Image courtesy of skeeze, pixabay.com, CC0. Let s grow. Economic Research Paris, September 2017

Transcription

1 Image courtesy of skeeze, pixabay.com, CC Let s grow Economic Research Paris, September 217

2 The global economy is back in business Global growth shifted up a gear in Q especially in the US, the Eurozone, China and Japan. 6% 5% 4% 3% 2% 1% % World GDP growth, q/q annualized Fragile four are Brazil, Russia, Turkey and South Africa Others APAC ex China ex Japan Japan China World aggregate -1% 1Q1 11Q1 12Q1 13Q1 14Q1 15Q1 16Q1 17Q1 Sources: Bloomberg, Euler Hermes, Allianz Research Fragile Four India Europe US 17Q2: +3.7% As a result we revise up our 217 and 218 global growth forecasts from +2.9% to +3.%: mainly due to upside revisions in Europe. 215 Latest forecast Revision (pps) Latest forecast Revision (pps) World GDP growth United States = Latin America = 2.2 = Brazil United Kingdom = 1. = Eurozone members Germany France Italy Spain = Russia Turkey Asia = 4.8 = China = 6.3 = Japan = India = Middle East = 2.6 = Saudi Arabia = Africa = South Africa = 1.2 = * Weights in global GDP at market price, 216 Global GDP growth forecasts (%) NB: The revisions refer to the changes in our forecasts since the last quarter Sources: IHS, Euler Hermes, Allianz Research 2

3 Business confidence Strong upside surprises from the Eurozone, while Emerging Markets acceleration was expected There are good reasons to get bullish on the Eurozone: Sentiment indicators are above longterm average. Europe: Consumer confidence vs. Business confidence* Emerging economies formerly in recession are back to (low) growth; yet Emerging Markets are not accelerating broadly speaking. Emerging Markets: Growth per country group United Kingdom Germany 15 Euro zone 1 France Italy Spain Portugal 5 Netherland s Greece Consumer confidence * August 217 value minus the respective average since % 8% 7% 6% 5% 4% 3% 2% 1% % -1% -2% Recessionary economies* Frontier Markets Bulk of EMs Brazil, South Africa, Russia and CIS. Sources: Bloomberg, Euler Hermes, Allianz Research Sources: IHS, Euler Hermes, Allianz Research 3

4 Country risk is improving Current account deficits decreased in deficit economies, and surpluses even increased in Asian surplus economies (except China). Emerging Economies: Current account balances (% of GDP for each country group) Deficit economies China Asia in surplus % 6% 6% As a result of rebalancing or higher surpluses, country risk reversed its trend in 217: now, it s clearly improving Country risk: sub-components changes +/- = upgrade/downgrade Q1-Q3 216 Q1-Q % 5% 5% 4-2% 4% 4% 2-3% 3% 3% -2-4% -5% -6% Argentina Mexico South Africa Indonesia Turkey Brazil India Others % 1% % % 1% % ME FFI CRI Sources: IMF, Euler Hermes, Allianz Research Sources: Euler Hermes, Allianz Research 4

5 Agenda 1 Global themes: Please don t stop the music 2 Regional outlooks: What to watch in the US, Europe, China and Emerging Markets 5

6 Music #1: Global trade is getting its mojo back but will it last? Dollar depreciation is driving values a bit further up. Volume growth is only back to figures. 1% 5% % Global exports of goods and services Volume Price in local currency Currency impact Value 7.% 5.7% 2.8% 3.6% 1.8% 3.7% 2.7% 2.% -1.9% 4.2% 3.8% Short-term indicators confirm that volume growth should plateau sooner or later. Merchandise trade and Euler Hermes Trade Momentum Index Global Merchandise (goods) trade growth y/y (CPB, left) EH TMI (right scale) % % -1.3% % Sources: Bloomberg, Euler Hermes, Allianz Research Sources: IHS, CPB, Euler Hermes, Allianz Research 6

7 US Russia India Argentina Indonesia Brazil Belarus Austria China Pakistan Hurdle #1: Protectionism is still around Protectionism is losing momentum except in the US, but the level of existing measures remains high. US protectionist measures against China have increased notably in New protectionist measures (Jan-August). World= World= World= World=849 Jan to Aug Jan to Aug Number of protectionist measures taken in the US directly aimed at China Remaining of the year January to August per year Sources: GTA, Euler Hermes, Allianz Research Sources: GTA, Euler Hermes, Allianz Research 7

