In the US The Euro area, e 2019 e e 2019 e Advanced 2,3 2,4 1,7 1,8 2,1 1,9 Euro Area 2,6 2,2 1,7 1,5 1,8 1,8

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1 In the US, activity wasn t as dynamic as expected at the start of the year, however this could be due to temporary factors Economy should continue to expand at a 3 percent path or so in 218, thanks to tax cuts, booming profits and credit In the wake of higher oil prices and more evident tensions in the labour market, inflation is accelerating It will overshoot the level for a while and the Fed will keep on normalizing monetary conditions We forecast the Fed Funds target rate to reach 2.75% by early 219. The Euro area, the recovery is continuing, although it has been weaker than expected at the start of the year Intra-EU trade continues to build with domestic demand, especially corporate investment. Inflation has rebounded in the wake of higher oil prices, but the core CPI trend remains subdued, which argues for the ECB to maintain the status quo on key rates. However, along with the Fed s net selling, the slower pace in ECB asset purchases should impact the long end of the curve We see the long term rates for US Treasuries and Bunds rising in 218. % e 219 e e 219 e Advanced 2,3 2,4 1,7 1,8 2,1 1,9 United-States 2,3 3, 2, 2,1 2,5 2,1 Japan 1,7,8,6,5,9,8 United-Kingdom 1,8 1,4 1,3 2,7 2,8 2,2 Euro Area 2,6 2,2 1,7 1,5 1,8 1,8 Germany 2,5 2,1 1,9 1,7 1,9 2, France 2,3 2,1 1,9 1,2 2, 1,6 Italy 1,6 1,4 1,2 1,3 1,4 1,7 Spain 3,1 2,8 2,2 2, 1,7 1,7 Emerging 4,9 5, 5, China 6,9 6,4 6,3 1,6 2,3 2,5 India 6,7 7,4 7,6 3,6 4,5 4,4 Brazil 1, 2, 3,5 3,4 3, 3,3 Russia 1,5 1,8 1,6 3,7 3,5 4,4 Source : BNP Paribas Group Economic Research (e: Estimates & forecasts,)

2 2 Interest rates, % ######## ######## ######## End of period Q1 Q2 Q3e Q4e Q1e Q2e Q3e Q4e e 219e US Fed Funds 1,75 2, 2,25 2,5 2,75 2,75 2,75 2,75 1,5 2,5 2,75 Libor 3m $ 2,31 2,2 2,5 2,65 2,8 2,8 2,7 2,55 1,69 2,65 2,55 T-Notes 1y 2,75 3,7 3,2 3,25 3,25 3,25 3,15 3, 2,41 3,25 3, Ezone ECB Refi,,,,,,,,25,,,25 Euribor 3m -,33 -,33 -,33 -,33 -,33 -,13 -,13,7 -,33 -,33,7 Bund 1y,5,53,9 1,1 1,2 1,3 1,4 1,5,42 1,1 1,5 OAT 1y,6,84 1,15 1,35 1,45 1,55 1,65 1,75,66 1,35 1,75 UK Base rate,5,5,75,75,75 1, 1, 1,25,5,75 1,25 Gilts 1y 1,39 1,5 1,6 1,75 1,8 1,9 2, 2,1 1,23 1,75 2,1 Japan BoJ Rate -,7 -,1 -,1 -,1 -,1 -,1 -,1 -,1 -,4 -,1 -,1 JGB 1y,4,5,5,5,4,4,2,,5,5, Exchange Rates End of period Q1 Q2 Q3e Q4e Q1e Q2e Q3e Q4e e 219e USD EUR / USD 1,23 1,18 1,18 1,24 1,3 1,31 1,33 1,34 1,2 1,24 1,34 USD / JPY 16,35 18, 17, 14, 12, 1, 99, 98, 112,65 14, 98, EUR EUR / GBP,88,89,89,88,88,88,88,88,89,88,88 EUR / CHF 1,18 1,18 1,19 1,2 1,22 1,24 1,25 1,25 1,17 1,2 1,25 Source : GlobalMarkets (e: Estimates & forecasts) 3 Euro-dollar 4 Interest rates Euro-dollar exchange rate Spot price 1,5 1,4 1,3 1,2 1,1 1, juin 1,17 Government Bond Yields (1 year) US Germany - Spread ,9%,3 29-juin 5 Interest rates 6 Oil market Government Bond Yields (1 year) France ----Germany 29-juin Oil price (Brent) $ per barrel, spot juin 8 79,6,

