In the US The Euro area, GDP Growth Inflation 2018 e 2019 e 2020 e 2018 e 2019 e 2020 e Advanced

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Crystal Freeman
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In the US, activity has been buoyant so far, largely thanks to tax cuts For the

increases on worth $3bn of imports will start to weigh on firms profitability, then

energy and IT As a consequence, the monetary tightening could rapidly come to an end,

from recession Extra and intra EU trade is less dynamic, in line with fading external

level, as a consequence of falling oil prices The ECB will stop its net asset purchases as

cause a (slight) rebound in bond yields as well as in the value of euro.

3 2. 1.7 1.8 United-States 2.9 2.1 1.5 2.4 1.8 2. Japan.9.7.3 1..6 1.4 United-Kingdom 1.

5 1.6 1.3 2.1 1.5 1.6 Italy 1..6.5 1.3 1.5 1.2 Spain 2.5 2.2 2. 1.8 1.7 1.3 Emerging 5.9 5.

1 In the US, activity has been buoyant so far, largely thanks to tax cuts For the foreseeable period, a landing is more than a possibility Interest rates hikes and tariffs increases on worth $3bn of imports will start to weigh on firms profitability, then activity The downward adjustment could be sizeable in highly leveraged sectors such as energy and IT As a consequence, the monetary tightening could rapidly come to an end, after a supplementary 5-75 bps hike in key rates Long term-bond yields would also stabilize, at around the 3pct level. The Euro area, growth is sharply decelerating, with some countries like Italy not very far from recession Extra and intra EU trade is less dynamic, in line with fading external demand, in particular coming from EMEs Inflation is expected to come-back below the 2pct level, as a consequence of falling oil prices The ECB will stop its net asset purchases as off the 1 st January of 219, while keeping rates unchanged up to the end of year This may cause a (slight) rebound in bond yields as well as in the value of euro. GDP Growth Inflation % 218 e 219 e 22 e 218 e 219 e 22 e Advanced United-States Japan United-Kingdom Euro Area Germany France Italy Spain Emerging China India Brazil Russia Source : BNP Paribas Group Economic Research (e: Estimates & forecasts,)

2 Interest rates, % 218 219 ######## ######## ######## End of period Q1 Q2 Q3e Q4e Q1e Q2e Q3e Q4e 218e 219e 22e US Fed Funds 1.75 2. 2.25 2.5 2.75 3. 3. 3. 2.5 3. 3. Libor 3m $ 2.31 2.34 2.4 2.65 2.

.55 1..9 OAT 1y.6.62.75.9.95 1. 1.1 1.25.9 1.25 1.15 UK Base rate.5.5.75.75.75 1. 1. 1.25.75 1.25 1.5 Gilts 1y 1.39 1.33 1.48 1.2 1.7 1.85 2. 2.1 1.2 2.1 2.1 Japan BoJ Rate -.7 -.7 -.6 -.1 -.1 -.1 -.1 -.1 -.1 -.1 -.1 JGB 1y.

2 2 Interest rates, % ######## ######## ######## End of period Q1 Q2 Q3e Q4e Q1e Q2e Q3e Q4e 218e 219e 22e US Fed Funds Libor 3m $ T-Notes 1y Ezone ECB Refi Euribor 3m Bund 1y OAT 1y UK Base rate Gilts 1y Japan BoJ Rate JGB 1y Exchange Rates End of period Q1 Q2 Q3e Q4e Q1e Q2e Q3e Q4e 218e 219e 22e USD EUR / USD USD / JPY EUR EUR / GBP EUR / CHF Source : BNPP GlobalMarkets (e: Estimates & forecasts) 3 Euro-dollar 4 Interest rates Euro vs Dollar Spot price 1,5 9-janv. 1,4 1,3 1,2 1,15 1,1 1, United States, 1y Government Bond Yield Germany, 1y Government Bond Yield 9-janv. 2,7, US-GER Spread 5 Interest rates 6 Oil market France, 1y Government Bond Yield Germany, 1y Government Bond Yield 9-janv.,7,2 Oil Price, Brent USD per barrel, spot janv. -

