Summary of macroeconomic forecasts GDP Growth Inflation Curr. Account / GDP Fiscal balances / GDP

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1 ECONOMIC RESEARCH DEPARTMENT Summary of macroeconomic forecasts GDP Growth Inflation Curr. Account / GDP Fiscal balances / GDP % 216 e 217 e 218 e 216 e 217 e 218 e 216 e 217 e 218 e 216 e 217 e 218 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 (e: estimates & forecasts) In the US, the normalisation of the monetary policy has been put on hold for the time being pending the release of stronger data. The rebound in oil prices has brought relief for the highly-leveraged shale oil sector The stabilisation of the dollar, better Chinese data and a strong Q1 in the Eurozone reduce the pressure on the manufacturing sector However, pressure on corporate profits do not bode well for business investment The US consumer remains key, hence the importance of the labour market and wage evolution. In the Euro area, the recovery looks self-sustained and compares favourably to the poor Q1 performance in the US and the underlying weak growth in Japan Yet, the UK referendum s direct effects on economic activity lead us to revise our forecasts downward somewhat Credit and money growth will continue to revive on the back of the ECB s QE and negative deposit rate policy Core inflation will stay low but headline inflation will gradually accelerate following the rise in energy prices.. 1 US GDP growth and composite ISM 2 EMU GDP growth and composite PMI GDP, q/q, ann. [L] M&N Index [R] Quarterly averages do not always tell the truth: both ISM surveys are actually rebounding from their early-216 lows GDP, q/q, ann. [L] PMI composite [R] Despite some softening the composite PMI is still above the 5 barrier. It is too early to see the potential effects of the Brexit vote February 217 1

2 Summary of financial forecasts Interest rates ######## ######## ######## End of period, % Q1 Q2 Q3 Q4 Q1e Q2e Q3e Q4e e 218e $ Fed Funds Libor 3m $ T-Notes 1y ECB "Refi" Euribor 3m Bund 1y OAT 1y BTP 1y BoE Base rate Gilts 1y Y BoJ Ov ernight JGB 1y Exchange rates End of period Q1 Q2 Q3 Q4 Q1e Q2e Q3e Q4e e 218e $ EUR / USD USD / JPY EUR / GBP EUR / CHF EUR / JPY Source : BNP Paribas Group Economic Research / GlobalMarkets (e: estimates & forecasts) 3 Euro-dollar 4 Interest rates Euro-dollar exchange rate Spot price Government Bond Yields (1 year) US Germany Spread Interest rates 6 Oil market Government Bond Yields (1 year) Germany France Oil price (Brent) $ per barrel, spot Spread February 217 2

3 United States 7 US, business climate 8 US, investment cycle vs corporate profits Business climate indicators (from purchasing manager index) ISM Manufacturing ISM Non manufacturing The manufacturing ISM index has rebounded after a long decline. Nonfinancial corporate, fixed investment (% value added) [L] Nonfinancial corporate, net profits (% value added) [R] Corporate investment declined for two quarters in a row, in line with declining profit margins. 9 US, falling oil prices dampen corporate investment.. 1 but benefit to the consumer US Oil market Oil production (mb/d) Number of drillings [R] Drillings have collapsed. Production is weakening Private consumption, 3m/3m, ann. [L] Retail sales, vol., 3m/3m, ann. [R] car sales - (adjusted to scale) Private consumption is supported by the strength of the labour market and the fall in the energy bill 11 US, housing market recovers 12 US, Housing market recovers Housing starts, x1 [L] NAHB [R] The NAHB index bodes well for housing starts going forward Housing starts, x1 [L] Inventories in months of sales [R] Inventories still very low in month of sales February 217 3

4 United States 13 US, non-farm payrolls vs unemployment rate 14 US, labour force participation rate Monthly change in nonfarm payrolls (x1) [L] Unemployment rate [R] The US unemployment rate has moved below the threshold. At this low level of unemployment, wage growth and inflation are supposed to pick up. 9% 7% Participation rate 2-64 aged population 8 79% 77% The rate of participation among the working age population (2-64) has rebounded recently, a further indication that the labour market is getting into a better shape. 15 US, no concern for inflation neither deflation 16 US, no concern for inflation neither deflation CPI Core y/y CPI Headline, y/y - - Energy Energy is largely responsible for the decrease in the inflation rate. Core inflation (excluding food and energy) is rather stable but well below, the Fed s official target. Phillips curve Yaxis: growth in nominal wages ; Xaxis:unemployment rate R² =.6 7% 9% 1 1 Wage growth is still subdued. However, the most recent observation came a little bit higher (estimated rise in hourly earnings +2.yoy in Q1 216). 17 US, credit to corporates keeps healthy 18 US, highly leveraged corporate sector Credit to corporate*, net flows, an $bn [L] Banks tightening credit, % [R] Credit conditions applied by banks are still easy though less than before. Net credit flows to corporates (loans and bond issues) remain considerable Corporate debt (credit market instrument) % value added US non-financial companies have increased their leverage ratio by issuing record amounts of debt on the bond market. 21 February 217 4