3 3 7 US, business climate 8 US, investment cycle vs corporate profits ISM Manufacturing Orders Profits after tax [L] Investment [R] % The business climate still looks healthy, although marking some correction from past buoyant level Corporate investment and profits are now relatively far along in the cycle. 9 US, domestic oil market recovers 1 US, consumption US Oil market Oil production (mb/d) ---- Number of drillings [R] After dropping sharply, the number of drillings is on the rise again. US oil production is also recovering, matching all times high Private consumption, 3m/3m, ann. [L] Retail sales, vol., 3m/3m, ann. [R] - car sales (adjusted to scale) 15% % Weaker at the start of the year, but could be due to specific factors. Now rebounding. 11 US, housing market on a good shape 12 US, housing market on a good shape 5% -5% ---- Housing starts, x1 [L] NAHB [R] The NAHB index points to an ongoing increase in housing starts Housing starts, x1 [L] Inventories in months of sales [R] Inventories are still low (in months of sales)

4 4 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 is below, the lowest since 18 year. 9% 8% 7% 5% Participation rate 2-64 aged population 8 79% 78% 77% 7 75% The participation rate among the working age population (2-64 year) has reverted upward, a further indication that the labour market is in better shape. 15 US, muted tensions over prices 16 US, muted tensions over wages US inflation Core Headline Energy [RHS] Energy Energy was largely responsible for the past upturn in headline inflation. However, core inflation (excluding food and energy) is now slightly accelerating. US Augmented Phillips curve ( ) XAxis: Unemployment rate ; YAxis: Real hourly wage rate 2,5%, 31/5/18 R² =,73-2,5% 5% 7% 8% Real hourly wage growth is now accelerating (coming from zero). However, it is still below the path suggested by a traditional Phillips curve. 17 US, credit to corporates keeps healthy 18 US, higher leverage in corporate sector Credit to corporate*, net flows, an $bn [L] Banks tightening credit, % [R] , 6, 3,, -3, Thanks to accommodating credit conditions, credit flows to corporates (loans & bond issues) have returned to healthy precrisis levels. Non-Financial Corporates debt & profits ratios Gross debt [L] ---- Net profits after tax [R] A cause for future concern? US companies are heavily in debt again, while their profitability is eroding, a configuration that has often preceded recessions. 8%

5 5 19 US, low corporate spreads 2 US, corporate net debt by sectors US BBB corporate spreads [L] ----Oil price, $ per barrel [R] Corporate spreads have become very sensitive to oil prices in the US. One explanation is the size of the highly-leveraged shale oil sector. Net debt / EBITDA R.ESTATE UTILITIES 35 1 ENERGY TELECOM 3 CO.DISCR 75 INDUSTR. 25 MATERIALS CO.STAPLE 5 2 HEALTHC. IT Sources : IMF, Financial Stability Report, April 217. The energy sector has considerably increased its net debt ratio since the revolution of shale gas and oil took place. 21 US, Fed funds rate and core inflation 22 US, flatter yields curve ---- Fed funds Core CPI, yy 5% Although the Fed funds rate has ticked upwards, it is still below the core inflation rate. It should become positive in real terms in the course of 218. Yield curve vs recessions 1y - 2y The normalizing monetary conditions are illustrated by flatter yield curve, still, not inverted. 23 US, dollar effective exchange rates 24 US, external accounts Dollar, real effective exchange rate 1973 = Sources : Thomson Datastream, IMF, BNP Paribas Looking at the real effective exchange rate (trade weighted & adjusted for inflation), the dollar now tends to retrace from a cyclical peak. Current account balance % GDP External deficits have stopped narrowing.