3 7 US, business climate 8 US, investment cycle vs corporate profits ISM Manufacturing ISM Manufacturing, new orders component 7 65 6 55 5 Corporate Profits after tax, % GVA [LHS] Corporate Fixed

9 US, domestic oil market recovers 1 US, consumption Oil production, m/bd [LHS] Number of drillings [RHS] 12 11 1 9 8 7 6 5 4 1 8 1 5 1 2 After dropping sharply, the number of drillings is on the

11 US, housing market on a good shape 12 US, housing market on a good shape 15% 1 5% -5% -1-15% NAHB Index [RHS] Housing starts, x1 [LHS] 2 5 9 2 1 5 6 1 3 5 1989 1994 1999 24 29 214 219 The NAHB

3 3 7 US, business climate 8 US, investment cycle vs corporate profits ISM Manufacturing ISM Manufacturing, new orders component Corporate Profits after tax, % GVA [LHS] Corporate Fixed investment, % of GVA [RHS] The business climate is now deteriorating Corporate investment and profits are now relatively far along in the cycle. 9 US, domestic oil market recovers 1 US, consumption Oil production, m/bd [LHS] Number of drillings [RHS] After dropping sharply, the number of drillings is on the rise again. US oil production is also recovering, matching all times high Private consumption, 3m/3m, ann. [LHS] Retail sales, vol., 3m/3m, ann. [RHS] - car sales (adjusted to scale) - Very strong in Q3, correcting in Q4. 11 US, housing market on a good shape 12 US, housing market on a good shape 15% 1 5% -5% -1-15% NAHB Index [RHS] Housing starts, x1 [LHS] The NAHB index is down from peak Inventories, Months of sales [RHS] Housing starts, x1 [LHS] First signs of peaking. Inventories are up in month of sales.

4 13 US, non-farm payrolls vs unemployment rate 14 US, labour force participation rate Nonfarm payrolls, monthly change, x1 [LHS] Unemployment rate [RHS] 5 3 1-1 -3-5 1 The US unemployment rate is

9% 7% 5% Participation rate 2-64 aged population 8 79% 7 77% 7 75% 25 27 29 211 213 215 217 219 The participation rate among the working age population (2-64 year) has reverted upward, a further

15 US, muted tensions over prices 16 US, some tensions over wages CPI Headline, yy CPI Core, yy CPI Energy, yy [RHS] - - - 4 3 2 1-1 -2-3 Energy was largely responsible for the past upturn in

4 4 13 US, non-farm payrolls vs unemployment rate 14 US, labour force participation rate Nonfarm payrolls, monthly change, x1 [LHS] Unemployment rate [RHS] The US unemployment rate is below, the lowest since 18 year. 9% 7% 5% Participation rate 2-64 aged population 8 79% 7 77% 7 75% The participation rate among the working age population (2-64 year) has reverted upward, a further indication that the labour market is in better shape. 15 US, muted tensions over prices 16 US, some tensions over wages CPI Headline, yy CPI Core, yy CPI Energy, yy [RHS] Energy was largely responsible for the past upturn in headline inflation. However, core inflation (excluding food and energy) is now slightly accelerating. XAxis: Unemployment rate YAxis: Real hourly wage rate 2,5%, 3/11/18 R² =,66-2,5% 5% 7% Real hourly wage growth is now accelerating (coming from zero). However, it is still below the path suggested by a traditional Phillips curve. 17 US, credit to corporates keeps healthy 18 US, higher leverage in corporate sector Credit to corporate*, net flows, an $bn [LHS] Banks tightening credit, % [RHS] 9 9 Corporate debt, % GVA [LHS] Corporate profit after tax, % GVA [RHS] Thanks to accommodating credit conditions, credit flows to corporates (loans & bond issues) have returned to healthy precrisis levels A cause for future concern? US companies are heavily in debt again, while their profitability is peaking, a configuration that has often preceded recessions.

