Eurozone Economic Watch FEBRUARY 2017
EUROZONE WATCH FEBRUARY 2017 Eurozone: A slight upward revision to our GDP growth projections The recovery proceeded at a steady and solid pace in, resulting in an average annual GDP growth of 1.7% in 2016. Hard data up to December along with national figures point to consumption as the main driver of growth, while investment could have increased markedly supported by increasing exports but also construction (Germany). Improving confidence across sectors and countries at the start of 2017 suggest that the recovery could be gaining momentum in 1Q17 driven by increasing foreign demand and the depreciation of the euro at the end of 2016. Nonetheless, soft data have provided an upbeat outlook as compared to hard indicators over the last half year, while consumer confidence declined in February. Our MICA-BBVA model estimates quarterly GDP growth in the eurozone to reach % QoQ in 1Q17, after growth of 0.4% in 2H16. For 2017 and 2018 growth is expected at 1.6%, implying a marginal upward revision, supported by very relaxed monetary conditions, a weak euro, improving global trade, and non-restrictive fiscal policies. Risks remain tilted to the downside and are mostly political, both at national and Europe-wide level, but derive also from financial sector fragilities. Inflation should remain below the ECB target in 2017-18, although it will reach a peak at the start of this year close to 2% owing to base effects and energy price increases, before reverting to somewhat lower levels (annual average inflation expected at 1.6% in 2017 and 2018). Core inflation remains stable below 1% and is expected to increase gradually to around 1.5% by the end of the forecast horizon. 2
EUROZONE WATCH FEBRUARY 2017 RECENT DEVELOPMENT: POSITIVE SIGNS HAVE YET TO BE CONFIRMED FEBRUARY 2017
3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 1Q17 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 EUROZONE WATCH FEBRUARY 2017 ECONOMIC DEVELOPMENTS GDP growth stabilized at 0.4% QoQ in while incoming data suggest a further gain of momentum in early 2017 GDP, CONTRIBUTION BY COMPONENTS (%QoQ, pp) 2.5 1.5-0.4 GDP AND MICA FORECASTS (%QoQ) 1.0 0.8 0.6 0.4 0.2-1.5-0.2-0.4 Imports Change in inventories Public consumption Real GDP Exports Gross fixed capital formation Private consumption -0.6 CI 20% CI 40% CI 60% Observed GDP showed stable growth in, increasing 0.4% QoQ again We expect the figure to be lead by consumption, while investment could have increased markedly supported by increasing exports (higher global growth and euro depreciation) but also construction (Germany). Net exports could weigh on growth due to larger imports 4
Germany France Italy Spain EUROZONE WATCH FEBRUARY 2017 ECONOMIC DEVELOPMENTS Germany and France GDP accelerated in, while Italy slowed down GDP, CONTRIBUTION BY COMPONENTS (%QoQ, pp) 2.0 1.5 1.0 - -1.0-1.5-2.0 0.4 0.4 0.2 0.7 10 8 6 4 2 0-2 -4-6 -8-10 In both Germany and France preliminary GDP growth accelerated to 0.4% QoQ in. A recovery in exports probably added to positive contributions from consumption and investment Italy s GDP growth slowed down to 0.2% QoQ in, apparently due to lower contribution from consumption, partially offset by the recovery of external demand 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 Spain continues to outperform the region showing a preliminary GDP increase of 0.7% QoQ in 5