6 6 25 China, various activity indicators 26 China, change in growth determinants Growth indicators (y/y) GDP Ind. output Electr. output 2 15% 1 5% -5% Sources : Thomson Datastream, IMF, BNP Paribas Electricity and industrial output both in line with GDP growth (at around 6.5% annually). US, households debt ratio, % GDP [L] ---- China, exports, % GDP [R] Bent on deleveraging, US consumers are importing less from China. 27 China, investment has come down 28 China, credit Fixed investment, % GDP ---- Private consumption, % of GDP 5 45% 4 35% Credit outstanding as % of GDP Total ----Bank lending Bonds, entrusted loans, bank's acceptances, financial trusts... 3 Sources : Thomson Datastream, IMF, BNP Paribas Excessive investment leads to surplus capacity, which is one of the lessons of the global turmoil triggered by the financial crisis in A contraction began in China has the highest internal debt ratio of the emerging countries. 29 China, trade surpluses remain large 3 China, leading the Commodity cycle Trade balance (% GDP) Total Excluding Food&Energy Food&Energy 15% Cement output in China, y/y [LHS] ---- World commodity prices (CRB spot) [RHS] % 15% 35% -5% Sources : Thomson Datastream, IMF, BNP Paribas External surpluses are still huge, even though they have narrowed somewhat since mid-216 (rebound in oil prices). -15% -35% The Chinese cement industry seems to edge back toward recession, which could have negative implication for commodity markets.

7 7 31 Euro area, lagging behind 32 Euro area, GDP growth vs business surveys GDP, vol. (28 = 1) US ----EMU 12 GDP, q/q, ann. [L] PMI composite [R] Although growth has accelerated, it still lags behind the US Correcting form record-high level, still satisfactory in absolute terms. 33 Germany, GDP growth vs business surveys 34 France, GDP Growth vs business surveys GDP, q/q, ann. [L] PMI composite [RHS] ----PMI Manuf. [RHS] 62 GDP, q/q, ann. [L] PMI Composite [RHS] Back to more normal levels after having rocketed Thomson Datastream, *BNP Paribas nowcast model Deceptive Q1, but might be related to specific factors. 35 France, booming housing activity 36 France, booming car registrations Housing market Starts (12m cumulated) ---- Surveys [RHS] 5 25 New car registrations Monthly, x After having returned to cyclical peaks (more than 4K annual starts) the housing activity in France is set to normalize Sources : Thomson Datastream, European Commission BNP Paribas Now close to the long term average

8 8 37 Italy, GDP growth vs business surveys 38 Spain, GDP growth vs business surveys GDP, q/q, ann. [L] PMI composite [RHS] ----PMI Manuf. [RHS] 5, ,5% 54, ,5% 42-5, Italian GDP growth is around 1.5 pct annually. GDP, q/q, ann. [L] PMI composite [RHS] ----PMI Manuf. [RHS] 5, ,5% 54, ,5% 42-5, The Spanish economy keeps on track 39 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) 11,5% 9 Corporate investment % of GDP (LHS) ---- Corp. profit index (27 = 1, RHS) 11,5% 12 11, 85% 11, 1 1,5% 8 1,5% 98 1, 75% 1, 96 9,5% Higher capacity utilisation rates 7 9,5% and upward profit margins trigger an upturn in corporate investment 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 in France has been rather resilient compared to other countries, and despite various trends in corporate profits. 1 9 Credit has been a support factor for investment in France.

9 9 43 Corporate debt ratio, diverging trends 44 Euro area, trend in corporate fixed investment Nonfinancial corporate debt as % of value added Germany ----France Investment in Mach. & Equipt., 28 = 1 (vol.) Spain ---- Italy The French corporate debt has surged over the past decade. However, this is largely due to big companies, which are also cash rich. The net debt ratio is not so high. 6 Corporate investment revives in keeping with profit margins, but not at the same pace across the board. 45 Euro area, current accounts show large surpluses 46 Euro area, trend in exports Current account balance % GDP 4, 3, 2, 1,, -1, -2, Sources : Eurostat, BNP Paribas At a record high. EU Export Volume Index (s.a., 213 = 1) Intra EU Extra EU Sources : Eurostat, BNP Paribas External trade is getting stronger within Europe. 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] The ECB bank lending surveys are improving as lending standards return to normal. The private sector s demand for credit is getting stronger Credit to corporates, EURbn (<1y & EUR 1mn) 12m cumulated net flows ----Monthly net flows (annualized) Credit to corporates (under 1 year and EUR 1mn) is now stalling.

