European Outlook. Huw Pill Chief European Economist Goldman Sachs International. April 2014

Transcription

1 The Goldman Sachs Group, Inc. Goldman Sachs Research European Outlook Huw Pill Chief European Economist Goldman Sachs International April 214 Investors should consider this research as only a single factor in making investment decisions. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to Goldman Sachs Global Investment Research 1

2 Global recovery remains intact GDP Growth, %yoy Source: Consensus Economics, Goldman Sachs Global Investment Research Note: * Consensus forecasts refer to February GS Consensus* GS Consensus* USA Japan Euro Area UK Brazil China India Russia BRICs Advanced Economies World Goldman Sachs Global Investment Research 2

3 The baseline outlook for global inflation appears benign, given the extent of slack Inflation, %yoy Source: Consensus Economics, Goldman Sachs Global Investment Research Note: * Consensus forecasts refer to February GS Consensus* GS Consensus* USA Japan Euro Area UK Brazil China India Russia BRICs Advanced Economies World Goldman Sachs Global Investment Research 3

4 and our expectation that oil and commodity prices will fall from here 14 Brent in USD Oil prices and GS forecast (LHS) GS total commodity index (RHS) Index Source: Datastream, Goldman Sachs Global Investment Research 3 Goldman Sachs Global Investment Research 4

5 We expect a below-trend recovery for Euro area economic activity %yoy Sequential quarterly GDP (RHS) Annual GDP (LHS) GS Forecast %qoq Source: Eurostat, Goldman Sachs Global Investment Research GDP Growth, %yoy (GS) 215 (GS) Euro area Germany France Italy Spain Goldman Sachs Global Investment Research 5

6 as financial conditions improve, despite remaining cross-country differences Financial conditions Index avg. 27=1 Germany France Italy Spain Tightening conditions Draghi's "whatever it takes" Lehman collapses ECB 3-yr LTROs ^^ average of Italy and Spain The index includes four variables: real 3-month interest rates, real long-term interest rates, real trade-weighted value of the exchange rate and equity market performances Source: Goldman Sachs Global Investment Research, ECB Goldman Sachs Global Investment Research 6

7 and the fiscal drag on growth diminishes as the pace of austerity eases % of GDP Italy France Spain Germany EMU4 Source: Goldman Sachs Global Investment Research Goldman Sachs Global Investment Research 7

8 despite a significant need for further fiscal consolidation in several countries Chg. in structural balance, 21 to 213 (est.), % of GDP Further required fiscal tightening Fiscal tightening so far Germany France Italy Spain Required improvement in structural budget balance to reach a level of debt-to-gdp of 6% over a 2 year period, starting from projected debt peaks. Source: Goldman Sachs Global Investment Research, ECB Goldman Sachs Global Investment Research 8

9 Deflationary pressures are in focus, but remain modest at the area-wide level over medium term %yoy GS Forecast ECB's definition of price stability objective Inflation, %yoy (GS) 215 (GS) Euro area Germany France Italy Spain ECB staff projections for HICP: 1.1%yoy in 214, +1.3%yoy in Source: Eurostat, Goldman Sachs Global Investment Research Goldman Sachs Global Investment Research 9

10 ECB drawing comfort from anchoring of medium- to long-term inflation expectations %yoy, 1d avg Inflation swaps 1y Inflation swaps 5y Inflation swaps 1y Inflation swaps 5y5y ECB's SPF Inflation forecast 5year ahead Source: Eurostat, Goldman Sachs Global Investment Research Goldman Sachs Global Investment Research 1

11 Banking systems in the periphery are being red-lined as Euro markets segment Pre-Lehman, Euro interbank markets were highly integrated (cross-border bank claims as a percentage of lending country quarterly GDP, 28Q1 Lending to GER NETH FRA ITA SPA POR IRE GRE GER NETH FRA ITA SPA POR IRE GRE With the financial crisis, segmentation has emerged (cross-border bank claims as a percentage of lending country quarterly GDP, 213Q1 Lending to GER NETH FRA ITA SPA POR IRE GRE GER NETH FRA ITA SPA POR IRE GRE Source: BIS, Goldman Sachs Global Investment Research Goldman Sachs Global Investment Research 11

