ECONOMIC RESEARCH DEPARTMENT Summary of macroeconomic forecasts GDP Growth Inflation Curr. Account / GDP Fiscal balances / GDP % 216 e 217 e 218 e 216 e 217 e 218 e 216 e 217 e 218 e 216 e 217 e 218 e Advanced 1.6 2. 2.1.8 2. 1.9 United States 1.6 2.4 2.7 1.3 2.5 2.7-2.5-2.4-2.4-3.4-4.2-5. Japan 1. 1.1.9 -.1 1.1 1. 3.6 3.8 4.1-4.6-4.2-4.1 United Kingdom 2. 1.8 1.1.6 2.7 2.7-5.5-4.6-3.5-3.7-4. -4.1 Euro Area 1.7 1.6 1.6.2 1.7 1.3 3.2 2.9 2.9-1.8-1.6-1.4 Germany 1.8 1.8 1.9.4 2. 1.4 8.9 8.1 8.4.6.6.5 France 1.1 1.3 1.5.3 1.4.9 -.9 -.6 -.8-3.4-3. -2.7 Italy.9.6.7 -.1 1.1.9 2. 2.2 2. -2.5-2.6-2.6 Spain 3.3 2.4 2. -.3 3. 1.4 1.1 1.6 1.6-4.6-3.8-3.2 Portugal 1.2 1.2 1..7 1.2 1.5.6.4.4-2.8-2.3-2. Emerging 4.2 4.5 5. 4.8 4.6 4.4 China 6.7 6.2 6.4 2. 2.7 2.5 2.2 1.7 1.5-3. -3.3-3.5 India 7. 7.3 8. 4.9 4.7 5.5-1.1 -.5-1.3-3.9-3.5-3.5 Brazil -3.5 1. 3. 8.8 4.1 4.3-1.1-1.4-2.1-9.6-9.3-7.4 Russia -.6 1.2 2. 7.1 4.2 4.3 2.5 2.7 3.2-3.7-2.9-1.8 World 3.1 3.4 3.8 3.1 3.5 3.4 Source : BNP Paribas Group Economic Research (e: estimates & forecasts) In the US, the normalisation of the monetary policy has been put on hold for the time being pending the release of stronger data. The rebound in oil prices has brought relief for the highly-leveraged shale oil sector The stabilisation of the dollar, better Chinese data and a strong Q1 in the Eurozone reduce the pressure on the manufacturing sector However, pressure on corporate profits do not bode well for business investment The US consumer remains key, hence the importance of the labour market and wage evolution. In the Euro area, the recovery looks self-sustained and compares favourably to the poor Q1 performance in the US and the underlying weak growth in Japan Yet, the UK referendum s direct effects on economic activity lead us to revise our forecasts downward somewhat Credit and money growth will continue to revive on the back of the ECB s QE and negative deposit rate policy Core inflation will stay low but headline inflation will gradually accelerate following the rise in energy prices.. 1 US GDP growth and composite ISM 2 EMU GDP growth and composite PMI GDP, q/q, ann. [L] M&N Index [R] - - - - 29 21 211 212 213 214 215 216 217 Quarterly averages do not always tell the truth: both ISM surveys are actually rebounding from their early-216 lows.. 65 6 5 4 3 GDP, q/q, ann. [L] PMI composite [R] - - - - 29 21 211 212 213 214 215 216 217 Despite some softening the composite PMI is still above the 5 barrier. It is too early to see the potential effects of the Brexit vote. 6 5 4 21 February 217 1
Summary of financial forecasts Interest rates 216 217 ######## ######## ######## End of period, % Q1 Q2 Q3 Q4 Q1e Q2e Q3e Q4e 216 217e 218e $ Fed Funds.25-.5.25-.5.25-.5.75.5-.75.75-1. 1.-1.25 1.25-1.5.25-.75 1.25-1.5 2.25-2.5 Libor 3m $.63.65.85 1..9.9.95 1.1 1. 1.1 2. T-Notes 1y 1.79 1.49 1.61 2. 2. 3. 3.25 3.5 2. 3.5 4. ECB "Refi"...........25 Euribor 3m -.24 -.29 -.3 -.32 -.3 -.3 -.3 -.3 -.32 -.3 -.15 Bund 1y.16 -.13 -.19.11.4.5.75 1..11 1. 1.6 OAT 1y.41.2.12.69.9.95 1.15 1..69 1. 2. BTP 1y 1.23 1. 1.19 1.84 1.9 2.2 2.6 3. 1.84 3. 3.4 BoE Base rate.5.5.25.25.25.25.25.25.25.25.25 Gilts 1y 1.42 1.2.76 1.24 1.7 1.65 1.75 1.9 1.24 1.9 2.15 Y BoJ Ov ernight -. -.6 -.6 -.6 -.1 -.1 -.1 -.1 -.6 -.1 -.1 JGB 1y -.4 -.23 -.8.5 -.6.1.1.3.5.3.4 Exchange rates 216 217 End of period Q1 Q2 Q3 Q4 Q1e Q2e Q3e Q4e 216 217e 218e $ EUR / USD 1.14 1.11 1.12 1.5 1.4 1.2 1.2 1. 