5 United States 19 US, low corporate spreads 2 US, highly leveraged investment trusts US corporate spreads High Yield Corporate spreads, after widening in the second part of 215, have tightened as of late. REITS Balance sheet MSB, $bn [R] Repo as % of total liabilities [L] 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] US, Fed funds rate and core inflation 22 US, real Fed funds rate and unemployment rate Fed funds Core CPI, yy Fed funds rate vs Unemployment Fed funds [Grey = real, LHS] U. Rate [RHS] December 215 marked the end of an exceptional period (seven year) of zero interest rates policy In the past, a to 5. unemployment rate saw the real Fed fund rate turning positive. This time is different and on this measure the Fed is well behind the curve. 23 US, dollar effective exchange rates 24 US, external accounts Dollar, real effective exchange rate 1973 = Source : Thomson Datastream, IMF, BNP Paribas The real effective exchange rate (trade weighted & adjusted for inflation) of the dollar is close to its long term average. Current account balance % GDP Household deleveraging and the surge in shale oil production, which reduces the dependence on imported energy, have contributed to a shrinking current account deficit in recent years. 21 February 217 5

6 China 25 China, weaker than officially admitted 26 China, change in growth determinants China, growth indicators (y/y) GDP Ind. output Electr. output Source : Thomson Datastream, IMF, BNP Paribas Indicators such as electricity output or shipping indicate that China s slowdown is particularly severe in the industrial sector, which is hit by weak demand, overcapacities and deflation. US, households debt ratio (% GDP) -L- China, exports (% GDP) -R China s export performance remains weak, in part due to subdued global demand. US consumption of Chinese goods has been on a downward trend as households have deleveraged. 27 China, investment has come down 28 China, credit China, fixed investment vs private consumption Fixed investment, % GDP Private consumption, % of GDP 47% % % 37% Source : Thomson Datastream, IMF, BNP Paribas Investment ratio is down, which is less a sign of a controlled rebalancing in growth sources than a painful adjustment after years of overinvestment and excessive debt. China, credit outstanding as % of GDP Total Bank lending Bonds, entrusted loans, bank's acceptances, financial trusts... China s internal debt ratio is the highest in the emerging world and continues to increase. 29 China, recovery in trade surpluses 3 China, food and energy bill China, trade balance % GDP Source : Thomson Datastream, IMF, BNP Paribas External trade surpluses are on the rise, due to improving terms of trade, sluggish export growth and weaker domestic demand. China, food & energy trade balance % GDP Large trade deficits generated by food and energy imports have declined in the last three years. 21 February 217 6

7 Euro Area 31 Euro area, lagging behind 32 Euro area, consumption remains strong GDP, vol. (28 = 1) US EMU The Eurozone did a lot better than the US in Q Since the start of 28 the picture is completely different. Private consumption, yy Retail sales, vol., yy Consumption is a key driver behind the Eurozone recovery, as witnessed by healthy retail sales. 33 Germany, GDP growth vs business surveys 34 France, GDP Growth vs business surveys GDP, q/q, ann. [L] PMI Manuf.[R] PMI composite [R] Despite some volatility in the monthly data, entrepreneurs remain very positive about business conditions. However, they have become more concerned about the outlook GDP, q/q, ann. [L] Composite indicator (BdF&Insee) PMI [R] GDP increased by 1.7% in Q4 16 (saar), confirming the expected pick-up (after +. annually in Q3). Besides, the still well oriented surveys point towards a similar growth rate in Q France, housing activity recovering 36 France, consumption and purchasing power gains Housing Starts (12m cumulated) Surveys [RHS] Part of the French weaker performance versus the Eurozone is due to the housing market, close to an all-time low. 216 saw the first signs of recovery. The improvement should continue in Gross Disposable Household Income (%,y/y) Household Consumption (%, y/y) Source : Thomson Datastream, European Commission BNP Paribas The lack of inflation, arising from cheap oil prices, has been a key support to purchasing power gains and consumption for two years. The jobs recovery is starting to add support, though a limited one. 21 February 217 7