12 Prima facie, the monetary pillar points to downside risks to price stability interest rates on business loans % up to 1mil., of maturity 1-5 years Germany France Italy Spain Source: ECB Goldman Sachs Global Investment Research 12

13 Absent significant restructuring, required internal devaluation is large 5 35 Required real exchange rate adjustment sizable within the Euro area* Intial imbalance (mid-28) Start of Euro area debt crisis (mid-21) Euro area debt crisis escalates (Q2 211) Most recent obs (Q2 213) End of GS f'cast horizon (Q4 217) macro model assuming no structural change and economies at potential GRC IRE ESP PRT ITA GER FRA NIIP : Net International Investment Position: external financial assets minus liabilities Source: Eurostat, Goldman Sachs Global Investment Research Goldman Sachs Global Investment Research 13

14 ... although this can be significantly reduced by well-designed structural change % Required real exchange rate depreciation to achieve sustainable external position macro model assuming no structural change and economies at potential Base case At least as good as median Equivalent to 'best performer' Ger Fra Ita Spa Gre Por Ire Source: Eurostat, Goldman Sachs Global Investment Research Goldman Sachs Global Investment Research 14

15 Significant progress is being made in (some parts of) the periphery Spain 5 4 Required RER depreciation for NIIP-to- GDP <25% in 2yr, % Greece Required RER depreciation for NIIP-to- GDP <25% in 2yr, % Required RER depreciation for NIIP-to- GDP <25% in 2yr, % Portugal Q Est. tradables/non-tradables elas, cal. share of non-tradables in cons. Tradables/non-tradables elas = 1, non-tradables share of cons =.45 Q Required RER depreciation for NIIP-to- GDP <25% in 2yr, % Italy Q3 21 Q3 21 Source: Goldman Sachs Global Investment Research Goldman Sachs Global Investment Research 15

16 in part as a result of changes in economic structure, although cyclical effects important unit labour costs, index 2Q1=1 Germany France Italy Spain Source: Markit, Ministerio de Vivienda, Statistisches Bundesamt, Eurostat, Goldman Sachs Global Investment Research Goldman Sachs Global Investment Research 16

17 Spain s labour market reform is best in class unemployment more effective in moderating pay Wage Phillips curve has steepened especially since the 212 labour market reform Wages in collective bargaining (%yoy) Steeper wage Phillips curve Labour shortages (%) Beveridge curve shows high structural unemployment and mismatch may have risen Less efficient Unemp. rate (%) More efficient Unemp. rate (%) Source: Eurostat, EC, Ministerio de Trabajo e Immigracion, Goldman Sachs Global Investment Research Goldman Sachs Global Investment Research 17

18 France Portugal Italy Greece Ireland Germany Spain Sweden UK US Japan Germany and France will become focus of intra-euro area adjustment -5 Germany Required RER depreciation for NIIP-to-GDP <25% in 2yr, % 5 Required RER depreciation for NIIPto-GDP <25% in 2yr, % France Q % of GDP Unemployment is rising in France Germany s current account is high EUR bn, 6-mths avg Q The French public sector is large as % of GDP Interest Payments Government Expenditure * Revenues EMU Members Non-EMU Members cross country avg. 48% Germany trade balance with France (LHS, goods) -4 France CA (RHS) Germany CA (LHS) * Including transfers, 212 data Source: GS Global Investment Research Goldman Sachs Global Investment Research 18

