1. THE ECONOMY AND FINANCIAL MARKETS
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1 THE ECONOMY AND FINANCIAL MARKETS 1.1. MACROECONOMIC CONTEXT According to the most recent IMF estimates, world economic activity grew by 3.1% in 16, which was the second consecutive year of moderation (-.1pp, after -.pp in 15) compared to the previous year. The slowdown was due to the deceleration of the growth pace of developed economies (-.5pp, to 1.6%). Conversely, the group of emerging and developing economies interrupted a cycle of five consecutive years of slowdown, and their growth rate is estimated to have accelerated by.pp to.% in 16. In the, GDP growth stood at 1.6%, which corresponds to the mildest pace of expansion since 11, penalised by the weaker performance of the economy in the first quarter of the year, fostered by more modest contributions of domestic consumption and investment components. In the euro area, real GDP growth of 1.7% allowed this economy to grow in 16 at a rate higher than that of the for the first time since 8. However, economic recovery remained moderate, despite the expansionary monetary policy, a neutral budgetary policy, and the reduced prices of raw materials. The high levels of disparity in terms of growth within the euro area were maintained, with emphasis on the plus side for the expansion in Ireland (.9%) and Spain (3.1%). On the other hand, GDP in Greece stagnated (+.1%) in 16. Despite the unfavourable contribution brought about by the progressive moderation of the economic growth of China (-.3pp, to 6.6%), the lower contraction of GDP in Brazil and Russia (less pronounced than in 15) and the stability of the growth rate of India (7.6%) allowed an acceleration of GDP growth of the aggregate of emerging and developing economies in 16. Graph 1 - Real GDP growth and general price developments 5 Real GDP growth 6 Inflation (HCPI) (CPI) Source: European Commission and Eurostat Source: Eurostat and Bureau of Labor Statistics Inflation continued low in most developed economies, remaining as such below the goal of their respective central banks. After particularly reduced records throughout the first half of 16, a recovery trend in inflation over the second half of the year was visible, largely justified by the recent price increase and stabilisation of energy raw materials, in the face of historically low values in the previous year. Thus, the annual average variation of inflation in the euro area was only.% in 16, after a null variation in 15. Core inflation, a measure that excludes the most volatile components of the inflation basket (such as energy, food, alcohol and tobacco) grew between.8% and 1% in 16, registering an annual average of.9%. In the, inflation also progressed at historical lows, reaching an annual average of 1.3% on total inflation. The respective core inflation grew at an annual average of.%. The gradual recovery of these economies has been accompanied by an improvement of the respective labour markets, although they are in different stages of the economic cycle. The
2 labour market is now close to full employment levels, with an unemployment rate of.7% in December 16. In the euro area, the labour market also developed favourably, with the unemployment rate standing at 9.6% in December 16, the lowest since April 9. This rate remains, however, marked by high disparities between the different countries of the region, with 3% in Greece and 18.% in Spain, compared to 3.9% in Germany. Public finances in the euro area preserved the consolidation path observed since 1, in a framework of economic recovery and reduction of interest rates. In 16, the General Government deficit decreased to 1.7% of GDP in the euro area (.1% in 15). This was not the case in the, where the General Government deficit increased by.6pp, to.8% of GDP in 16. The euro area public debt also registered a favourable trend in 16, with the respective ratio reducing for the second consecutive year, to 91.5% of GDP, 1.1pp lower than the previous year. The behaviour of this metric was less favourable in relation to the economy, increasing (for the tenth consecutive year).1pp to 17.3% of GDP. Graph Public debt and budget deficit in advanced economies General Government balance Public debt Source: European Commission In 16, the Portuguese economy registered a positive growth rate for the third consecutive year, albeit at a slower pace than that observed in the euro area. Overall, GDP grew 1.% in 16 (-.pp compared to the previous year),.3pp lower than the euro area. The slowdown of economic activity was due to the dichotomous development of the Portuguese economy between the first and second semesters of the year, with weak growth in the first half of 16 (+1% year on year), in contrast with the strong dynamism observed in the second half of the year, where the performance of the Portuguese economy was among the best of the euro area (+1.9%). Domestic demand grew significantly, driven by private consumption, with a growth of.3% (.6% in 15), which contrasts with a contraction of.3% of the gross fixed capital formation (+.5% in 15). The contribution of net external demand was positive, with higher exports than imports (despite the negative impact on exports associated with temporary factors in the first half of the year). This contributed to maintain a surplus of the balance of goods and services for the fifth consecutive year in 16 (.% of GDP), a trend that also reflects a sustained improvement in the terms of trade in recent years. Also important is the preservation, since 1, of the positive financing capacity of the Portuguese economy. In sectoral terms, there was a slight decrease in the financing capacity of households (from 1 to.8% of GDP) and financial corporations (from 3.8 to.%), offset by the improvement in the situation of General Government (from. to.1%) and non-financial corporations (from -. to.%), with the financing capacity of the total economy improving from.3 to 1.5% of GDP