8 Openness Rate as % of GDP Resilience factor #1: Openness to trade and innovation are paying off Short-run evidence: all regions seem to experience an uptick in export growth, while open economies benefit more. Volume of goods exports (First semester, y/y, %) Central and Eastern Europe Japan Emerging Asia United States Emerging economies World exports Advanced economies Latin America Euro Area Africa and Middle East Over the last five years, export-led strategies were the most profitable, despite trade weakness. 1% 9% 8% 7% 6% 5% 4% 3% 2% Innovation, openness to trade and convergence 1% Argentina Size of the bubble: Change in PPP Per Capita GDP relative to AE frontier 212 vs. 217 (IMF) Involved in value chains Protectionist Russia Brazil China Indonesia Mexico Spain France Malaysia United Kingdom Poland Czech Republic Hungary Sw eden Japan United States Korea, Rep. Germany % -1 Technological 1 content of 1 exports (Complexity 2 Index 2 Ranking) 3 3 Less Complex Export and R&D driven More Complex Sources: CPB, Euler Hermes, Allianz Research Sources: IMF, Harvard, Euler Hermes, Allianz Research 8

9 Music #2: A cyclical uptick in Europe Corporate turnover growth is boosting corporate confidence. 6% 4% 2% Corporate Turnover: EU vs. RoW Germany Italy Eurozone (19) France Spain 5,3% 4,1% 3,8% 3,5% 2,4% Capacity utilization rates in the US are approaching long-term averages. In the Eurozone they have surpassed them. Capacity utilization in manufacturing industry (%)* % -2% -4% 12% 1% 8% 6% 4% 2% % -2% -4% United Kingdom Japan China United States 6,4% 5,6% 3,3%,7% * Dotted line: Average since 199 Sources: Bloomberg, Euler Hermes, Allianz Research Sources: Datastream, Euler Hermes, Allianz Research 9

10 Hurdle #2: This time around policy nudges are outside Europe In the US: Critical deadlines for fiscal issues to return in December. Date December 8, 217 (No hard deadline, as extraordinary measures will probably be used again) Federal fiscal policy timeline Policy Action needed / planned / pledged Debt ceiling needs to be increased (Alternative option: Further suspension for a period of time) Risk of policy inaction and/or prolonged policy confrontation Failure to raise debt ceiling would be unprecedented and represent a large negative demand shock; missed interest payments would send shock waves across global markets. Geopolitical risks: Rising threat of a military conflict in the Korean peninsula is a source of uncertainty. Japan and Korea stock markets In July, North Korea test fires a long-range missile into the Sea of Japan, which could potentially reach Alaska In August, tensions escalate as North Korea threatens to attach Guam In September, major economies intensify sanctions on North Korea. The latter fire ballistic missile over Japan December 8, 217 From late September Funding bill must be passed (Alternative option: Another temporary financing via a Continuing Resolution) Debate on and release of a framework for individual/corporate tax cuts/reform Failure to pass a funding bill would result in a partial government shutdown; GDP growth negatively affected as federal employees would be furloughed. If tax reform is not implemented, growth above 2% would be hard to achieve next year Kospi (left) Nikkei (right) Sources: Bloomberg, Euler Hermes, Allianz Research 2 1/17 3/17 5/17 7/17 9/17 Sources: IHS, Euler Hermes, Allianz Research 17 1

11 UK Germany* Italy* Japan France US* Spain* UK Germany* Italy Japan France US Spain Resilience factor #2: Private investment should hold the line Corporates should be eager to invest more, since capacity utilization rates increased, particularly in the Eurozone. Growth of Corporate Investment (y/y, %) Household investment will be supported by good purchasing power and increasing second-hand housing prices. Growth of Household Investment in Construction (y/y, %) 9% f 18f 11% f 18f 7% 9% 5% 3% 2.7% 2.% 3.1% 3.6% 4.2% 5.7% 7% 5% 3% 5.% 4.3% 4.5% 4.4% 1.9% 3.4% 1% -.4% 1% 1.2% -1% -1% -3% -3% *Countries where data reported as Equipment Investment Sources: Bloomberg, Euler Hermes, Allianz Research * Overall construction Sources: Datastream, Euler Hermes, Allianz Research 11

