms for now six years. Real Fed Funds rate [L] Unemployment rate [R] - Negative real Fed - funds rates A 5% to 5.5% level in unemployment rate is the limit where real Fed fund rates start to be positive. 9% 7% 5% 21 US, real estate investment trusts balance sheet 22 US, Federal reserve balance sheet REITS Balance sheet MSB, $bn [R] Repo as % of total liabilities [L] Source : Thomson Datastream, IMF, BNP Paribas Real estate investment trusts (REITS) use repo markets as a source of funding for longer-term, less-liquid assets like RMBS. Some are vulnerable to contagion risks / asset fire sales [IMF] Federal Reserve, total assets USD bn juil. Federal Reserve s total assets increased more six time since 27 and now account for 25% of GDP. The QE is now over and the Fed is expected to hike rates by mid US, dollar effective exchange rates 24 US, investment hit by falling oil prices, stronger dollar Dollar, real effective exchange rate Deviation from long-term average Source : Thomson Datastream, IMF, BNP Paribas Looking at the real effective exchange rate (trade weighted & adjusted for inflation) the dollar has moved back toward its long term equilibrium level. Invest. Mach.& Eqpt., q/q, ann. [L] Cap. Good orders, 3m/3m, ann. [R] Stronger dollar and falling energy prices may have dampen corporate investment during the first quarter of 215, especially in the shale oil sector.

6 Group Economic Research /// OECD Countries /// Eco Charts /// 9 July 215 The Euro area economy 25 Euro area, better prospects 26 Euro area, consumption strengthening GDP, q/q, ann. [L] PMI composite [R] The composite PMI close to the 55 level suggests GDP would expand at a 1.5% to annual pace over the first half of Private consumption, yy Retail sales, vol., yy Consumption to be the main driver behind the Eurozone recovery at the early stage of 215. Data are particularly impressive in Germany. 27 Germany, GDP growth vs business surveys 28 France, GDP Growth vs business surveys GDP, q/q, ann. [L] PMI Manuf.[R] PMI composite [R] Better business surveys + buoyant retail sales point toward stronger activity at the start of GDP, q/q, ann. [L] Composite indicator (BdF&Insee) PMI [R] The rebound is not as impressive as in Germany. However, surveys are less depressed, companies own prospects look better in the manufacturing industry France, construction activity still very low 3 France, budgetary effort Housing permits and starts 12 m cumulated, x1 6 Change in Gen. Govt. primary structural deficit, % GDP EMU France 1.5% Part of the French poor performance in Europe is due to the housing market, trending at all-time low. According to the INSEE, the fall in the property market drags.4pp to growth in % Source : Thomson Datastream, European Commission BNP Paribas The fiscal effort (the reduction in structural deficit) has come higher in France than in the rest of the Euro area since 213. But the way is will be prolonged through 215 is an open question

7 Group Economic Research /// OECD Countries /// Eco Charts /// 9 July 215 The Euro area economy 31 Italy, GDP growth vs business surveys 32 Spain, GDP growth vs business surveys GDP, q/q, ann. [L] PMI Manuf.[R] PMI composite [R] By early 215, the first genuine sign of expanding activity since four year GDP, q/q, ann. [L] PMI Manuf.[R] PMI composite [R] Spain is on a good track. The PMI above the 55 level suggests that the economy keeps expanding at a 2.5% annual rate Euro area, fixed investment vs cap. utilization rate 34 Euro area, corporate fixed investment vs profits Investment (Mach. & Equipt) % of GDP (LHS) Capacity utilisation rate (RHS) 11.5% 9 Investment (Mach. & Equipt) % of GDP (LHS) Unit profit margin index, whole economy. (22 = 1, RHS) 11.5% % % 8 1.5% % % Higher capacity utilisation rates 7 9.5% and stabilisation in profit margins might prompt companies investment to pick up, albeit from very low levels Euro area, trend in corporate profits 36 Euro area, trend in unit labour costs Corporates profit margin index, 22 = 1 Spain Ireland Corporate profits at historical high in Spain, Portugal and Ireland Unit labor costs (21 = 1) EMU - - -France Spain Spain is becoming more and more competitive within the Euro area, challenging Italy & France

