EUROZONE ECONOMIC WATCH JANUARY 2017

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1 EUROZONE ECONOMIC WATCH JANUARY 2017

2 Key messages: some changes for the better Improving confidence in across the board shows the resilience of the eurozone to the various potentially disturbing political events during the second half of 2016, while leading components suggest a slightly more optimistic outlook for coming months, supported by increasing export orders and the depreciation of the euro. Hard data up to November also point to the same direction. The strength of consumption remains in place and exports seem to recover, but concerns about the weakness of investment have not been dispelled. Beyond data volatility in, positive underlying signs are taking root. Our MICA-BBVA model estimates quarterly GDP growth in the eurozone to gain momentum to /0.6% QoQ in, after growth of 0.3% in the previous two quarters. These figures point to growth of 1.7% in 2016 and to a slight upward bias for 2017 (our last projections stood at 1.5%), but we remain cautious on the outlook for coming quarters given the wide range of risks. Risks remain tilted to the downside and are mostly political, both at national and regional level, but derive also from financial sector fragilities and public debt sustainability in some countries. Inflation is picking up given the energy prices base effects, but core measures remain subdued. We continue to expect headline inflation to increase in early 2017 (to around 1.8% YoY, and then to fall back a bit) mostly due to oil price increases and base effects. 2

3 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 GDP growth seems to have accelerated in GDP, CONTRIBUTION BY COMPONENTS (%QoQ, pp) GDP AND MICA FORECASTS (%QoQ) Imports Change in inventories Public consumption Real GDP Exports Gross fixed capital formation Private consumption CI 20% CI 40% CI 60% Observed GDP growth stable in (0.3% QoQ), thanks to stronger consumption and despite low investment and a negative contribution from net exports Available indicators suggest that the economy gained sizable traction in, as the eurozone has shown high resilience to increased political uncertainty Domestic demand continues to support growth thanks to a continued decline of labor market slack and favorable policies, added to tailwinds such as improving global demand and euro depreciation 3

4 (f) (f) (f) (f) Germany France Italy Spain with improvements in Germany and Spain GDP, CONTRIBUTION BY COMPONENTS (%QoQ, pp) Data for point to further widespread acceleration of GDP growth in Germany (BBVAe: % QoQ after 0.2% QoQ), Spain (BBVAe: 0.9% QoQ after 0.7% QoQ), and France (BBVAe: 0.3% QoQ after 0.2% QoQ) Germany France Italy Spain Diff. GDP level relative to 2008 Private consumption Gross fixed capital formation Exports Real GDP Public consumption Change in inventories Imports Eurozone GDP In contrast, Italy growth could slow in (BBVAe: 0.2% QoQ after 0.3% QoQ in ) 4

5 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Confidence gains traction in 4Q across sectors, showing resilience to political uncertainty PMI AND GDP (level, %QoQ) PMIs level ESI AND GDP (level, %QoQ) 108 ESI level GDP (% QoQ) GDP (% YoY) -2-3 Real GDP (% QoQ) Manufacturing PMI PMI Services PMI Confidence data so far continue to show the economy's resilience to increasing uncertainty since the summer, with manufacturing increasing strongly driven by expectations on global demand and a weaker euro Real GDP (% YoY) ESI But we remain cautious as political events in coming months could end up weighing on confidence 5

6 Manufacturing and services PMIs improved in all core countries in 4Q, although German and Italian services slowed in December PMI (level) Oct-16 Nov-16Dec-16 Oct-16 Nov-16Dec-16 Oct-16 Nov-16Dec-16 Oct-16 Nov-16Dec-16 Germany France Italy Spain PMI Composite PMI Manufacturing PMI Services

7 Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14 Aug-14 Nov-14 Feb-15 May-15 Aug-15 Nov-15 Feb-16 May-16 Aug-16 Nov-16 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14 Aug-14 Nov-14 Feb-15 May-15 Aug-15 Nov-15 Feb-16 May-16 Aug-16 Nov-16 Sharp increase of industrial output in November. Positive signs stem from the good performance of capital and intermediate goods in 4Q INDUSTRIAL PRODUCTION (%QoQ, pp) IP (level) IP (% QoQ) * IP CAPITAL, INVESTMENT IN MACHINERY AND EQUIPMENT AND UTILIZATION CAPACITY (%QoQ, %) Inv. M&E, IP capital (% QoQ) Capacity utilization (%) IP (2012=100) IP (% QoQ) Investment M&E (% QoQ) Capacity Utilization (%) IP Capital (% QoQ) Industrial production increased 1.5% MoM in November after 0.1% MoM in October, accelerating with respect to (% QoQ) Production of capital and durable consumer goods added to high capacity utilization suggest a recovery in equipment and machinery investment in *October and November with respect to three previous months 7

