Eurozone Economy Update

Transcription

1 MACRO REPORT Eurozone Economy Update September 2015 Key Insights Monica Defend Head of Global Asset Allocation Research Andrea Brasili Senior Economist Global Asset Allocation Research Also contributing Riccardo Soggiu Senior Economist, Central Banks Global Asset Allocation Research Outlook: After a nice start to the year, the Eurozone tackled with a huge fatigue the Greek saga, and then the EM-prompted market turbulence. The impact of the second is far from clear, but as European Central Bank s President Draghi stated, it increases the risk that external demand will be lower than previously thought. In our view, the three powerful factors that initiated the recent recovery phase remain in place, namely, expansionary monetary policy, the positive real income shock from the oil price decline, and the weakened currency; however, in a risk off environment the last is more in doubt. Hence, barring further worsening of the global picture, the main scenario is still that of an improving economy, hitting a 2% growth pace next year. It will take a bit more time to return to faster growth and higher inflation, but the path is still in place. As for specific GDP numbers, we have lowered just a bit our forecasts, and now expect growth to hit 1.6% this year and 2.0% in Inflation: The plummet in oil prices during the summer along with a slightly strengthening euro implies a longer time before we will see any kind of price pressures, even though in December there will likely be a jump in headline inflation. The second round of transmission of lower oil and commodity prices should keep inflation tame in 2016, but will help consumption and corporate profits. Monetary and fiscal policy: The ECB sent a dovish message in September, lowering projections for growth and inflation and stating that, if needed, the size and duration of Quantitative Easing (QE) can be adjusted. Fiscal policy ex ante coordination will be an interesting exercise this year: it is possible that after the Greek story and some disappointment on the pace of recovery, the accent on growth and employment policies will be strengthened. Macro Pulse ECONOMIC CONDITIONS STABILITY CONDITIONS Poor Good Poor Good Growth: weak Q2 GDP data, but underlying figures are better than at first glance. Spain and Italy are doing better than expected. Risks and threats come from abroad. Economic Trend: inflation will likely increase towards year end but low commodity prices and the slack in the economy should prevent any jump. Financial Conditions: loose credit standards in a less risky environment, loans extended to Non Financial Corporations turned positive again. Economic Policies: fiscal policy no longer a drag on growth. The Greek saga could help in changing the approach to policy. EU Demographics: aging population is a threat to long term equilibrium. Now the issue is to find a common and reasonable policy to deal with immigration and refugees. Social: improving economic conditions should help lessen social tensions. Politics: in our view, general elections in Greece, Portugal and Spain will have a huge European content. On the immigration issue, debate with UK will not be easy. Economic Health: ECB is favouring deleveraging, public sector is reducing the debt service burden. Source: Pioneer Investments, as of September 8,

2 Index % Eurozone Macro Report September 2015 Economic Conditions Growth & Economic Trend Q2 GDP was a bit disappointing, but more in the headline than in the composition. In fact, a quite notable drag from inventories suggests that if demand remains at the same level in the coming months growth will strengthen. In addition, some of the ingredients were good: net export contributions turned in general more positive in Q2 (particularly in Germany and France), and where this was not the case (Italy) it was mainly because of a quite nice increase in domestic demand. Figure 1. Eurozone GDP Contributions Q1 12 Q4 12 Q3 13 Q2 14 Q1 15 Consumption Gross Fixed Capital Formation Inventories Gov.cons Source: Eurostat, Datastream, Pioneer Investments, as of September 8th, Net export Production related data in the last two months are still missing (June industrial output was quite weak) while consumer related figures, particularly car sales, displayed a good tone. But in general, market jitters, first related to Greece and then to China, exerted some impact on confidence. Our coincident indicators actually show some pause in the acceleration, at the moment suggesting a pace in Q3 not much different from that in Q2. It must be said, however, that this represents good news, considering that the early 2014 eruption of the Ukranian- Russian turmoil froze the hopes for recovery of the Eurozone economy, while now we are seeing just a moderation. Hence, the Eurozone at least seems more resilient than in the recent past to external shocks. GDP Figure 2. Our Coincident Indicators for Big-4 Eurozone Countries Source: Pioneer Investments, as of September 4th, Germany Italy Spain France 2

3 Index Eurozone Macro Report September 2015 China Woes August turmoil in the equity market was due to worries that the Chinese economy could be headed toward a deeper slowdown than previously thought. Given the increasing role of China in the world economy, such an event would reinforce the fear that secular stagnation is an appropriate description of the world economy. The table below represents the direct trade links between the major European countries and the US with China, in terms of the share of each country s total exports that reach China, and the weights in the effective exchange rate compiled by the BIS that take into account competition in third markets. Table 1. China Slowdown and Impact on US and Some Eurozone Countries Direct trade link (Share of exports to China on total exports) in 2014 Weights on Effective Exchange Rate by BIS that takes into account competition in third markets Source: Direction of Trade IMF, BIS. Germany France Italy Spain US 5.8% 3.7% 2.6% 1.7% 7.6% 10.9% 9.1% 9.2% 8.9% 20.9% While the direct trade links suggest that the impact of slower growth in China would be manageable, simple observation of the weights of the yuan on the effective exchange rates suggest that what worries the market is the impact of a larger devaluation. But we attach a quite low probability to this event. As noted, the Greek story and now the recent market turmoil have favored some pause in the strengthening of confidence indicators. While consumer confidence and industrial confidence have receded a little, neither is far below the peaks of March 2015, with consumer confidence recovering a bit in August. Moreover, other indicators are in better shape; for example, confidence in both the service and retail sectors is pointing north quite clearly. Figure 3. Consumers and Manufacturing Confidence % Economic sentiment Industrial confidence Consumer confidence Source: Datastream, Pioneer Investments, as of September 8th,