8 Group Economic Research /// OECD Countries /// Eco Charts /// 9 July 215 The Euro area economy 37 Euro area, trend in exports for some countries 38 Exports, 28 = 1 (vol.) Germany Spain Spain and Portugal : an export- led recovery, that now spreads on domestic demand, mainly companies investment Euro area, the periphery is getting more and more competitive Current account, % GDP Italy Portugal Spain --- Ireland 9% % -1-15% Internal devaluations led to a significant reduction in unit labour costs and surge in external surpluses at the periphery of the EMU 39 EMU, distribution of foreign direct investments 4 EMU, closing imbalances Foreing direct investments % GDP, 2 year cumulated flows, upt to 214Q1 - - IR PT GR ES BG FN FR IT NL BD OE It also allowed foreign direct investments to come back. Intra EMU trade balances, % GDP Germany Italy Spain % Intra-EMU imbalances have been reduced or closed, as a result of the global deleveraging process. For the first times since the launch of the euro, Germany gets no trade surpluses inside EMU 41 Germany, current account balance with China 42 EMU, current account balance German current account with China % GDP.5%. -.5% Part the German surpluses have shifted from EMU to emerging countries. Trade in goods and services with China is now generating positive revenues Current account balance % GDP The largest current account surplus ever seen

9 Group Economic Research /// OECD Countries /// Eco Charts /// 9 July 215 The Euro area economy 43 Euro area, the fall in the euro beccomes very supportive 44 Euro area, decoupling yields Trend in th euro (211 = 1) Against the dollar Trade weighted Down 2 against the dollar, 1 in nominal effective terms. Empirical models suggest the positive response to the shock could be +.5/ +.7 pp of GDP after one year. 1y Govt. Bond yield, Germany 1y Govt. Bond yield, US 5% % 2-juil. 1 year yield spread between the Bunds and Treasuries is close to 2 bps, a record. Euro Area, credit to corporates vs bank lending survey 46 Spain, credit to corporates (<1y, EUR 1mn) Credit to corporate*, net flows EUR bn [L] Expected tightening, % [R] Expected demand, % [R] ECB s bank lending surveys are improving with credit standards back to their normal levels. Demand for credit addressed by the private sector is weak, but expected to improve Spain, credit to corporates (<1y & 1M EUR) Annualized net flows (EURbn, s.a., monthly) 1-1 Trend credit to corporates (under 1 year and EUR 1mn) tends to pick up in Spain, albeit from very depressed levels. 47 Fall in interest rates not everywhere 48 Cross border lending activity as not yet recovered Interest rates on banks lending to corporates (<1y, 1MEUR) Spain --- France ECB (refi) 7% 5% First positive reaction of ECB asset purchase program? Interest rates charged by Spanish banks have come down recently Cross border holdings, "Core" vs "Periphery" % GDP 3 25% 2 15% Cross border lending activity is still very low in the Eurozone and partly explained by the new regulatory environment

10 Group Economic Research /// OECD Countries /// Eco Charts /// 9 July 215 The Euro area economy 49 Euro Area, M3 vs core inflation rate 5 Monetary aggregates, Euro area vs US CPI Core y/y [L] M3, y/y [R] % % 1..5% % 1 The main monetary aggregate M3 is bottoming out. But this is largely as a result of investors shift toward liquid assets from longer-term financial liabilities. 9% - Monetary aggregates (28 = 1) EMU (M3) US (M2) Money growth still subdued when compared to other developed countries like the US or UK. 51 Euro area, core inflation rate by country 52 Euro Area, ECB refi rate vs determinants Core inflation May % 1..5%. -.5% -1. OE IR BG BD NL EMU FR IT FN PT ES GR Now positive everywhere except in Greece Core inflation rate [L] Unemploment rate [R, inv.] "Refi" rate [L] 4.5% % % % 1..5% % 9% The ECB has opted for an ultimate cut in interest rates on sept. 4. The refi is now.5%, while the deposit facility is charged at.2. We do not expected any change in key rate before Italian 1 year rates 54 Spanish 1 year rates Italy, Govt. bond yields 1y 2y 7% 5% juil A sharp rebound in 1 year yield as a result of global bond price reassessment. No particular tension on spreads, despite of Greece Spain, Govt. bond yields 1y 2y 2-juil. 7% 5% Same story

