1 US GDP growth and manufacturing ISM 2 EMU GDP growth and composite PMI

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1 ECONOMIC RESEARCH DEPARTMENT Summary of macroeconomic forecasts GDP Growth Inflation Curr. account / GDP Fiscal balances / GDP En % e 217 e e 217 e e 217 e e 217 e Advanced United States Japan United Kingdom Euro Area Germany France Italy Spain Netherlands Belgium Portugal Emerging China India Brazil Russia World Source : BNP Paribas Group Economic Research / GlobalMarkets (e: Estimates & forecasts) In the US, the normalization of the monetary policy could come to a halt, depending on the developments of global financial markets, the growth outlook for the emerging world and the expected path of domestic prices. We think that the US economy will rely more on its own traditional forces in 216, i.e. households spending In the Euro area, the pace of recovery will remain highly dependent on domestic demand, against the background of persistent emerging-led global slowdown. Like in 215, cheap oil price and low interest rates will be supportive Depending on US monetary policy, the euro could firm compared to 215, but still remain competitive Energy prices could bring inflation back in negative territory in the first part of the year Low inflation and weakening inflation expectations will push ECB to do more. 1 US GDP growth and manufacturing ISM 2 EMU GDP growth and composite PMI GDP, q/q, ann. [L] M&N Index [R] Source : Thomson Datastream, ISM, BNP Paribas The drop in the manufacturing ISM points to weaker activity by end early 216. However, exceptional mild winter might complicate the quarter to quarter readings of GDP numbers GDP, q/q, ann. [L] PMI composite [R] Recent softening of PMI data requires close monitoring. So far however, the recovery keeps on track despite activity s slowdown in other parts of the world February 216 1

2 Summary of financial forecasts Interest rates ######## ######## ######## End of period, % Q1 Q2 Q3 Q4 Q1e Q2e Q3e Q4e e 217e $ 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 217e $ EUR / USD USD / JPY EUR / GBP EUR / CHF EUR / JPY Source : BNP Paribas Group Economic Research / GlobalMarkets (e: Estimations, prév isions) 3 Euro-dollar 4 Interest rates Euro-dollar exchange rate Spot price 1,5 1,4 1,3 1,2 1,1 1,1 1, Government Bond Yields (1 year) US Germany 1,,1 - Spread Interest rates 6 Oil market Government Bond Yields (1 year) Germany France ,5,1 Oil price (Brent) $ per barrel, spot February 216 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 Confidence is low in the manufacturing sector. However, activity keeps rather healthy elsewhere 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. It is standing now relatively high in the cycle. 9 US, falling oil prices dampen corporate investment.. 1 but benefit consumers US Oil market Oil production (mb/d) Number of drillings [R] Drillings have collapse. Production starts to correct Private consumption, 3m/3m, ann. [L] Retail sales, vol., 3m/3m, ann. [R] car sales - (adjusted to scale) Private consumption (read the left scale) is very robust, thanks to the solid labour market and the reduction of the energy bill. 11 US, housing market recovers 12 US, Housing market recovers Housing starts, x1 [L] NAHB [R] The NAHB index is pointing to continuous increase in housing starts Housing starts, x1 [L] Inventories in months of sales [R] Inventories remain low relative to sale volumes. 26 February 216 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 broken the threshold, e.g. the estimated NAIRU whereby wages and inflation are supposed to start accelerating. 9% 7% Participation rate 2-64 aged population 8 79% 77% The rate of participation among the working age population (2-64) has stopped falling recently, which indicates that the labour market is coming 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 inflation rates. Core inflation (excluding food and energy) picked up recently is now above. Phillips curve Yaxis: growth in nominal wages ; Xaxis:unemployment rate R² =,7 15'Q4 21 7% 9% 1 1 Wages are still subdued. However, their y/y rate of growth accelerated recently. 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 are loose and flows to corporates (loans and bond issues) are back to their very strong pre-crisis level Corporate debt (credit market instrument) % value added US non-financial companies have increased their leverage ratio by issuing record amount of debt on the bond market. 26 February 216 4

5 United States 19 US, rising corporate spreads 2 US, highly leveraged investment trusts US corporate spreads BBB High Yield Corporate spreads are widening, especially in the high yield sector. 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 marks the end of an exceptional period (seven year) of zero interest rates policy The unemployment rate within the - 5. range is the limit where real Fed fund rates start to be positive. Not this time. 23 US, dollar effective exchange rates 24 US, external accounts Dollar, real effective exchange rate 1973 = Source : Thomson Datastream, IMF, BNP Paribas The dollar is now near to its long-term equilibrium level, as measured by its real effective exchange rate (trade weighted and adjusted for inflation). Current account balance % GDP The external financing needs of the US have been dramatically cut by a mix of households rebalancing their financial situation and surging oil production. 26 February 216 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 Alternative indicators such as shipping or electricity output suggest that Chinese s slowdown is much more pronounced than depicted by official GDP numbers. US, households debt ratio (% GDP) -L- China, exports (% GDP) -R US consumers are on a deleveraging mood and import less from China. 27 China, investment has come down 28 China, credit China, fixed investment vs private consumption Fixed invetment, % GDP Private consumption, % of GDP % 4 % Source : Thomson Datastream, IMF, BNP Paribas Over investment leads to over capacities, a consequence of s world turmoil caused by the financial crisis. 215 has marked the start of a contraction China, credit outstanding as % of GDP Total Bank lending The highest internal debt ratio is in the emerging world. Bonds, entrusted loans, bank's acceptances, financial trusts China, recovery in trade surpluses 3 China, food and energy bill China, trade balance % GDP Source : Thomson Datastream, IMF, BNP Paribas External surpluses on the rise again, due to improving terms of trade and weaker domestic demand. China, food & energy trade balance % GDP Trade for food and energy generates huge deficits in China, albeit less than two years ago. 26 February 216 6