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 Feb-17 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 EUROZONE WATCH FEBRUARY 2017 ECONOMIC DEVELOPMENTS Confidence figures signal a positive 2017 kick-off PMI AND GDP (level, %QoQ) 56 54 PMIs level 0.9 0.6 ESI AND GDP (level, %YoY) 108 ESI level 104 2 1 52 0.3 100 0 50 96-1 48 46 GDP (% QoQ) -0.3-0.6 92 88 GDP (% YoY) -2-3 Real GDP (% QoQ) Manufacturing PMI PMI Services PMI Confidence data surprised to the upside in February driven mostly by services, suggesting an acceleration of growth in EZ in 1Q17 Real GDP (% YoY) ESI However, there remains a significant risk of political events potentially affecting the recovery 6
EUROZONE WATCH FEBRUARY 2017 ECONOMIC DEVELOPMENTS Overall manufacturing PMIs improved in core countries at the start of 1Q17 but with mixed signals in services PMI (level) 58 56 54 52 50 5 48 46 44 Jan-17Feb-17 Jan-17Feb-17 Jan-17Feb-17 Jan-17Feb-17 1Q17 1Q17 1Q17 1Q17 Germany France Italy Spain PMI Composite PMI Manufacturing PMI Services 58 56 54 52 50 48 46 44 7
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 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 EUROZONE WATCH FEBRUARY 2017 ECONOMIC DEVELOPMENTS Despite the fall in December, industrial production maintains the positive trend of last quarters INDUSTRIAL PRODUCTION (%QoQ, pp) 105 104 103 102 101 100 99 98 97 96 IP (level) -0.2 IP (% QoQ) 0.8 1.5 1.0 - -1.0 IP CAPITAL, INVESTMENT IN MACHINERY AND EQUIPMENT AND UTILIZATION CAPACITY (%QoQ, %) 4 3 2 1 0-1 -2-3 -4 Inv. M&E, IP capital (% QoQ) Capacity utilization (%) 84 83 82 81 80 79 78 IP (2012=100) IP (% QoQ) Investment M&E (% QoQ) Capacity Utilization (%) IP Capital (% QoQ) Industrial production dropped 1.6% MoM in December after an increase of 1.5% MoM in November, closing with an overall growth of 0.8% QoQ (: % QoQ) Production of capital goods eased in December. Nonetheless durable consumer goods accelerated along with high capacity utilization, suggesting a recovery in equipment and machinery investment in 8
EUROZONE WATCH FEBRUARY 2017 ECONOMIC DEVELOPMENTS Recovery of industrial output growth across countries in, except in Germany and Belgium INDUSTRIAL PRODUCTION (%QoQ, pp) 3 2 1 0-1 -2-3 -0.3 IP (% QoQ) 1.1 1.3 0.9 3.3 1.2 2.0-1.2 0.7 IP (level) 2.6 112 110 108 106 104 102 100 98 96 94 92 90 88 Germany France Italy Spain Portugal Austria Belgium Finland Netherlands IP (% QoQ) IP (2012=100) 9
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 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 * EUROZONE WATCH FEBRUARY 2017 ECONOMIC DEVELOPMENTS Exports accelerated sharply in on the back of improved global demand and euro depreciation TRADE BALANCE ( bn, %GDP) EXPORTS CONTRIBUTION BY DESTINATION (%QoQ, pp) 180 175 170 165 Exports, Imports & Trade balance 0.7 0.8 0.9 0.8 1.2 1.0 0.8 4.0 3.0 2.0 1.0 160 155 150 145 Trade Balance (% GDP) 0.6 0.4 0.2-1.0-2.0-3.0 140 Trade balance ( bn) Exports Imports Trade balance (%GDP) Other EU countries China LatAm United States Asia (excl China) Rest of world *October and November with respect to three previous months 10
Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 2Q07 4Q07 2Q08 4Q08 2Q09 4Q09 2Q10 4Q10 2Q11 4Q11 2Q12 4Q12 2Q13 4Q13 2Q14 4Q14 2Q15 EUROZONE WATCH FEBRUARY 2017 ECONOMIC DEVELOPMENTS Retail sales exhibited a solid growth over despite disappointing figures at the end of the quarter RETAIL SALES AND CONSUMER CONFIDENCE (%QoQ, pts) 1.5 1.0 - -1.0-1.5 Retail Sales (% QoQ) 0.3 0.3 Consumer Confidence 0.8 0-5 -10-15 -20-25 -30 RETAIL SALES AND TOTAL WAGE BILL (%YoY) 4 3 2 1 0-1 -2-3 -4-5 Retail Sales (% QoQ) Consumer Confidence Employees Total wage bill Real compensation Retail sales Retail sales declined again in December (-0.3% after -0,6 MoM in November). Nonetheless, overall figures for (+0.8% QoQ) point to a positive contribution of private consumption to GDP growth Consumer confidence fell more than expected in February suggesting some steam maybe coming out of the consumption recovery 11
Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 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 EUROZONE WATCH FEBRUARY 2017 ECONOMIC DEVELOPMENTS Eurozone unemployment rate continues to decline and reaches its lowest level since 2009 UNEMPLOYMENT RATE BY COUNTRY (%) 25 20 15 10 5 ANNUAL UNEMPLOYMENT CHANGE BY GENDER & AGE (millions) - -1.0-1.5-2.0 0 Dec-15 Nov-16 Dec-16 Eurozone Germany France Italy Spain Women 25-74Y Men 25-74Y Men < 25Y Women < 25Y Total Jobless rate reached 9.6% in December 2016 and continues to fall at a low pace, driven mostly by Spain Unemployed decline is observed mostly among the experienced population 12
Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-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 EUROZONE WATCH FEBRUARY 2017 ECONOMIC DEVELOPMENTS Annual headline inflation rose up to 1.8% YoY in January driven by energy prices, while the core rate remained unchanged INFLATION AND CONTRIBUTION OF COMPONENTS (%YoY, pp) INFLATION AND TRIMMED MEAN (%YoY) 1.5 1.0 - -1.0-1.5 3.5 3.0 2.5 2.0 1.5 1.0 Services Non-energy industrial goods Processed Food Energy Unprocessed Food HICP (% y/y) Trimmed mean inflation Core inflation Eurozone HCPI came out above expectations in January (+1.8% YoY), increasing +0.7pp on the back of a sharp rise in energy inflation Nonetheless the core measure remained unchanged at 0.9% YoY We expect inflation to reach a peak of around 2% in the coming months and then moderate somewhat 13
1Q17 EUROZONE WATCH FEBRUARY 2017 ECONOMIC DEVELOPMENTS The acceleration of inflation is widespread, but with differences across countries HEADLINE AND CORE INFLATION (%YoY) 2.5 2.0 1.5 1.0 - -1.0 1.0 0.7 0.1 0.1 0.1 0.4-0.6 0.7 1.7 0.8 1.6 0.6-0.2 0.9 0.2 0.1-1.1 1.2-1.5-2.0 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: Spain (1.4% after % YoY), Italy (% after 0.1% YoY) and France (0.8% after 0.7% YoY). In January, Germany HCPI rose to 1.9% from 1.7% previously, supported by energy and unprocessed food prices 14
EUROZONE WATCH FEBRUARY 2017 UPDATED FORECASTS: STEADY RECOVERY PROCEEDS, RISKS TO THE DOWNSIDE FEBRUARY 2016
EUROZONE WATCH FEBRUARY 2017 UPDATED FORECASTS Growth drivers for the eurozone Stronger confidence Resilience of domestic drivers despite of higher uncertainty Supportive economic policies: very relaxed monetary conditions and non-restrictive fiscal policies Gradual improvement in world trade along with a weaker euro Lower tailwinds from oil prices are pushing up inflation, adding pressure on interest rates Global outlook positive but with many uncertainties Political risks in many countries in the region (several election over next months) Unresolved problems Hard Brexit 16