4 % Eurozone Macro Report September 2015 A number of other indicators also suggest further progress is being made on the path to normalization. Credit-related variables are clear in that regard: in July the Bank Lending Survey suggested that credit standards applied to non financial corporates are easing, thanks to improved conditions and lowered risks, and that demand for loans is on the rise, with fixed investments as one of the motivations. Actual data seems to confirm that picture: the statistics on the harmonized cost of borrowing tell a story of reduced fragmentation and loans to NFC returned to the positive side for the whole area. Figure 4. Loans to NFC in Eurozone, Var Jan-08 Dec-08 Nov-09 Oct-10 Sep-11 Aug-12 Jul-13 Jun-14 May-15 France Germany Euro area Italy Spain Source: Datastream, Pioneer Investments, as of September 8th, It will take a bit more time to return to faster growth and higher inflation, but the path remains in place. As for specific numbers, we have lowered just a bit our forecasts and now expect growth to hit 1.6% this year and 2.1% in Momentum varies across major countries, (confirmed in Spain, hopefully to begin in Italy), while we downgraded Germany a bit and France slightly more (see the tables at the end). It will be a combination of the strengthening of domestic demand and reviving investments, coupled with a positive contribution from net exports thanks to the weaker euro, that will allow growth to strengthen for some time. Figure 5. Our GDP Forecasts 6.0% Forecast 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% -8.0% Q3 93 Q4 95 Q1 98 Q2 00 Q3 02 Q4 04 Q1 07 Q2 09 Q3 11 Q4 13 Q1 16 Source: Datastream, Pioneer Investments, as of September 8th,

5 % Eurozone Macro Report September 2015 As for inflation, the general picture is much different versus the end of last year. While recent further price declines in oil and other commodities have the power to once again scale inflation down to zero, it is clear that as soon as in November there will be a quite significant increase (for a base effect) that will realign headline and core inflation at the beginning of But it is also clear that it could take longer to have inflation reach the 2% range. Figure 6. Eurozone Inflation (%, YoY Change) Q4 05 Q1 08 Q2 10 Q3 12 Q4 14 Q1 17 Source: Datastream, Pioneer Investments, as of September 8th, Economic Policies Monetary Policy In the press conference after the September meeting, ECB indicated that the QE program continues to proceed smoothly ; Forecast He indicated that renewed downside risks have emerged (in the form of the emerging market slowdown which is weighing on global growth) but it was premature to say if the recent events will have a lasting effect. He once again stated that QE will run until there is a sustained adjustment in the path of CPI that is having a favorable impact on the economy, and that the ECB can adjust size and duration of QE if needed and can use all instruments available if needed. The ECB s latest economic forecasts (September Staff Economic Projections) were mildly reduced, but overall continue to point to a recovery in growth (1.4% vs.1.5% previously in 2015, 1.7% vs. 1.9% in 2016 and 1.8% vs. 2.0% in 2017) while inflation is expected to remain below target this year and then rise moderately in the following years (0.1% vs. 0.3% in 2015 and 1.1% vs. 1.5% in 2016, 1.7% vs. 1.8% in 2017). The ECB has indicated that it will continue to buy assets until it sees a sustained improvement in inflation rates. On the basis of the inflation and growth forecasts provided by the ECB staff projections in September, QE is expected to be mostly successful in returning Eurozone inflation to its target of «below, but close to, 2%» in the forecast horizon, with euro-area inflation forecast to be at 1.7% in Economic growth is also expected to recover, with a 1.8% expansion forecast for 2017, in this case aided not only by the QE but also by the decline in oil prices and the significantly weaker euro on FX markets. 5

6 Eurozone Macro Report September 2015 Fiscal Policy This year is the first in which the flexibility clauses in the fiscal compact have been used, favouring a situation in which fiscal policy maintained a generally neutral tone instead of turning contractionary again. In the coming months, each member state will communicate to the EU Commission their Budget Plan. In a situation in which unemployment is still very high in the area and uncertainty on the pace of expansion is lingering, in our view, it will be important that the approach favour some push to growth and employment, without endangering fiscal equilibrium Triggers and Risks Triggers The acceleration in Spain, the improvements in Italy become contagious for France, boosting growth. An acceleration in productivity growth could turn the cyclical recovery into a structural one, making the Eurozone more resilient to external shocks. More coordinated economic policy and fiscal policy become more effective in addressing structural problems while also sustaining growth. Risks Reduced external demand and a sort of currency war could endanger one of the pillars of the recovery. The immigrant and refugee issue is calling for a common political decision and a common framework. Vanishing political consensus on the euro project is a risk that cannot be dismissed. 6