8 Euro Area 37 Italy, GDP growth vs business surveys 38 Spain, GDP growth vs business surveys GDP, q/q, ann. [L] PMI Manuf.[R] PMI composite [R] Italian growth turned back positive in 215, for the first time in almost four years GDP, q/q, ann. [L] PMI Manuf.[R] PMI composite [R] Spanish economic growth is likely to weaken in the quarters ahead Euro area, fixed investment vs cap. utilization rate 4 Euro area, corporate fixed investment vs profits Corporate investment % of GDP (LHS) Capacity utilisation rate (RHS) Corporate investment % of GDP (LHS) Corp. profit index (27 = 1, RHS) Investment is picking up on the back of a rising trend in capacity utilisation rates The stabilisation of profit margins could encourage corporate investment to pick up. Uncertainty following the UK referendum could hold back investment decisions though France, fixed investment vs corporate profit 42 France, fixed investment vs corporate debt Corporate investment % of GDP (LHS) Operating earnings % of value added (RHS) 1 3 Corporate investment % of GDP (LHS) Corporate debt % of value added (RHS) % The rise in corporate profit margins has been building up since 214, supporting the upturn in business investment Credit growth has supported corporate investment in France. However the proportion of investment generating productivity gains is insufficient. 21 February 217 8

9 Euro area 43 Corporate debt ratio, diverging trends 44 Euro area, trend in corporate fixed investment Nonfinancial corporate debt as % of value added Germany France The French corporate sector s debt-ratio has increased significantly over the past decade, contrary to what happened in Germany. Investment in Mach. & Equipt., 28 = 1 (vol.) Spain Italy Very different dynamics of investment in Spain versus Italy, where the gap compared to the pre-recession level remains huge. Euro area, trend in labour costs 46 Euro area, trend in exports Change in unit labour costs (Q4) IR PT GR ES BD OE FN BG FR IT NL Down in many countries of the the EMU periphery (Ireland, Spain, Greece, Portugal). EU Export Volume Index (s.a., 213 = 1) Intra EU 28 Extra EU External trade is weaker outside Europe, stronger inside 47 Euro Area, credit to corporates vs bank lending survey 48 Spain, credit to corporates 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 is becoming stronger before Brexit Spain, credit to corporates, EURbn 12m cumulated net flows Monthly net flows (annualized) Credit to corporates tends to recover in Spain. 21 February 217 9

10 Euro area 49 Euro area, financing conditions improve 5 Euro area, consumer credit recover Bank's lending rates to corporates (<1Y & EUR 1mn) Italy Spain France 7% The convergence of lending rates shows fragmentation is declining. Euro are consumer credit 12m cumulated flows, EURbn After turning positive for the first time in six year in the first half of 215, flows continue to rise. 51 Monetary aggregates, Euro area vs US 52 Euro area, base money surge with the QE Monetary aggregates (28 = 1) EMU (M3) US (M2) Monetary support has been much stronger in the US than in the Euro area, looking at broad aggregates. This now may change with the ECB s asset purchase program. Money base R.Reserves Ex.Reserves D. Facility Base money (bank s holdings to the ECB) was temporarily inflated by the ECB s TLTROs. It is now increasing along with the QE. 53 Euro area, M3 vs core inflation rate 54 Euro Area, ECB refi rate vs determinants CPI Core y/y [L] M3, y/y [R] M3 is weakening on the back of slower M1 growth % - Core inflation rate [L] Unemployment rate [R, inv.] "Refi" rate [L] % 9% The refi has been lowered to. as of 16 March 216, and the deposit facility rate (DFR) cut to February 217 1

11 Markets Italian 1 year rates 56 Spanish 1 year rates Italy, Govt. bond yields 1y 2y Spain, Govt. bond yields 1y 2y 9% 7% Spread Back to historical low levels after tensions seen during the Summer of 215. The widening of spreads vs Bunds after Brexit has been limited. Spread Same story 57 France, over several maturities 58 Euro, still rather cheap France, Govt. bond yields 1y 5y y 1. Trend in the euro (211 = 1) Against the dollar Trade weighted Very low everywhere along the curve, and generating substantial savings on debt interest payments ( EUR 44.5bn 216 Financial Law, down EUR1.2bn compared to previous estimate) The euro has rebounded in nominal effective terms. However, it looks still cheap by historical standards. 59 Euro-dollar vs interest rates spreads 6 Euro-dollar vs ECB s balance sheet Bund - Treasuries yields spread 5y [R] Euro vs dollar [L] The spread between German and US interest rates is likely to stay very negative over the foreseeable future, weighing on the euro. ECB's balance sheet vs euro-dollar ECB Balance Sheet, bn [L] /$ [R] The introduction of a negative deposit rate in 214 and the anticipation of ECB QE caused a big correction of the euro. More recently, a dovish Fed has caused a strengthening of the euro February

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