5 19 US, low corporate spreads 2 US, corporate net debt by sectors United-States, BBB Corporate Bond Spread, Bps Net debt / EBITDA 216 24-6 Oil Price, Brent, USD per Barrel [RHS] R.

Corporate spreads have become sensitive to oil prices in the US. One explanation is the size of the highly-leveraged shale oil sector.

5 5 19 US, low corporate spreads 2 US, corporate net debt by sectors United-States, BBB Corporate Bond Spread, Bps Net debt / EBITDA Oil Price, Brent, USD per Barrel [RHS] R.ESTATE UTILITIES ENERGY 35 1 TELECOM CO.DISCR 3 75 INDUSTR. 25 MATERIALS CO.STAPLE 5 2 HEALTHC. IT Sources : IMF, Financial Stability Report, April 217. Corporate spreads have become sensitive to oil prices in the US. One explanation is the size of the highly-leveraged shale oil sector. The energy sector has considerably increased its net debt ratio since the revolution of shale gas and oil took place. 21 US, Fed funds rate and core inflation 22 US, flatter yields curve CPI Core Fed Funds Target Rate 5% The Fed funds rate has ticked upwards, coming close to the core inflation level. Yield Curve, 2y-1y Recession periods The normalizing monetary conditions are illustrated by flatter yield curve. 23 US, dollar effective exchange rates 24 US, external accounts Dollar, real effective exchange rate 1973 = Sources : Thomson Datastream, IMF, BNP Paribas Looking at the real effective exchange rate (trade weighted & adjusted for inflation), the dollar has appreciated. Current account balance % GDP External deficits have stopped narrowing.

6 25 China, various activity indicators 26 China, change in growth determinants GDP, yy Electr.

US Households Debt Ratio, % GDP [LHS] China, Exports, % GDP [RHS] 11 1 9 8 7 6 4 3 2 1 Bent on deleveraging, US consumers are importing less from China.

loans, bank's acceptances, financial trusts.

6 6 25 China, various activity indicators 26 China, change in growth determinants GDP, yy Electr. Output, yy Industrial Output 2 15% 1 5% -5% -1 Sources : Thomson Datastream, IMF, BNP Paribas Electricity and industrial output both in line with GDP growth (at around annually). US Households Debt Ratio, % GDP [LHS] China, Exports, % GDP [RHS] Bent on deleveraging, US consumers are importing less from China. 27 China, investment has come down 28 China, credit Fixed investment, % GDP Private consumption, % GDP 5 45% 4 35% Credit outstanding as % of GDP Total ----Bank lending Bonds, entrusted loans, bank's acceptances, financial trusts... 3 Sources : Thomson Datastream, IMF, BNP Paribas Consumption is still relatively low in terms of GDP (less than 4) China has the highest internal debt ratio of the emerging countries. 29 China, trade surpluses remain large 3 China, leading the Commodity cycle Trade balance (% GDP) Total Excluding Food&Energy Food&Energy 15% Cement output in China, yy [LHS] CRB World Commodity Prices Index, yy [RHS] % 15% 35% -5% Sources : Thomson Datastream, IMF, BNP Paribas External surpluses are still huge, even though they have narrowed somewhat since mid-216 (rebound in oil prices). -15% The Chinese cement industry seems to edge back toward recession, which has negative implication for commodity markets. -35%

7 31 Euro area, lagging behind 32 Euro area, GDP growth vs business surveys GDP, vol.

[LHS] PMI composite [RHS] 6 1 55 5 8 2 23 26 29 212 215 218 Although growth has accelerated, it still lags behind the US.