11 Group Economic Research /// OECD Countries /// Eco Charts /// 9 July 215 The Euro area economy 55 Central bank balance sheet 56 Central bank balance sheet (at June 215) Central banks total assets, % of GDP ECB Fed BoE BoJ On sept 4 214, the ECB announced it will start buying ABS and reintroduce a security market program focused on covered bonds. It s balance sheet will start to expand again Gen. Govt. Debt hold by central banks % of 214 GDP % % ECB BoE Fed Boj ECB s public debt holding has nothing to compare with those of others central banks. However, a large QE ( 1pct of GDP) based on government bonds purchases is launched 57 Banks current account to the ECB 58 EUR vs GBP Rate on deposit facility [RHS] Excess reserves, bn [LHS] Deposit facility, bn [LHS] The ECB has opted for a negative interest rate on deposit facilities and excess reserves. Banks current accounts to the ECB have come down, but will start to rise again with the QE..95 EUR vs GBP [L] M Rates differential (%) Reactive to real rates spreads

12 Group Economic Research /// OECD Countries /// Eco Charts /// 9 July 215 FOCUS ON PUBLIC FINANCES GDP Gen. Gov. fiscal balance Interest payment Public debt Total Primary Struct. Total In 214 bn bn %GDP %GDP %GDP bn %GDP Av. rate bn %GDP Rating S&P Germany AAA France AA Italy BBB- Spain BBB Netherlands AA+ Belgium AA Austria AA+ Greece CCC- Portugal BB Finland AA+ Ireland A+ EMU United Kingdom AAA EU United States AA+ Japan AA- Sources : European Commission, BNPP

13 Group Economic Research /// OECD Countries /// Eco Charts /// 9 July 215 ECONOMIC RESEARCH DEPARTMENT William DE VIJLDER Chief Economist OECD COUNTRIES Jean-Luc PROUTAT Head Alexandra ESTIOT Deputy Head - Globalization, United States, Canada Hélène BAUDCHON France, Belgium, Luxembourg Frédérique CERISIER Public finances - European institutions Clemente DE LUCIA Euro area, Italy - Monetary issues - Economic modelling Thibault MERCIER Spain, Portugal, Greece, Ireland Caroline NEWHOUSE Germany, Austria - Supervision of publications Catherine STEPHAN United Kingdom, Switzerland, Nordic countries - Labour market Raymond VAN DER PUTTEN Japan, Australia, Netherlands Environment - Pensions Tarik RHARRAB Statistics BANKING ECONOMICS +33.() william.devijlder@bnpparibas.com +33.() jean-luc.proutat@bnpparibas.com +33.() alexandra.estiot@bnpparibas.com +33.() helene.baudchon@bnpparibas.com +33.() frederique.cerisier@bnpparibas.com +33.() clemente.delucia@bnpparibas.com +33.() thibault.mercier@bnpparibas.com +33.() caroline.newhouse@bnpparibas.com +33.() catherine.stephan@bnpparibas.com +33.() raymond.vanderputten@bnpparibas.com +33.() tarik.rharrab@bnpparibas.com Laurent QUIGNON +33.() laurent.quignon@bnpparibas.com Head Delphine CAVALIER +33.() delphine.cavalier@bnpparibas.com Céline CHOULET +33.() celine.choulet@bnpparibas.com Laurent NAHMIAS +33.() laurent.nahmias@bnpparibas.com EMERGING ECONOMIES AND COUNTRY RISKS François FAURE Head Christine PELTIER Deputy Head - Methodology - China, Vietnam Stéphane ALBY Africa, French-speaking countries Sylvain BELLEFONTAINE Latin America - Methodology, Turkey Pascal DEVAUX Middle East - Scoring Anna DORBEC CIE, Hungary, Poland, Czech Republic, Slovakia Hélène DROUOT Asia Johanna MELKA Asia - Capital flows Alexandra WENTZINGER Africa, Brazil Michel BERNARDINI Public Relation Officer +33.() francois.faure@bnpparibas.com +33.() christine.peltier@bnpparibas.com +33.() stephane.alby@bnpparibas.com +33.() sylvain.bellefontaine@bnpparibas.com +33.() pascal.devaux@bnpparibas.com +33.() anna.dorbec@bnpparibas.com +33.() helene.drouot@bnpparibas.com +33.() johanna.melka@bnpparibas.com +33.() alexandra.wentzinger@bnpparibas.com +33.() michel.bernardini@bnpparibas.com

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