3 Graph 3 Economic growth and external accounts in Portugal 6% Contributions to GDP growth External accounts 5% %,8% 1,6%,5% 1,9% %,9% 1,6% 1,% % %,% -1,1% % -1,8% % -3,% -6%,% -8% -5% -1% -15% Source: INE Internal demand GDP External demand Current + capital account Current account Goods and services account The labour market in Portugal maintained the positive trend that started in mid13, with the unemployment rate dropping to 1.% of the labour force in December 16 (the lowest record since mid9), which corresponded to a correction of pp year on year. This evolution reflected a reduction of 16.5% of the unemployed population and an increase of.3% of the employed population during the year. With regard to the evolution of the average price level, the prevalence of a context of reduced inflationary pressures, both internal and external, has dictated a scenario of low inflation in Portugal, similar to that observed for the euro area aggregate. The HICP in Portugal registered an annual average variation of.6% in 16,.1pp above that of the previous year. Graph Public finances in Portugal General Government balance Source: INE Overall balance Structural overall balance Primary balance Structural primary balance , 11 Maastricht debt 19, 13,6 19, 13, , Central Government deposits General Gov debt net of Central Gov deposits General Government gross debt The budgetary consolidation process continued in 16, allowing a reduction of the budget deficit to.% of GDP, the lowest since 197 and below 3% for the first time since the creation of the Economic and Monetary Union. This resulted from an improvement in the primary balance as a percentage of GDP from. to.% of GDP, the highest since 199. Notwithstanding these developments, along with the 3% growth of nominal GDP, the gross public debt ratio increased slightly (from 19 to 13.% of GDP), on the back of an increase of deposits, largely for the prefinancing of the recapitalisation of CGD, which occurred in the first quarter of 17. On the other hand, the public debt net of Central Government deposits decreased for the first time since 1997 (from 11.6 to 11% of GDP)
4 1.. MONETARY POLICY AND FINANCIAL MARKETS The monetary policy of the main central banks remained generally accommodative throughout 16, although with a greater degree of divergence between the progressive normalisation of the level of interest rates by the Federal Reserve and the maintenance of an expansionist policy by the ECB. In line with its mandate, given the convergence of the economy to a situation of full employment, accompanied by favourable economic perspectives (which should be consistent with an acceleration of inflation), the Federal Reserve continued the gradual normalisation process of key interest rates. Given the economic risks identified in the first half of the year (mostly associated with the Chinese economy), the Fed decided to raise the intervention rates only at the end of 16. Although the cycle of interest rate hikes is expected to continue over the next two years, it is anticipated that this process will be only gradual. Furthermore, the ECB extended the range of assets acquired monthly to corporate debt securities and increased the aggregate amount of monthly purchases from 6 to 8 billion as from April 16. The period of validity of the ECB s purchase programme was further extended until the end of 17, or later, if necessary. In addition, a new series of four TLTRO auctions was announced, which started in June 16, aiming at maintaining attractive funding levels for the banking sector with the ECB and improving the transmission mechanism of the monetary policy in the region, with a calibration of the respective amounts for total lending to the economy by financial institutions. Developments in the European and money markets reflected the monetary policy adopted by the respective central banks. In this way, while the 3-month Euribor continued the downward trend that has characterised it over the past few years, ending the year at historic lows of -.319%, the Libor exhibited an opposite behaviour, reaching 1% at the end of 16, the highest since mid9. The evolution of sovereign yields in 16 was also conditioned by the policy of the Federal Reserve and the ECB, as well as by the occurrence of two political events with opposing impacts the result of the referendum on Britain s membership of the EU and the presidential elections. If the first reinforced the downward trend of yields in the and Germany, the second dictated their sharp rise between November and December, following an increase of both inflation and real growth expectations in the. Therefore, after reaching an annual minimum of 1.36% in August, the strong rise in the last two months of the year made it possible for the 1-year Treasury rate to increase by 17bp over the year to.%. The 1-year Bund rate also declined over the first three quarters of 16, backed by the ECB policy, in particular under the PSPP. In this sense, after reaching a minimum of -.19% in July, the sharp rise between November and December positioned the German 1-year yield at.1% at the end of 16, which nonetheless corresponded to an annual variation of bp. In December, the difference between the 1-year Treasury-Bund yield reached the highest level since German reunification (35bp), settling at bp at the end of the year
5 % basis points % basis points Graph 5 OT yields and euro-area sovereign spreads vs the Bund OT yields,5 Spread vs. bund (1Y), 3,5 3,,5, 1,5 1, 5Y,5 1Y Dec-1 Jun-15 Dec-15 Jun-16 Dec-16 Source: Bloomberg The spreads of peripheral countries of the euro area registered different dynamics in 16, with Portuguese yields behaving unfavourably in international markets, related inter alia to the resolution of Banif and the retransmission of Novo Banco s senior bonds to the vehicle resulting from the resolution of BES (which occurred at the end of 15), the reduction of the volume of purchases under the PSPP in the second half of 16, and the uncertainty about the decision of DBRS in relation to the Portuguese Republic s rating. The 1-year spread between German and Portuguese yields increased from 167bp to 356bp at the end of the year, which represents an underperformance in the light of the evolution of Spain spreads (+3bp, to 118bp) and Italy (+6bp to 161bp) versus German debt, with the same maturity. The euro depreciation trend against the dollar continued, as a result of the Fed and ECB monetary policy, as well as a set of exogenous factors, consistent with the increase in the interest rate differential between the two geographies, with the 3.% annual depreciation placing the euro close to the minimum observed in 3. The performance against the Yen was also negative (- 5.9%), which contrasts with the strong appreciation of the euro vis-à-vis the British Pound (+15.8%, influenced by the outcome of Britain s referendum on the exit of the UK from the EU), which favoured the euro s performance in relation to the currency mix representing the main trading partners (+1.5%). In relation to the SDR basket of currencies in which IMF loans are denominated, the European currency appreciated.%, which implied a marginal increase of the value of the IMF loan in euros, before currency hedges, of about EUR 3 million throughout the year 16 (see section.3.). Graph 6 Foreign exchange rates and 1-year interest rates 5 5 1,3 Diferencial Treasury - Bund (RHS) 1, Bund 1,1 Treasury 3 3 1, 1-1 Dec-1 Jun-15 Dec-15 Jun-16 Dec-16 Source: Bloomberg Jan-1 Jul-1 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17,9,8,7 PT IT SP,6 Dec-1 Jun-15 Dec-15 Jun-16 Dec-16 EUR/D EUR/GBP EUR/JPY (RHS)
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