[LHS] PMI composite [RHS] PMI Manuf. [RHS] 65 GDP, q/q, ann. [LHS] PMI composite [RHS] PMI Manuf.

The fall in Q3 GDP is partly accidental and should be corrected in Q4. However, the global trend appears less favourable.

35 France, peaking housing? 36 France, booming car registrations 4 Housing Starts, ann.

7 7 31 Euro area, lagging behind 32 Euro area, GDP growth vs business surveys GDP, vol. (28 = 1) United States Euro Area 12 GDP, q/q, ann. [LHS] PMI composite [RHS] Although growth has accelerated, it still lags behind the US. - Still down Germany, GDP growth vs business surveys 34 France, GDP Growth vs business surveys GDP, q/q, ann. [LHS] PMI composite [RHS] PMI Manuf. [RHS] 65 GDP, q/q, ann. [LHS] PMI composite [RHS] PMI Manuf. [RHS] Back to more normal levels after having rocketed. The fall in Q3 GDP is partly accidental and should be corrected in Q4. However, the global trend appears less favourable. 4 - Thomson Datastream, *BNP Paribas nowcast model A downward trend, accentuated by the gilets jaunes protests in 18 Q4. 35 France, peaking housing? 36 France, booming car registrations 4 Housing Starts, ann. x1 [LHS] Home Builders Business Outlook Index [RHS] 5 25 New car registrations Monthly, x After having returned to cyclical peaks (more than 4K annual starts) the housing activity in France is set to normalize Sources : Thomson Datastream, European Commission BNP Paribas A surge in Aug. ahead of more stringent technical standards. A downward correction occurred last autumn.

8 37 Italy, GDP growth vs business surveys 38 Spain, GDP growth vs business surveys GDP, q/q, ann.

[RHS] 6 6 55 55 5 5-45 - 45-4 - 4 Back to zero or even below Still good, albeit losing some momentum 39 Euro area, fixed

investment % of GDP [LHS] Capacity utilisation rate [RHS] 87% Corporate Mach. & Equipt.

utilisation rates and upward profit margins have triggered an upturn in corporate investment. Now peaking?

% of GVA (LHS) Corporate Operating Earnings, % GVA (RHS) 27% 3 Corporate Fixed Investment, % of GVA (LHS) Corporate Debt,

8 8 37 Italy, GDP growth vs business surveys 38 Spain, GDP growth vs business surveys GDP, q/q, ann. [LHS] PMI composite [RHS] PMI Manuf. [RHS] 65 GDP, q/q, ann. [LHS] PMI composite [RHS] PMI Manuf. [RHS] Back to zero or even below Still good, albeit losing some momentum 39 Euro area, fixed investment vs cap. utilization rate 4 Euro area, corporate fixed investment vs profits Corporate, Mach. & equipt. investment % of GDP [LHS] Capacity utilisation rate [RHS] 87% Corporate Mach. & Equipt. investment, % GDP [LHS] Corporate profit margin index, 27=1 [LHS] % 8 7% % 94 Higher capacity utilisation rates and upward profit margins have triggered an upturn in corporate investment. Now peaking? 41 France, fixed investment vs corporate profit 42 France, fixed investment vs corporate debt Corporate Fixed Investment, % of GVA (LHS) Corporate Operating Earnings, % GVA (RHS) 27% 3 Corporate Fixed Investment, % of GVA (LHS) Corporate Debt, % GDP (RHS) 27% 8 25% 3 25% Investment in France has been rather resilient compared to other countries, and despite various trends in corporate profits. 2 5 Credit has been a support factor for investment in France.

9 43 Corporate debt ratio, diverging trends 44 Euro area, trend in corporate fixed investment Nonfinancial corporate debt, % GDP Germany France 8 7 6 5 4 3 2 23 26 29 212 215 218 The French corporate

) Spain Italy 12 11 1 9 8 7 6 Corporate investment revives in keeping with profit margins, but not at the same pace across the board.