12 Music #3: There remains room to deepen the growth cycle Advanced economies are not exhibiting supply excesses. Nor do the US. OECD countries (base 1 = 1998) US (base 1=1998) Total retail trade (Volume) sa, Index (lhs) Total retail trade (Volume) sa, Index (lhs) Production of total industry sa, Index (rhs) Production of total industry sa, Index (rhs) Sources: OECD, Euler Hermes, Allianz ResearcH Sources: OECD, Euler Hermes, Allianz Research 12

13 Hurdle #3: Monetary policy normalization is on the horizon Inflation pressures should intensify: Output gaps in main economies are persistent, but should close by 219. Output Gaps (% of GDP) This should go along with monetary policy normalization. Along with interest rate hikes, global liquidity will be tapered. Central Banks Balance Sheet monthly changes (USD, bn) United States France Germany Italy United Kingdom Spain ECB Fed BoJ Flow f 18f 19f Flow to turn negative in Q2/Q3 218 Forecasts/assumptions -75 1/17 4/17 7/17 1/17 1/18 4/18 7/18 1/18 1/19 4/19 7/19 1/19 Source: IMF Sources: Euler Hermes, Allianz Research 13

14 Japan France Italy Eurozone China Germany US Spain UK France Germany Italy United Kingdom United States Spain Resilience factor #3: Inflation should normalize gradually Wage growth is still below its pre-crisis trend, except in Germany. Wages (NCU at current prices, y/y period average, %) Core inflation still trending downwards; swings in headline inflation driven by oil. Consumer prices (headline, core) vs. oil price (Brent) Inflation will exceed +2% in the US in 218, but should stay under +2% in the Eurozone. Headline Inflation Forecasts (y/y, %) 5% 4% 4% 3% 3% 21 to 27 average 28 to 216 average 3.1% 3.1% 2.3% 3.9% 3.5% 3.5% 2.2% 3% 3% 2% 2% f 18f 1.3% 1.2% 1.6% 2.% 1.8% 2.4% 1.4% 2.6% 2% 2% 1% 1% 1.7% 1.6% 1.2% 1.7% 1.8% 1% 1% %.9% % -1% -1% Sources: OECD, Euler Hermes, Allianz Research Sources: Datastream, Euler Hermes, Allianz Research Sources: IHS, Euler Hermes, Allianz Research 14

15 Bonus: Risk appetite is here Housing prices are on the rise with advanced economies taking the lead. The search for yield drove corporate spreads to new lows in the US and the Eurozone. Spreads rose in China as debt is high. Evolution of Housing Prices (Base 1 = 21) Corporate spreads Australia China Japan Advanced economies (aggregate) Emerging markets (aggregate) Eurozone US China Germany France 125 Italy Spain Canada United States United Kingdom Sources: BIS, Euler Hermes, Allianz Research NB: calculations based on (i) the BofA Merrill Lynch BBB Index for both the US and China and on (ii) the FTSE Euro BBB index for the Eurozone. Sources: Bloomberg, Euler Hermes, Allianz Research 15

16 Malus: Higher risk taking may well drive some insolvencies But, mind corporate balance sheets: insolvency forecasts are tilted to the upside in the US in 218. EH Global and Regional Insolvency Indices (y/y, %) Major failures increased in Retail (+15 cases in H1, +11 in the US), and Construction (+11 cases, +9 in Western Europe). Major failures* (number of companies by sectors) Source: Euler Hermes (*) Companies with a turnover exceeding EUR5mn Source: Euler Hermes 16