7 Eurozone Macro Report September 2015 Macroeconomic Forecast Germany E 2016E 2017E E* 2016 E* 2017 E* Macroeconomic Forecasts Q1 Q2 Q3 Q4 Q1 Q2 Q3E Q4E Q1E Q2E Q3E Q4E Q1E Q2E Q3E Q4E GDP & Components %YoY GDP GDP YoY Personal Consumption Expenditures Government Consumption Expenditures Fixed Investment (Machinery and Equipment) Exports Imports GDP Contributions Net trade Inventories changes %YoY Consumer Prices Index Unemployment Update as of 26th of August 2015; for time series with higher frequency (monthly or daily) than quarterly, we consider the quarterly average; in Italic exogenous variables; GDP components on quarterly frequency are %Q/Q; all other figures, if not otherwise specified, are %Y/Y. France E 2016E 2017E E 2016 E 2017 E Macroeconomic Forecasts Q1 Q2 Q3 Q4 Q1 Q2 Q3E Q4E Q1E Q2E Q3E Q4E Q1E Q2E Q3E Q4E GDP & Components YoY% GDP GDP YoY Personal Consumption Expenditures Government Consumption Expenditures Fixed Investment Exports Imports GDP Contributions Net trade Inventories changes Consumer Prices Index Unemployment Update as of 26th of August 2015; for time series with higher frequency (monthly or daily) than quarterly, we consider the quarterly average; in Italic exogenous variables; GDP components on quarterly frequency are %Q/Q; all other figures, if not otherwise specified, are %Y/Y. Italy E 2016E 2017E E 2016 E 2017 E Macroeconomic Forecasts Q1 Q2 Q3 Q4 Q1 Q2 Q3E Q4E Q1E Q2E Q3E Q4E Q1 Q2E Q3E Q4E GDP & Components YoY% GDP GDP YoY Personal Consumption Expenditures Government Consumption Expenditures Fixed Investment Exports Imports GDP Contributions Net trade Inventories changes Consumer Prices Index Unemployment Update as of 3rd of Sep 2015; for time series with higher frequency (monthly or daily) than quarterly, we consider the quarterly average; in Italic exogenous variables; GDP components on quarterly frequency are %Q/Q; all other figures, if not otherwise specified, are %Y/Y. Spain E 2016E 2017E E 2016 E 2017 E Macroeconomic Forecasts Q1 Q2 Q3 Q4 Q1 Q2 Q3E Q4E Q1 Q2E Q3E Q4E Q2 Q2E Q3E Q4E GDP & Components YoY% GDP GDP YoY Personal Consumption Expenditures Government Consumption Expenditures Fixed Investment Exports Imports GDP Contributions Net trade Inventories changes Consumer Prices Index Unemployment Update as of 3rd of Sep 2015; for time series with higher frequency (monthly or daily) than quarterly, we consider the quarterly average; in Italic exogenous variables; GDP components on quarterly frequency are %Q/Q; all other figures, if not otherwise specified, are %Y/Y. 7

8 Eurozone Macro Report September 2015 Unemployment Rate Update as of the 8th of September 2015; for time series with higher frequency (monthly or daily) than quarterly, we consider the quarterly average; in grey AAR elaborations; in Italic exogenous variables; all figures, if not otherwise specified, are %Y/Y. Important Information Unless otherwise stated, all information contained in this document is from Pioneer Investments and is as of September 7, The views expressed regarding market and economic trends are those of the author and not necessarily Pioneer Investments, and are subject to change at any time based on market and other conditions and there can be no assurances that countries, markets or sectors will perform as expected. These views should not be relied upon as investment advice, as securities recommendations, or as an indication of trading on behalf of any Pioneer Investments product. There is no guarantee that market forecasts discussed will be realized or that these trends will continue. Investments involve certain risks, including political and currency risks. Investment return and principal value may go down as well as up and could result in the loss of all capital i nvested. This material does not constitute an offer to buy or a solicitation to sell any units of any investment fund or any services. Pioneer Investments is a trading name of the Pioneer Global Asset Management S.p.A. group of companies. Date of First Use: September 10, EMU MACROECONOMIC FORECASTS Q1 Q2 Q3E Q4E Q1E Q2E Q3E Q4E Q1E Q2E Q3E Q4E Q1E Q2E Q3E Q4E GDP & COMPONENTS GDP GDP YoY Personal Consumption Expenditure Government Consumption Expenditure Fixed Investments Total Internal Demand Total Consumption + Fixed Investment+Inventories Final Internal Demand Total Consumption + Fixed Investment Exports Imports GDP CONTRIBUTIONS Net trade Inventories changes ECONOMIC TREND YoY% YoY% 2014 E 2015 E QoQ (% change) QoQ (% change) YoY (% change) Industrial Production Hourly Compensations Unit Labour Cost Producer Prices Index Consumer Prices Index E QoQ (% change) 2017 E Follow us on: 8