9 9 43 Corporate debt ratio, diverging trends 44 Euro area, trend in corporate fixed investment Nonfinancial corporate debt, % GDP Germany France The French corporate debt has surged over the past decade. However, this is largely due to big companies, which are also cash rich. The net debt ratio is not so high. Investment in Mach. & Equipt., 28 = 1 (vol.) Spain Italy Corporate investment revives in keeping with profit margins, but not at the same pace across the board. 45 Euro area, current accounts show large surpluses 46 Euro area, trend in exports Current account balance % GDP 4, 3, 2, 1,, -1, -2, Sources : Eurostat, BNP Paribas At a record high. Intra-EU Exports, vol., 213=1 Extra EU Exports, vol., 213= Sources : Eurostat, BNP Paribas Down both inside and outside EU, a further confirmation that global trade is weakening 47 Euro Area, credit to corporates vs bank lending survey 48 Spain, credit to corporates (<1y, EUR 1mn) Credit to Corporates, EURbn, an. [LHS] Banks tightening, % [RHS] Banks Expected demand, % [RHS The ECB bank lending surveys are improving as lending standards return to normal. Corporate credit has slowly recovered since Credit to corporates, EURbn, <1y & EUR 1mn 12m cumulated net flows Monthly net flows (annualized) Credit to corporates (under 1 year and EUR 1mn) is stable in Spain.

1 49 Euro area, financing conditions have improved 5 Euro area, consumer credit Bank's lending rates to corporates (<1Y & EUR 1mn) France Italy Spain 5% The convergence of lending rates signals a

10 1 49 Euro area, financing conditions have improved 5 Euro area, consumer credit Bank's lending rates to corporates (<1Y & EUR 1mn) France Italy Spain 5% The convergence of lending rates signals a reduction in fragmentation. Euro are consumer credit 12m cumulated flows, EURbn Consumer credit is firmly back in positive territory. 51 Euro area, base money surge with the QE 52 Euro area, M3 growth vs core inflation Money base R.Reserves Ex.Reserves D. Facility The ECB s TLTRO programme temporarily inflated the money base (bank holdings with the ECB), then growing with QE. CPI Core, yy [RHS] M3, yy [RHS] M3 growth is decelerating 15% 1 9% - 53 Euro area, inflation still subdued 54 Euro Area, ECB refi rate vs determinants CPI Headline, yy CPI Core, yy CPI Energy, yy [RHS] - The core inflation rate is trending around per year. The fluctuation in headline figure is mainly caused by energy ECB Refi CPI Core, yy Unemployment Rate [RHS] 5% The refi has held at. since March 16, 216, while the deposit facility rate (DFR) is negative at -.4. The decline in UR normally calls for normalisation, but not this time 9% 7%

11 55 Italian 1 year rates 56 Spanish 1 year rates Italy, 1y Government Bond Yield Italy, 2y Government Bond Yield 9-janv.

2,9,5 1,5 -,1 - Rebounding, amid political uncertainties. - Still relatively low.

Euro vs Dollar, 217=1 Euro Nominal Effective Exchange rate, 217=1 12 11,7 -,1 - -,5 Still very low by historical standard, at

59 Euro-dollar vs capital flows 6 Euro-dollar vs ECB s balance sheet EUR vs USD [RHS] Direct & Portfolio Investments to/from