17 Malus, North Korea crisis: What if there were a war? The impact would be systemic: main protagonists account for 1/3 of global GDP. Financial risk would increase as war efforts would drain already weak public finances. Share in global GDP Sources: Chelem, IMF, Euler Hermes, Allianz Research Share in global goods exports Share in global goods imports Main protagonists United States 25% 9% 14% Japan 7% 4% 4% South Korea 2% 3% 3% North Korea na na Third Party China 15% 13% 1% Russia 2% 2% 1% Public debt (% of GDP) Japan United States South Korea Assuming that Japan and South Korea would be the first hit, three sectors would be at risk globally: Electronic and Electrical, Automotive, metal and energy. Total Trade of South Korea and Japan Electronic Iron steel Vehicles Electrical Machinery and Equipment Non ferrous Energy Chemicals Textiles Wood paper Food agric. Sources: Euler Hermes, Allianz Research (% Global Trade per sector) % 4% 8% 12% South Korea Japan Country-wise, main victims of a negative shock in Japan and South Korea would be in Asia and the Middle East 1. A global trade shock would hinder growth in small export oriented markets Hong Kong, Singapore and Taiwan 2. Manufacturing producers in ASEAN (Thailand, Vietnam, Philippines and Malaysia) would be hit a lower demand and lower FDI from Japan 3. Oil producers in the Middle East would see a mixed impact as war efforts (lower activity growth) could lead to higher (lower) demand for energy. 17

18 Agenda 1 A breeze of growth 2 Regional outlooks: What to watch in the US, Europe, China and Emerging Markets 18

19 US: Following solid Q2 growth, hurricanes will weigh on growth momentum in the near term 218 GDP growth should be helped by fiscal stimulus assumed to be to the tune of 1.2% of GDP. Short term: Hurricanes to take a toll on output - disrupting an upward trend in industry. 4 GDP growth (y/y, %) Industrial production (indices, base 1=Jan. 214) August m/m % change: - Industrial production: Manufacturing prod.: Est. Hurricane impact: -.75pp Sources: Euler Hermes, Allianz Research Sources: Datastream, Federal Reserve, Euler Hermes, Allianz Research 19

20 US: Consumption growth has been supported by a lower savings rate future consumption growth has to rely on higher income growth Income expectations have moved higher. Consumer income expectations & personal saving rate (quarterly data) Wage growth to accelerate, but low trend productivity growth probably to limit the ascent. Employment cost index & ratio of job openings to unemployed Sources: Datastream, Allianz Research, Euler Hermes Sources: Datastream, Allianz Research, Euler Hermes 2

21 US: Policy uncertainty to remain elevated for the foreseeable future Non-raise of the debt ceiling: a tail risk. Channels through which economic activity would be hit Channel Fiscal tightening Heightened uncertainty Sovereign Rating & Treasury demand Central role of Treasuries in the financial system Sources: Bloomberg, Euler Hermes, Allianz Research Impact on economic activity Federal budget has to be immediately balanced; inter alia, recipients of social security and other federal income support would need to cut spending. Government s reliability as a partner would be questioned; private sector precautionary saving would increase. Downgrades; international investors share of the Treasury market around 45%. Foreign demand for Treasuries would be adversely affected, sending yields and interest expense higher; reinforcing downward pressure on other government expenditure categories. Repo market: Dominant role of US Treasury collateral to secure repos. Tangible repricing of Treasury collateral would potentially lead to: forced deleveraging, decline in lending capacity in financial markets. Policy disagreement among US politicians is very high Partisan Conflict index (base 1=199) * Index tracks the degree of political disagreement among US politicans at the federal level by measuring the frequency of newspaper articles reporting disagreement in a given month. Higher index values indicate greater conflict among political parties, Congress and the President Sources: Federal Reserve Bank of Philadelphia, Euler Hermes, Allianz Research

22 US: Financial asset prices are high Shiller s Cyclically Adjusted PE (CAPE) has risen to the highest level since the early 2s. Stock Market Valuations: Shiller s CAPE A market drop can accompany a drop in real GDP. S&P 5 (leading 2 quarters) vs. Real GDP (y/y) Sharp equity market correction would present significant risk for the real economy: e.g. tech bubble. S&P 5 and output gap 5 12% 4 8% 3 3 4% 2 5 yr ave = 2 % 1-4% Real GDP a drop in the stock market can coincide with asignificant drop in GDP S&P % -5% % 5% 1% Sources: IHS, S&P, Shiller, Fed, Euler Hermes, Allianz Research Sources: IHS, BEA, S&P, Euler Hermes, Allianz Research 22 Sources: IHS, CBO, S&P, Euler Hermes, Allianz Research