10 1 49 Euro area, financing conditions have improved 5 Euro area, consumer credit recover Bank's lending rates to corporates (<1Y & EUR 1mn) Italy Spain ----France 5% The convergence of lending rates signals a reduction in fragmentation. Euro are consumer credit 12m cumulated flows, EURbn Consumer credit is firmly back in positive territory. 51 Monetary aggregates, Euro area vs US 52 Euro area, base money surge with the QE Monetary aggregates (28 = 1) US (M3) ----EMU (M2) Money base R.Reserves Ex.Reserves D. Facility For a long time, monetary support was stronger in the US than in the euro area, but this changed when the ECB launched its asset purchase program The ECB s TLTRO programme temporarily inflated the money base (bank holdings with the ECB), which is now increasing in keeping with QE. 53 Euro area, inflation still subdued 54 Euro Area, ECB refi rate vs determinants Eurozone inflation Core Headline Energy [RHS] - The core inflation rate is trending around per year. The rebound in headline figure is due to energy. 3 15% -15% Refi rate [L] Unemployment rate [R, inv.] Core inflation [L] 5% The refi has held at. since March 16, 216, while the deposit facility rate (DFR) is negative at % 8% 9%

11 11 55 Italian 1 year rates 56 Spanish 1 year rates Italy, Govt. bond yields 1y ----2y 8% 29-juin Spain, Govt. bond yields 1y ----2y 8% 29-juin 2,69%,7 1,3 -, Rebounding, amid political uncertainties. Still relatively low. 57 France, over several maturities 58 Euro-dollar France, Govt. bond yields 1y 5y y Still very low by historical standard, at all maturities. 29-juin,6 -,1 -,5 Trend in th euro (jan. 217 = 1) Against the dollar ---- Trade weighted Correcting from the 217 rebound. 59 Euro-dollar vs capital flows 6 Euro-dollar vs ECB s balance sheet Direct & portfolio invest. (6m flows, annualized, bn) In Out EUR/USD 6 1, ,4 1,3 1,2 1,1 1, Net capital outflows from the EMU (direct and portfolio investments) intensified recently, possibly helped by US profits repatriation. The US dollar is rebounding. ECB's balance sheet vs euro-dollar ECB Balance Sheet, bn [L] ---- /$ [R] The ECB s asset purchase programme, combined with a negative deposit facility rate, has put downward pressure on the exchange rate. 1,5 1,4 1,3 1,2 1,1 1,

12 12 61 US, S&P5 Trend in Operating earnings 62 US, S&P5 index vs operating earnings S&P5 Operating earning per share ($, annual) Trend ----Actual $ US stock market S&P5 ----Annual EPS (RHS) $ $ Operating earnings are now above their long-term trend. An all-time high. 63 US, S&P 5 Fed model 64 Euro Area, 1y Yield spreads vs public debt S&P 5 Price-to-earnings ratio [R] Risk premium [L] 8% 25 X Axis: Gross debt as % of GDP (216) Y Axis: 1y yield spread vs Germany ( ) The PE ratio (based on trend EPS) is high, but the risk premium on the risk-free rate (Treasuries) is not so low. with some details (European Commission estimates) NL FI IR AT ES FR BE GDP Gen. Gov. fiscal balance Interests payment Public debt Total Primary Struct. Total 218 bn bn %GDP %GDP %GDP bn %GDP Av. rate bn %GDP Rating S&P Germany ,1 1,2 2,2 1,2 33,9 1, 1, ,2 AAA France ,1-2,3 -,6-2,1 39,5 1,7 1, ,4 AA Italy ,9-1,7 1,9-1,7 62,8 3,6 2, ,7 BBB Spain , -2,6 -,2-3,3 29,1 2,4 2, ,6 A- Netherlands 768 5,6,7 1,6 -,1 6,3,8 1, ,5 AAA Belgium 453-4,9-1,1 1,2-1,4 1,2 2,3 2, ,5 AA Austria 386-1,8 -,5 1,2 -,8 6,2 1,6 2, ,8 AA+ Greece 183,8,4 3,7 2,5 6, 3,3 1, ,8 B+ Portugal 2-1,8 -,9 2,7-1,1 7,1 3,5 2, ,5 BBB- Finland 233-1,7 -,7,2 -,8 2,1,9 1, ,4 AA+ Ireland 315 -,8 -,2 1,5 -,6 5,4 1,7 2, ,6 A+ EMU ,2 -,7 1,2 -,8 212,4 1,8 2, ,5 UK ,5-1,9,6-2,4 62,1 2,6 3, ,3 AA EU ,7 -,8 1, -1,7 296, 1,9 2, ,2 PT

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14 BNP Paribas (215). All rights reserved. Prepared by Economic Research BNP PARIBAS Registered Office: 16 boulevard des Italiens 759 PARIS Tel: +33 () Internet : Publisher: Jean Lemierre. Editor: William De Vijlder