11 11 55 Italian 1 year rates 56 Spanish 1 year rates Italy, 1y Government Bond Yield Italy, 2y Government Bond Yield 9-janv. Spain, 1y Government Bond Yield Spain, 2y Government Bond Yield 9-janv. 2,9,5 1,5 -,1 - Rebounding, amid political uncertainties. - Still relatively low. 57 France, over several maturities 58 Euro-dollar France, Government Bond Yields 1y 5y 2y 9-janv. Euro vs Dollar, 217=1 Euro Nominal Effective Exchange rate, 217= ,7 -,1 - -,5 Still very low by historical standard, at all maturities Correcting from the 217 rebound. 59 Euro-dollar vs capital flows 6 Euro-dollar vs ECB s balance sheet EUR vs USD [RHS] Direct & Portfolio Investments to/from (+/-) EMU, EURbn 6 1,5 ECB's Balance Sheet, Total Assets, EURbn [LHS] Euro vs Dollar 5 1,5 3 1,4 1, ,4 1, ,2 1, ,2 1, , 1 5 1, Net capital outflows from the EMU (direct and portfolio investments) still important but reducing. Lower range of fluctuation after QE.

12 61 US, S&P5 Trend in Operating earnings 62 US, S&P5 index vs operating earnings Operating Earnings Per Share, Annual, USD, Trend Operating Earnings Per Share, Annual, USD, Spot 16$ 14$ 12$ 1$ 8$

12 12 61 US, S&P5 Trend in Operating earnings 62 US, S&P5 index vs operating earnings Operating Earnings Per Share, Annual, USD, Trend Operating Earnings Per Share, Annual, USD, Spot 16$ 14$ 12$ 1$ 8$ S&P5, Index, = 1 [LHS] Operating Earnings Per Share, Annual, USD, Spot [RHS] 3 162$ $ Earnings per share are now far above their long-term trend. 8 4$ Correcting at the turn of the year. 63 US, S&P 5 Fed model 64 Euro Area, 1y Yield spreads vs public debt S&P 5, Price-to-Earnings Ratio S&P 5 Risk Premium The PE ratio (based on trend EPS) is high, but the risk premium on the risk-free rate (Treasuries) is not so low. with some details (European Commission estimates) X Axis: Gross debt as % of GDP (216) Y Axis: 1y yield spread vs Germany (9-1-19) NL FI IR AT ES FR BE GDP Gen. Gov. fiscal balance Interests payment Public debt Total Primary Struct. Total 217 bn bn %GDP %GDP %GDP bn %GDP Av. rate bn %GDP Rating S&P Germany , 1, 2,1,8 33,8 1, 1, ,9 AAA France ,4-2,7 -,8-2,4 42,7 1,9 2, ,5 AA Italy ,1-2,4 1,4-1,8 65,5 3,8 3, ,2 BBB Spain ,9-3,1 -,5-2,9 29,8 2,6 2, ,1 A- Netherlands 737 9, 1,2 2,2,7 7,3 1, 1, , AAA Belgium 439-3,9 -,9 1,6-1,4 1,9 2,5 2, ,4 AA Austria 37-2,9 -,8 1, -,8 6,8 1,8 2, ,3 AA+ Greece 18 1,4,8 3,9 4,6 5,6 3,1 1, ,1 B+ Portugal 195-5,8-3,,9-1,3 7,4 3,8 3, ,8 BBB- Finland 224-1,5 -,7,3 -,2 2,2 1, 1, ,3 AA+ Ireland 294 -,7 -,2 1,7 -,2 5,8 2, 2, ,4 A+ EMU , -1, 1, -,8 221,8 2, 2, ,9 UK ,1-1,8,9-2,3 63,2 2,7 3, ,3 AA EU ,2-1, 1, -1,7 36,3 2, 2, ,2 PT IT

14 BNP Paribas (215). All rights reserved. Prepared by Economic Research BNP PARIBAS Registered Office: 16 boulevard des Italiens 759 PARIS Tel: +33 () Internet : Publisher: Jean Lemierre. Editor: William De Vijlder

In the US The Euro area, GDP Growth Inflation e 2020 e e 2020 e Advanced

In the US The Euro area, GDP Growth Inflation e 2020 e e 2020 e Advanced In the US, activity has been buoyant so far, largely thanks to tax cuts. For the foreseeable period, a slowdown is more than a possibility Interest rates hikes and tariffs increases on worth $3bn of imports