23 Eurozone: Economic momentum accelerated, as well as exports As political uncertainty took a backseat economic momentum shifted up another gear. More synchronized growth in the Eurozone is driving a recovery in exports. Composite PMI 12M total exports by country (y/y) 12% 1% Germany France Italy Spain Netherlands Eurozone 8% 6% 4% 2% % -2% -4% Sources: Datastream, Allianz Research, Euler Hermes Sources: Datastream, Allianz Research., Euler Hermes 23

24 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 ECB: Soft tapering is an option towards monetary policy normalization amid euro concerns Soft tapering could be a way to reduce stress on Italy: ECB s demand in the Italian market would be more important than in the baseline scenario. Three ECB exit scenarios: net market effect in H1 218 Maturing bonds eligible for reinvestment could represent an average of EUR 11 bn per month for the main four QE countries in 218. ECB public bonds holdings eligible for reinvestment in 218 (EUR bn, monthly amounts) Germany France Italy Spain Notes The stopping reinvestments scenario estimates the maximum amounts involved if the ECB stops reinvesting all maturing bonds every month For the baseline scenario, we assume a first reduction of bond purchases from EUR 6 bn to EUR 4 bn per month in January 218 and a probable end of QE mid-218 Sources: Bloomberg, Euler Hermes, Allianz Research Sources: ECB, Bloomberg, Allianz Research 24

25 Germany: Buoyant upswing, with real GDP expanding by 2.2% in 217 and by 2.% in 218 Upward trend in business expectations signals robust upswing to continue. Ifo index: Manufacturing (base 1=25) Refuting common perception: Growth in recent years powered by consumption, not by exports. Investment disappoints. Cumulated growth and growth contributions of different components since 28* GDP Consumption expenditure Gross investments Net exports * Annual average 217 on annual average 28 Sources: Datastream, Allianz Research, Euler Hermes Sources: Datastream, Allianz Research, own forecasts, Euler Hermes 25

26 France: Growth is strengthening, pushing forecasts up by +.2 pp to +1.7% in 217 and 218 Private sector confidence increased to fresh highs and GDP growth stood at +.5% q/q for three consecutive quarters. 12 France: Private sector confidence and GDP growth Investment is back: corporate investment in machinery as well as household investment in (residential) construction. GDP Growth and demand drivers (%) % 2.% 1.5% Net exports Inventories Investment Public consumption Private consumption GDP 8 1.% 7 Consumer confidence Business confidence.5% % 1% -.5% % -1% GDP Growth q/q -2% % -1.5% Sources: IHS, Euler Hermes, Allianz Research Sources: IHS, Euler Hermes, Allianz Research 26

27 Italy: Favorable cyclical outlook with GDP growth of 1.4% in 217 and 1.1% in 218 but will it last? 217 GDP growth rate highest since 21 thanks to ongoing recovery in domestic demand and favorable export demand. Italian GDP growth (y/y, %) and business confidence But structural problems still loom large: To exit the low-growth/high-debt/fragile-banks trap Italy is in dire need of more reform. Potential GDP (%) Sources: Istat, Datastream, Allianz Research, Euler Hermes Sources: European Commission, Datastream, Allianz Research, Euler Hermes 27

28 Italy: High risk of a hung parliament bodes ill for political stability and reform Political fragmentation bodes ill for political stability and economic reform outlook, but reduces odds of Italexit. Coalition games based on Ipsos poll (July) Italexit is a tailrisk as it requires a long-lived, stable government but cannot be ruled out completely given Italy s inability to reform and growing euro-fatigue. Path to Italexit Parliament approves changes to the Constitution (Art. 75 prohibits referendums on internal treaties) If a qualified majority is not reached, the government has to confirm the constitutional changes via a referendum. If a majority votes yes, the Italian constitution can be amended. The Italian government calls a referendum on euro (and/or EU)-membership. A majority votes in favor of exiting the Eurozone/European Union FI: Forza Italia; Fdl: Fratelli d Italia; LN: Lega Nord; PD: Partito Democratico; AP/CP: Alternativa Popolare; M5S: Movimento 5 Stelle Sources: Allianz Research, Euler Hermes Sources: Istat, Ipsos, Datastream, Allianz Research, Euler Hermes 28