1.5 1. 1.6 USD / JPY 112 13 11 117 118 121 124 128 117 128 13 EUR / GBP.79.83.87.85.83.82.82.8.85.8.82 EUR / CHF 1.9 1.8 1.9 1.7 1.8 1.1 1.12 1.12 1.7 1.12 1.15 EUR / JPY 128 114 114 123 123 123 126 128 123 128 138 Source : BNP Paribas Group Economic Research / 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 1.6 1. 211 212 213 214 215 216 217 Government Bond Yields (1 year) US Germany 2..3 - Spread - 211 212 213 214 215 216 217 5 Interest rates 6 Oil market Government Bond Yields (1 year) Germany France Oil price (Brent) $ per barrel, spot 12 1 8 6 Spread 1..3 4-211 212 213 214 215 216 217 2 211 212 213 214 215 216 217 21 February 217 2
United States 7 US, business climate 8 US, investment cycle vs corporate profits Business climate indicators (from purchasing manager index) ISM Manufacturing ISM Non manufacturing 65 6 5 4 3 29 21 211 212 213 214 215 216 217 The manufacturing ISM index has rebounded after a long decline. Nonfinancial corporate, fixed investment (% value added) [L] Nonfinancial corporate, net profits (% value added) [R] 2 1 2 1 1 1 1991 1996 21 26 211 216 1 1 Corporate investment declined for two quarters in a row, in line with declining profit margins. 9 US, falling oil prices dampen corporate investment.. 1 but benefit to the consumer US Oil market Oil production (mb/d) Number of drillings [R] 1 9 8 7 6 5 4 28 29 21 211 212 213 214 215 216 217 Drillings have collapsed. Production is weakening 1 8 1 5 1 2 9 6 3 Private consumption, 3m/3m, ann. [L] Retail sales, vol., 3m/3m, ann. [R] car sales - (adjusted to scale) - 29 21 211 212 213 214 215 216 217 1 1 - -1-1 Private consumption is supported by the strength of the labour market and the fall in the energy bill 11 US, housing market recovers 12 US, Housing market recovers Housing starts, x1 [L] NAHB [R] 3 9 2 5 2 6 1 5 1 3 5 1991 1996 21 26 211 216 The NAHB index bodes well for housing starts going forward Housing starts, x1 [L] Inventories in months of sales [R] 3 2 5 2 1 5 1 5 1991 1996 21 26 211 216 Inventories still very low in month of sales. 14 12 1 8 6 4 2 21 February 217 3
United States 13 US, non-farm payrolls vs unemployment rate 14 US, labour force participation rate Monthly change in nonfarm payrolls (x1) [L] Unemployment rate [R] 4 2-2 -4-6 -8 29 21 211 212 213 214 215 216 217 1 The US unemployment rate has moved below the threshold. At this low level of unemployment, wage growth and inflation are supposed to pick up. 9% 7% Participation rate 2-64 aged population 8 79% 77% 7 1986 1991 1996 21 26 211 216 The rate of participation among the working age population (2-64) has rebounded recently, a further indication that the labour market is getting into a better shape. 15 US, no concern for inflation neither deflation 16 US, no concern for inflation neither deflation CPI Core y/y CPI Headline, y/y - - Energy - 29 21 211 212 213 214 215 216 217 4 3 2 1-1 -2-3 Energy is largely responsible for the decrease in the inflation rate. Core inflation (excluding food and energy) is rather stable but well below, the Fed s official target. Phillips curve Yaxis: growth in nominal wages ; Xaxis:unemployment rate R² =.6 7% 9% 1 1 Wage growth is still subdued. However, the most recent observation came a little bit higher (estimated rise in hourly earnings +2.yoy in Q1 216). 