19 Annex Goldman Sachs Global Investment Research 19

20 Continued divergence across countries: Germany outperforms, periphery weak Germany GDP growth, % qoq France GDP growth, % qoq Q2 213Q4 214Q2 214Q4 215Q2 215Q Q2 213Q4 214Q2 214Q4 215Q2 215Q GS Cons. GS Cons GS Cons. GS Cons. Italy GDP growth, % qoq Spain GDP growth, % qoq Source: Eurostat, Goldman Sachs Global Investment Research Q2 213Q4 214Q2 214Q4 215Q2 215Q Q2 213Q4 214Q2 214Q4 215Q2 215Q GS Cons. GS Cons GS Cons. GS Cons. Goldman Sachs Global Investment Research 2

21 ECB s balance sheet is shrinking and less excess liquidity puts pressure on EONIA The size of ECB balance sheet is diminishing... assets % of GDP FED ECB BoE BoJ as LTRO repayments take place EUR 137bn EUR bn 2nd 3-yr LTRO repayments 1st 3-yr LTRO repayments Cumulative 3-yr LTRO repayments (RHS) EUR bn With excess reserves over 1bn, EONIA remains close to the deposit rate Eur, Bn ECB commences 'fixed rate full allotment' tenders ECB excess liquidity While the EONIA is rising owing to LTRO repayments, liquidity remains ample Jan-13 Apr-13 Jul-13 Oct-13 Eonia - deposit rate spread (daily obs) Oct 28 - Jan 29 Feb 29 - Apr 29 May 29 - June 213 Non-parametric smoother on May 29 - Jan 212 sample ECB LTROs Source: ECB, Goldman Sachs Global Investment Research Goldman Sachs Global Investment Research Excess liquidity (daily obs), Eur, Bn

22 UK overview stronger growth, but puzzling productivity developments Activity data have improved significantly % qoq annl % Funding costs are low 3m LIBOR Banks' Weighted 5-yr CDS Bank Rate UK Marginal Funding Cost GDP qoq annl UK CAI The level of GDP remains below its pre-crisis peak Level of teal GDP (1= pre-crisis peak) UK Germany France Productivity growth remains weak so far %yoy 98 Pre-crisis peak Real labor productivity growth ( output /person employed) avg avg Source: Bloomberg, Eurostat, GS Global Investment Research Goldman Sachs Global Investment Research 22

23 UK inflation running below 2% on a sequential basis month annl. inflation, seas. adj. (%) VAT 17.5% to 15% VAT 15% to 17.5% VAT 17.5% to 2% Univ. tuition cap rise CPI Core CPI* Source: ONS, GS Global ECS Research; * Ex energy, food, alc & tob. Source: ONS, Goldman Sachs Global Investment Research; *ex ex-energy, food, alc. & tob Goldman Sachs Global Investment Research 23

24 UK credit availability has eased, although other elements of financial conditions are tightening % bal Greater credit availability To Corporates (Past 3 months) Index 1 Jul 8=1 UK GS Financial Conditions Index Easier conditions To Households - Secured (Past 3 Months) Nov-12 Mar-13 Jul-13 Nov-13 Mar-14 Source: Bank of England, Goldman Sachs Global Investment Research Goldman Sachs Global Investment Research 24

25 Goldman Sachs rates forecasts Interest rates 3-month horizon 6-month horizon 12-month horizon Current* Forward Forecast Forward Forecast Forward Forecast US 3M Y Canada 3M Y Australia 3M Y Japan 3M Y Euro area 3M Y UK 3M Y Sweden 3M Y Switzerland 3M Y Close 19 February 14 Source: Goldman Sachs Global Investment Research Goldman Sachs Global Investment Research 25

26 Goldman Sachs FX forecasts Exchange rates 3-months 6-months 12-months Current* Forward Forecast Forward Forecast Forward Forecast EUR/$ $/ EUR/ EUR/CHF CHF/ $/CHF EUR/ /$ / /CHF EUR/NOK EUR/SEK A$/$ NZ$/$ $/C$ $/CNY * Close 21 February 14 Source: Goldman Sachs Global Investment Research Goldman Sachs Global Investment Research 26

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