EUROZONE WATCH FEBRUARY 2017 UPDATED FORECASTS Eurozone: steady recovery led us to revise slightly up GDP growth in 2017-18 but with caution due to a very uncertain policy environment GDP GROWTH AND FORECAST (%) MAIN MACROECONOMIC INDICATORS (%YoY, %GDP) 2.5 2.0 1.9 2015 2016 2017 (f) 2018 (f) Real GDP 1.9 1.7 1.6 1.6 1.5 1.2 1.7 1.6 1.6 Private consumption 1.8 1.7 1.4 1.4 Public consumption 1.4 1.9 1.3 1.0 1.0 Investment 2.9 2.9 2.8 3.1 Domestic demand (cont. pp) 1.7 1.9 1.6 1.6 Exports 6.2 2.4 3.7 3.9 Imports 6.2 3.2 4.1 4.4 Net exports (cont. pp) 0.3-0.2-2014 2015 2016 2017 2018 Jan-17 Oct-16 Current account (% GDP) 3.1 3.2 2.9 2.8 Budget balance (% GDP) -2.1-1.9-1.8-1.7 HICP (avg. %YoY) 0.2 1.6 1.6 Domestic demand remains as the main driver of growth, still supported by monetary policy and, to a much lesser extent, fiscal policy Minor revisions in growth composition: slightly stronger contribution from investment and to a lesser extent from exports, not enough to offset slowing consumption 17
Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 Aug-11 Feb-12 Aug-12 Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 EUROZONE WATCH FEBRUARY 2017 UPDATED FORECASTS ECB to remain patient in the coming months despite the recent upturn of headline inflation BBVA EZ INFLATION MONITOR (index) 4 3 2 1 0-1 -2-3 -4-5 -6 Whatever it takes Forward guidance TLTRO's Jackson Hole meeting QE short term medium term long term What happened Next steps ECB extended QE until December 2017, or beyond if necessary Monetary policy has remained highly supportive despite improving growth and confidence figures The key will be to observe how core inflation develops, but pressures should remain subdued Tappering talks could arise after Summer We expect the end of QE by around mid-2018 and the first rate hike by December 2018 18
2015 2016 2017 2015 2016 2017 2015 2016 2017 2015 2016 2017 2015 2016 2017 EUROZONE WATCH FEBRUARY 2017 UPDATED FORECASTS Fiscal policy will continue to be supportive, but with high heterogeneity across countries STRUCTURAL BALANCES: OBSERVED, BUDGET DRAFTS AND TARGETS (% Potential GDP) 1.0 - -1.0-1.5-2.0 The path of consolidation has slowed down Ongoing fiscal adjustment lies in the improvement of cyclical budget Fiscal policy slightly expansionary in the eurozone as a whole but not much margin in Italy an Spain -2.5-3.0 Germany France Italy Spain Portugal Observed Drafts 2017 Targets 2016 Targets 2015 Source: Eurostat, Stability and Convergence Programs and BBVA Research 19
EUROZONE WATCH FEBRUARY 2017 UPDATED FORECASTS Germany: loosening steam in 2017, as improving global demand is unlikely to offset weaker domestic drivers MAIN MACROECONOMIC INDICATORS (%YoY, %GDP) 2015 2016 (f) 2017 (f) 2018 (f) Real GDP 1.5 1.8 1.6 1.6 Private consumption 1.9 1.7 1.5 1.3 Public consumption 2.8 4.3 2.3 1.4 Investment 1.1 1.9 1.9 2.5 Domestic demand (cont. pp) 1.3 2.0 1.7 1.6 Exports 4.6 2.1 3.0 3.4 Imports 5.0 3.0 3.7 3.8 Net exports (cont. pp) 0.1-0.3-0.1 0.1 Current account (% GDP) 8.4 8.8 7.7 7.2 Budget balance (% GDP) 0.7 0.6 0.3 0.3 HICP (avg. %YoY) 0.1 0.4 1.9 1.8 Solid performance in 2016 (1.8%) mainly driven by domestic demand Tightened labour market along with moderated wage rises and higher inflation could result in lower real income and thus private consumption in 2017 while the public expenditure is likely to moderate after increasing last year due to refugees accommodation expenses and investment in machinery and equipment is expected to remain subdued due to higher uncertainty Improving global demand, still sluggish, will not offset the lower contribution of domestic demand, while there are risks from lower trade, especially in the UK 20