7 Euro Area 31 Euro area, lagging behind 32 Euro area, consumption remains strong GDP, vol. (28 = 1) US EMU Eurozone GDP reached eventually its pre-crisis activity level in end-215. What if activity growth starts slowing down now? Private consumption, yy Retail sales, vol., yy Consumption will remain the main driver behind the Eurozone recovery, as suggested 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] Annualised GDP growth was 1. in Q4, as the negative contribution of net foreign trade was more than offset by strong domestic demand GDP, q/q, ann. [L] Composite indicator (BdF&Insee) PMI [R] GDP growth was + annually in Q4 after +1. in Q3. The small deceleration is due to the negative impact on consumption of mild winter conditions and of November terrorist attacks France, housing activity bottoming out? 36 France, car registrations bottoming out Housing Starts (12m cumulated) Surveys [RHS] 5 3 New car registrations Monthly, x Part of the French poor performance in Europe is due to the housing market, trending at all-time low. 216 may see the first signs of recovery according to surveys Source : Thomson Datastream, European Commission BNP Paribas Bouncing back, from historical low. 26 February 216 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 turns back positive in 215, for the first time since almost four years GDP, q/q, ann. [L] PMI Manuf.[R] PMI composite [R] The Spanish economy keeps on a good track, albeit slowing down since last Spring 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) 11, 9 Corporate investment % of GDP (LHS) Corp. profit index (27 = 1, RHS) 11, 12 11, 8 11, 1 1, 8 1, 98 1, 7 1, 96 9, Higher capacity utilisation rates 7 9, and stabilisation in profit margins might encourage corporate investment to pick up, starting from historical low levels 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) % Investment has proved rather resilient in France compared to other countries and despite the fall in corporate profits. The recovery in these latter should support investment in Credit has proved rather supportive for investment in France. 26 February 216 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 French corporate sector is not the most leveraged in Europe. However, its debt-ratio has increased significantly over the past decade, contrary to what happened in Germany. Investment in Mach. & Equipt., 28 = 1 (vol.) Spain Italy Corporates investment revives with firm s profitability, however not at the same pace everywhere. Euro area, trend in labour costs 46 Euro area, trend in exports Change in unit labour costs (Q3) GR IR PT ES BD OE FN BG NL FR IT Rebalancing under way. 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 (<1y, EUR 1mn) Credit to corporate*, net flows EUR bn [L] Expected tightening, % [R] Expected demand, % [R] ECB s bank lending surveys are showing easier credit standards. Demand for credit addressed by the private sector is becoming stronger Spain, credit to corporates, EURbn (<1y & EUR 1mn) 12m cumulated net flows Monthly net flows (annualized) credit to corporates (under 1 year and EUR 1mn) tends to recover in Spain. 26 February 216 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% Continuous improvement: the convergence of lending rates to corporates is slowly going on. Euro are consumer credit 12m cumulated flows, EURbn Positive in 215 at last, and accelerating 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 main aggregates. This started to 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] 3, 2, 2, 1, 1,,, M3 is bottoming out. This is as a result of investors shift toward liquid assets from longer-term financial liabilities. ECB s QE is likely to encourage this pick-up. 9% - Core inflation rate [L] Unemploment rate [R, inv.] "Refi" rate [L] 4, 4, 3, 3, 2, 2, 1, 1,,, % 9% The refi is fixed at. since Sept.4 214, while the deposit facility rate (DFR) is negative, at -.3. The ECB recently suggested it could even cut further, setting a more negative DFR. 26 February 216 1

11 Markets Italian 1 year rates 56 Spanish 1 year rates Italy, Govt. bond yields 1y 2y ,5, Back to historical low level after temporary tensions during the summer. Spain, Govt. bond yields 1y 2y 7% Same story. 1,7,7% 57 France, over several maturities 58 Euro, still rather cheap France, Govt. bond yields 1y 5y y Trend in th euro (211 = 1) Against the dollar Trade weighted ,5 -,2 -,4 Very low everywhere along the curve, and generating substantial savings on debt interest payments ( EUR 44.5 bn 216 Financial Law, down EUR1.2 bn compared to previous estimate) The euro has rebounded in nominal effective terms. However, it looks still cheap by historical standard. 59 Euro-dollar vs interest rates spreads 6 Euro-dollar vs ECB s balance sheet Bund - Treasuries yields spreads 5y [R] Euro vs dollar [L] 1,6 1,5 1,4 1,3 1,2 1,1 1, ,,, -, -1, -1, -2, The spread between German and US interest rates is likely to stay very negative over the foreseeable period. ECB's balance sheet vs euro-dollar ECB Balance Sheet, bn [L] /$ [R] The ECB asset purchase program, along with the negative interest rates fixed on deposit facility, has put a continuous downward pressure on the exchange rate. 1,5 1,4 1,3 1,2 1,1 1, 26 February

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