29 UK: GDP growth will slow to +1.4% in 217 and +1.% in 218 in line with cooling domestic demand UK consumers face double-whammy blow: High inflation and sluggish wage growth put a squeeze on living standards. Headline inflation, retail price inflation, core inflation & compensation per employee (y/y, %) External sector not making up for slowing domestic demand with exporters responding to weak Sterling by raising export prices, putting profit before volume. GBP/EUR (lhs) & export prices index (base 1=213, rhs) Sources: Datastream, Allianz Research, Euler Hermes Sources: Datastream, Allianz Research., Euler Hermes 29

30 China: Financial tightening is starting to bear fruit Financial imbalances start to reduce with more sustainable credit growth and lower risky credit flows. Shadow banking and domestic credit The downside is that credit intensive activity expenditures are slowing. Industrial Production and Investment 4 Shadow Banking (3m summed bn, right) 3 Nominal Retail sales (y/y) 35 Domestic Credit (y/y, left) Real industrial production (y/y) Nominal Investment in Fixed Assets in Urban areas (YTD, y/y) Sources: IHS, Euler Hermes, Allianz Research Sources: IHS, Euler Hermes, Allianz Research 3

31 China: No hard landing in sight but expect some turbulences Turbulence #1: On saving allocation. One bubble drives out another. Sales Price Indices of Newly Constructed Residential and Shanghai Stock Exchange (y/y, %) 4 35 Beijing (left) Shanghai (left) Shanghai Stock exchange (right) 16 Turbulence # 2: On China s supply chain. Suppliers to the construction sector to feel the heat. 4 3 Producer prices and real estate price Shanghai - Sales Price Residential Buildings PPI - Capital Goods PPI - Mining and Quarrying Turbulence #3: On the RMB. It is the end of the one-way appreciation RMB per USD F PPI - Raw Materials Sources: IHS, Euler Hermes, Allianz Research Sources: IHS, Euler Hermes, Allianz Research Sources: IHS, Euler Hermes, Allianz Research 31

32 World financial crisis Eurozone crisis Fed tapering announced Commodity orice / Emerging Markets crisis Are Emerging Economies back to business? Monetary conditions are supportive Capital flows to Emerging Markets recovered to 214 levels, not to ones. As pull factors (growth, monetary conditions in Emerging Markets) are supportive. 5 Net capital flows to Emerging Markets Excluding China and Russia, USD bn 6 Emerging Markets: monetary policy & inflation dynamics Arrows show changes over the last 3-months (if any) Last inflation compared to average (%) 45 4 Sep.-Dec. 3 DOVISH Mexico Turkey 35 Jan.-Aug. Korea Brazil Indonesia Russia Chile South Africa Poland China Hungary HAWKISH India Key policy rate changes since the beginning of the monetary policy cycle (basis points) Sources: IHS, Euler Hermes, Allianz Research Sources: IHS, Euler Hermes, Allianz Research 32

33 Are Emerging Economies back to business? Gradually, since growth is only normalizing No more crises, so Emerging Markets returned to the pace of growth they had in their new normal period (212-14) Emerging Markets aggregate manufacturing PMI August As growth is improving incrementally, so does the exchange rate. Not more. It means no return to the super-cycle broken in 211. Emerging vs. Advanced economies growth differential and Emerging economies exchange rate Growth differential (left) Exchange rate (right) Appreciation % Source: Bloomberg, Euler Hermes, Allianz Research Sources: Bloomberg, Euler Hermes, Allianz Research 33

34 Asia-Pacific: Keeping up the momentum Regional economic growth to remain firm at +4.8%, underpinned by strong growth in China and Japan, and rising global trade. In 218, economic growth would decelerate to +4.7% as China focus on reducing financial risks. Asia Pacific: country risk and economic growth growth in 217 in light grey USD denominated exports (y/y) APAC: 4.8% Japan South Korea 25% A1 BB1 1.5% 2.8% 2% 216 Q1 217 Q2 217 China B2 Hong Kong A2 Taiwan A2 15% India B1 6.5%** Thailand B1 6.7% 3.5% 1.9% Philppines B1 6.3% 1% 5% Low risk Medium risk Sensitive risk High risk 3.8% Malaysia BB2 5.5% Singapore AA2 2.3% Indonesia B1 5.1% ASEAN-6* 4.8% AA1 Australia % 2.3% -5% AA1 New Zealand 2.5% -1% South Korea India China Indonesia Japan Sources: IHS, Euler Hermes, Allianz Research Sources: IHS, Euler Hermes, Allianz Research 34