17 US, credit to corporates keeps healthy 18 US, highly leveraged corporate sector Credit to corporate*, net flows, an $bn [L] Banks tightening credit, % [R] 1 8 6 4 2-2 -4-6 24 26 28 21 212 214 216 Credit conditions applied by banks are still easy though less than before. Net credit flows to corporates (loans and bond issues) remain considerable. 9 6 3-3 Corporate debt (credit market instrument) % value added 9 9 8 8 7 7 1991 1996 21 26 211 216 US non-financial companies have increased their leverage ratio by issuing record amounts of debt on the bond market. 21 February 217 4
United States 19 US, low corporate spreads 2 US, highly leveraged investment trusts US corporate spreads High Yield 2 1 1 23 25 27 29 211 213 215 217 Corporate spreads, after widening in the second part of 215, have tightened as of late. REITS Balance sheet MSB, $bn [R] Repo as % of total liabilities [L] 4 3 2 1 21 24 27 21 213 216 Real estate investment trusts (REITS) use repo markets as a source of funding for longer-term, less-liquid assets like RMBS. Some are vulnerable to contagion risks / asset fire sales [IMF]. 3 25 2 15 1 5 21 US, Fed funds rate and core inflation 22 US, real Fed funds rate and unemployment rate Fed funds Core CPI, yy Fed funds rate vs Unemployment Fed funds [Grey = real, LHS] - - - U. Rate [RHS] 1 1997 1999 21 23 25 27 29 211 213 215 217 December 215 marked the end of an exceptional period (seven year) of zero interest rates policy. - 1991 1996 21 26 211 216 In the past, a to 5. unemployment rate saw the real Fed fund rate turning positive. This time is different and on this measure the Fed is well behind the curve. 23 US, dollar effective exchange rates 24 US, external accounts Dollar, real effective exchange rate 1973 = 1 13 12 11 1 9 8 1976 1986 1996 26 216 Source : Thomson Datastream, IMF, BNP Paribas The real effective exchange rate (trade weighted & adjusted for inflation) of the dollar is close to its long term average. Current account balance % GDP - - - 21 24 27 21 213 216 Household deleveraging and the surge in shale oil production, which reduces the dependence on imported energy, have contributed to a shrinking current account deficit in recent years. 21 February 217 5
China 25 China, weaker than officially admitted 26 China, change in growth determinants China, growth indicators (y/y) GDP Ind. output - - - Electr. output 3 2 2 1 1 - -1 28 29 21 211 212 213 214 215 216 217 Source : Thomson Datastream, IMF, BNP Paribas Indicators such as electricity output or shipping indicate that China s slowdown is particularly severe in the industrial sector, which is hit by weak demand, overcapacities and deflation. US, households debt ratio (% GDP) -L- China, exports (% GDP) -R- 1 8 6 1998 21 24 27 21 213 216 4 3 2 1 China s export performance remains weak, in part due to subdued global demand. US consumption of Chinese goods has been on a downward trend as households have deleveraged. 27 China, investment has come down 28 China, credit China, fixed investment vs private consumption Fixed investment, % GDP Private consumption, % of GDP 47% % 4 4 39% 37% 3 26 28 21 212 214 216 Source : Thomson Datastream, IMF, BNP Paribas Investment ratio is down, which is less a sign of a controlled rebalancing in growth sources than a painful adjustment after years of overinvestment and excessive debt. China, credit outstanding as % of GDP Total Bank lending 24 22 2 18 16 14 12 1 8 24 27 21 213 216 Bonds, entrusted loans, bank's acceptances, financial trusts... China s internal debt ratio is the highest in the emerging world and continues to increase. 