8 Mixed growth of industrial output across countries, with an acceleration in most core countries at the end of 2016 INDUSTRIAL PRODUCTION (%QoQ, pp) IP (% QoQ) IP (level) Germany France Italy Spain Portugal Austria Belgium Finland Netherlands IP (% QoQ) IP (2012=100) * calculated using October and November data. Only October for Austria and Belgium 8

9 Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14 Aug-14 Nov-14 Feb-15 May-15 Aug-15 Nov-15 Feb-16 May-16 Aug-16 Nov-16 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 * Exports picked up in November, sustaining the upward trend observed over the second half of the year TRADE BALANCE ( bn, %GDP) EXPORTS CONTRIBUTION BY DESTINATION (%QoQ, pp) Exports, Imports & Trade balance Trade Balance (% GDP) Trade balance ( bn) Exports Imports Trade balance (%GDP) Other EU countries China LatAm Total Exports United States Asia (excl China) Rest of world *October and November with respect to three previous months 9

10 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 2Q07 4Q07 2Q08 4Q08 2Q09 4Q09 2Q10 4Q10 2Q11 4Q11 2Q12 4Q12 2Q13 4Q13 2Q14 4Q14 2Q15 Improvement of retail sales suggests that private consumption continued to underpin growth in RETAIL SALES AND CONSUMER CONFIDENCE (%QoQ, pts) Retail Sales (% QoQ) Consumer Confidence * RETAIL SALES AND TOTAL WAGE BILL (%YoY) Retail Sales (% QoQ) Consumer Confidence Employees Total wage bill Real compensation Retail sales Retail sales declined in November (-0.4% after +1.4 MoM in October). Nonetheless, overall figures of (0.9% QoQ) revert the moderation of the previous two quarters Consumer confidence continued to gain momentum at the end of Together with labour market gains should support household spending *October and November with respect to three previous months 10

11 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 Employment growth slowed in 3Q mainly driven by weaker public and private services JOB GROWTH CONTRIBUTION BY COUNTRY (pp, %QoQ) JOB GROWTH CONTRIBUTION BY SECTOR (pp, %QoQ) Germany France Italy Spain Others Total Agriculture & fishing Const. & real state Information & comm. Public services Industry Trade & travel Fin & private services Total Lower employment growth contribution from Germany and Italy in, but higher from Spain By sector, lower contributions from public and private services, which add to trade and travel activities 11

12 3Q15 3Q15 3Q15 3Q15 with weakness mostly in Germany and Italy, while job creation continued in France and Spain JOB GROWTH CONTRIBUTION BY SECTOR (pp, %QoQ) Public employment explained all job growth in Germany, offsetting the decline of private employment growth Job destruction in Italy in 3Q driven by construction, trade and travel activities Germany France Italy (rh axis) Spain (rh axis) Employment growth in France and Spain still supported by services Agriculture & fishing Industry Const. & real state Trade & travel Information & comm. Fin & private services Public services Total 12

13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Unemployment continued to decline during to stand at 9.8% in the Eurozone as a whole UNEMPLOYMENT RATE BY COUNTRY (%) ANNUAL UNEMPLOYMENT CHANGE BY GENDER & AGE (millions) Nov-15 Oct-16 Nov-16 Eurozone Germany France Italy Spain Women 25-74Y Men 25-74Y Men < 25Y Women < 25Y Total Jobless rate continues to fall at a low pace, driven mostly by Spain Unemployed decline is observed mostly among the experienced population 13

14 Nov-04 Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Nov-13 Nov-14 Nov-15 Nov-16 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Annual headline inflation accelerated to 1.1% YoY in December last year driven by energy prices, but the core rate remained subdued INFLATION AND CONTRIBUTION OF COMPONENTS (%YoY, pp) INFLATION AND TRIMMED MEAN (%YoY) Services Non-energy industrial goods Processed Food Energy Unprocessed Food HICP (% y/y) Trimmed mean inflation Core inflation Eurozone HCPI came out slightly higher than expected at 1.1% YoY in December, accelerating from previous month (0.6% YoY in November) and marking the highest figure since September 2013 The core measure increased slightly to 0.9% YoY We expect increases in inflation in early 2017 to around 1.8% YoY 14

15 Inflation is picking up in most countries in HEADLINE AND CORE INFLATION (%YoY) Germany France Italy Spain Portugal Austria Belgium Finland Netherlands Greece Ireland Headline Inflation (% YoY) Core Inflation (% YoY) Headline Inflation 2015 Core Inflation 2015 By country, HCPI inflation picked up in all core countries in December 2016: Germany (1.7% after 0.7% YoY), Spain (1.4% after % YoY), Italy (% after 0.1% YoY) and France (0.8% after 0.7% YoY) 15

16 EUROZONE ECONOMIC WATCH DECEMBER 2016

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