35 Latin America: The seeds of recovery slowly start to blossom Regional growth should reach +1.2% in 217, far below the +4.5% average. (Geo)political uncertainty drags growth down. Country risk and economic growth in 217 and 218 Market sentiment and domestic factors have improved as shown by declining spreads and recovering equity prices. Financial conditions in Latin America (Base 1= Index 1) BB2 Mexico D4 Venezuela 2.4% 2.2% % 2.8% -3.1% -7.5% Corporate spread (CEMBI) Sovereign spread (EMBI) Equity prices (MSCI) Colombia 217 BB2 218 C4 Ecuador.6% 1.4% Peru 2.3% BB1 3.6% B3.8% Brazil 2% Low risk Medium risk Uruguay BB2 3.% 2.5% 5 Sensitive risk High risk Chile 1.2% A2 2.5% Argentina 2.8% C3 3.2% Jan-13 Jan-14 Jan-15 Jan-16 Jan As of Q3 217 Sources: Euler Hermes Sources: Bloomberg, Datastream, Euler Hermes, Allianz Research 35

36 Emerging Europe: Region continues to surprise on the upside Growth in the region as a whole to pick up to +3.1% in 217 (+1.8% in 216) as EU members accelerate (+3.9% in 217), Turkey rebounds (+5.2%) and Russia has left recession (+1.5%). Monetary policy in EU member states set to tighten gradually by end-218. GDP growth in 216 and 217 (forecast) and short-term country risk as of Q3 217 Monetary policy interest rates BB1 A1 C4 B2 D4 B1 B2 C3 Sources: National sources, IHS, Euler Hermes, Allianz Research Sources: National sources, IHS, Euler Hermes, Allianz Research 36

37 Middle East and Africa: The credit constraint is still binding Shades of Africa & Middle East: Reforms are paying off in Egypt, growth to be subdued in Nigeria and South Africa. Middle East & Africa: country risk and economic growth growth in 217 in light grey The commodity price shock nurtured a strong financing gap. It normalized only partially. Africa: Cumulative financing gap (USD bn) +/- means a gap/surplus Morocco B1 4.5% B3 2.% Tunisia C3 4.% Egypt BB2.5% Saudi Arabia UAE BB1 1.8% Nigeria D3 1.% Angola D3.5% South Africa B2.6% Kenya C2 4.5% Low risk Medium risk Sensitive risk High risk Source: Bloomberg, Euler Hermes, Allianz Research Sources: Bloomberg, Euler Hermes, Allianz Research 37

38 Image courtesy of skeeze, pixabay.com, CC Thank you for your attention! Economic Research Department Euler Hermes Group 1 place des Saisons 9248 Paris La Défense Cedex France Phone: research@eulerhermes.com This material is published by Euler Hermes SA. a Company of Allianz. for information purposes only and should not be regarded as providing any specific advice. This publication and its contains are proprietary to Euler Hermes SA. Euler Hermes and Euler Hermes logo are trademarks or registered trademarks belonging to Euler Hermes Group. Worldwide Recipients should make their own independent evaluation of this information and no action should be taken. solely relying on it. This material should not be reproduced or disclosed without our consent. It is not intended for distribution in any jurisdiction in which this would be prohibited. Whilst this information is believed to be reliable. it has not been independently verified by Euler Hermes and Euler Hermes makes no representation or warranty (express or implied) of any kind. as regards the accuracy or completeness of this information. nor does it accept any responsibility or liability for any loss or damage arising in any way from any use made of or reliance placed on. this information. Unless otherwise stated. any views. forecasts. or estimates are solely those of the Euler Hermes Economics Department. as of this date and are subject to change without notice. The classification of this document is PUBLIC. Euler Hermes SA. Registered in Nanterre ( ).Euler Hermes SA is authorized and regulated by the Financial Markets Authority of France. Copyright 217 Euler Hermes. All rights reserved