EUROZONE WATCH FEBRUARY 2017 UPDATED FORECASTS France: moderate recovery seems to change gear despite higher political uncertainty MAIN MACROECONOMIC INDICATORS (%YoY, %GDP) 2015 2016 (f) 2017 (f) 2018 (f) GDP growth slowed in 2016 to 1.1% dragged by net exports that offset the strengthening of private consumption and investment Real GDP 1.2 1.1 1.3 1.5 Private consumption 1.5 1.8 1.5 1.5 Public consumption 1.4 1.5 1.3 1.1 Investment 0.9 2.8 2.0 2.3 Domestic demand (cont. pp) 1.5 2.0 1.5 1.5 Exports 6.0 0.8 3.4 3.6 Imports 6.4 3.5 3.7 3.2 Net exports (cont. pp) -0.3-0.9-0.2 Current account (% GDP) -0.2-1.0-1.4-1.1 Budget balance (% GDP) -3.5-3.3-2.7-2.6 HICP (avg. %YoY) 0.1 0.3 1.3 1.4 Political uncertainty driven by upcoming elections could weigh over consumer and business and confidence over the first half of the year, partly offset by increasing employment In this context, both private consumption and investment growth are expected to decelerate adding to an ongoing fiscal adjustment in 2017 The exports recovery observed over 2H16 is expected to consolidate this year, and thus net exports should not drain much growth 21
EUROZONE WATCH FEBRUARY 2017 UPDATED FORECASTS Italy: idiosyncratic uncertainty to tame the recovery MAIN MACROECONOMIC INDICATORS (%YoY, %GDP) 2015 2016 (f) 2017 (f) 2018 (f) Real GDP 0.6 1.0 1.0 1.2 Private consumption 1.5 1.4 0.9 1.0 Public consumption -0.6 0.6 0.2 0.3 Investment 1.1 2.0 2.1 2.4 Domestic demand (cont. pp) 1.0 1.0 0.9 1.1 Exports 4.0 1.3 3.1 3.3 Imports 5.8 1.7 2.7 3.1 Net exports (cont. pp) -0.4-0.1 0.2 0.1 Current account (% GDP) 1.7 2.7 2.6 2.5 Budget balance (% GDP) -2.6-2.4-2.3-2.1 HICP (avg. %YoY) 0.1-0.1 1.4 1.4 Recovery gained some momentum in 2016 as net exports did not weigh as much on growth, but it is still lagging Political uncertainty and banking sector worries weighed on domestic demand, mainly private consumption, though the Jobs Act reform and fiscal incentives seemed to support job creation Net exports will again contribute to growth this year, but will be less supportive than in other peripheral countries as well as more subdued investment, which could be curbed in the forecast horizon by expectations of a sluggish recovery 22
EUROZONE WATCH FEBRUARY 2017 UPDATED FORECASTS Spain: robust growth, but with a slowdown MAIN MACROECONOMIC INDICATORS (%YoY, %GDP) 2015 2016 (f) 2017 (f) 2018 (f) Real GDP 3.2 3.2 2.7 2.7 Private consumption 2.9 3.0 2.5 2.4 Public consumption 2.0 1.3 1.8 1.9 Investment 6.0 3.6 3.3 4.4 Domestic demand (cont. pp) 3.3 2.8 2.4 2.6 Exports 4.9 4.3 4.5 5.2 Imports 5.6 3.2 3.8 5.5 Net exports (cont. pp) -0.1 0.3 0.1 Current account (% GDP) 1.4 2.0 1.9 1.8 Budget balance (% GDP) -5.0-4.4-3.0-2.1 HICP (avg. %YoY) - -0.2 2.1 1.9 Slight upward GDP growth revision to 2.7% in 2017 and 2018 but symptoms of lower growth as tailwinds slacken: already affecting both household consumption and investment in machinery and equipment Fiscal policy stance will shift from expansive to neutral in 2017-18 Exports are recovering in spite of Brexit Risks remain related to ongoing fiscal consolidation and political uncertainty (decreasing but still relevant) 23
Eurozone Economic Watch FEBRUARY 2017
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