29 China, recovery in trade surpluses 3 China, food and energy bill China, trade balance % GDP 1 2 22 24 26 28 21 212 214 216 Source : Thomson Datastream, IMF, BNP Paribas External trade surpluses are on the rise, due to improving terms of trade, sluggish export growth and weaker domestic demand. China, food & energy trade balance % GDP - - - 2 22 24 26 28 21 212 214 216 Large trade deficits generated by food and energy imports have declined in the last three years. 21 February 217 6
Euro Area 31 Euro area, lagging behind 32 Euro area, consumption remains strong GDP, vol. (28 = 1) US EMU 115 11 15 1 95 9 28 29 21 211 212 213 214 215 216 217 The Eurozone did a lot better than the US in Q1 216. Since the start of 28 the picture is completely different. Private consumption, yy Retail sales, vol., yy - - 29 21 211 212 213 214 215 216 217 Consumption is a key driver behind the Eurozone recovery, as witnessed by healthy retail sales. 33 Germany, GDP growth vs business surveys 34 France, GDP Growth vs business surveys GDP, q/q, ann. [L] - - - PMI Manuf.[R] PMI composite [R] - - - - 29 21 211 212 213 214 215 216 217 Despite some volatility in the monthly data, entrepreneurs remain very positive about business conditions. However, they have become more concerned about the outlook. 65 6 5 4 3 GDP, q/q, ann. [L] - - - Composite indicator (BdF&Insee) PMI [R] - - - - 29 21 211 212 213 214 215 216 217 GDP increased by 1.7% in Q4 16 (saar), confirming the expected pick-up (after +. annually in Q3). Besides, the still well oriented surveys point towards a similar growth rate in Q1 17. 65 6 5 4 3 France, housing activity recovering 36 France, consumption and purchasing power gains Housing Starts (12m cumulated) Surveys [RHS] 5 4 3 26 28 21 212 214 216 Part of the French weaker performance versus the Eurozone is due to the housing market, close to an all-time low. 216 saw the first signs of recovery. The improvement should continue in 217. 3-3 -6 5 4 3 2 1-1 Gross Disposable Household Income (%,y/y) Household Consumption (%, y/y) -2 26 28 21 212 214 216 Source : Thomson Datastream, European Commission BNP Paribas The lack of inflation, arising from cheap oil prices, has been a key support to purchasing power gains and consumption for two years. The jobs recovery is starting to add support, though a limited one. 21 February 217 7
Euro Area 37 Italy, GDP growth vs business surveys 38 Spain, GDP growth vs business surveys GDP, q/q, ann. [L] - - - PMI Manuf.[R] PMI composite [R] - - - - 29 21 211 212 213 214 215 216 217 Italian growth turned back positive in 215, for the first time in almost four years. 65 6 5 4 3 GDP, q/q, ann. [L] - - - PMI Manuf.[R] PMI composite [R] - - - - 28 29 21 211 212 213 214 215 216 217 Spanish economic growth is likely to weaken in the quarters ahead. 65 6 5 4 3 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. 9 Corporate investment % of GDP (LHS) Corp. profit index (27 = 1, RHS) 11. 12 11. 8 11. 1 1. 8 1. 98 1. 7 1. 96 9. 26 28 21 212 214 216 7 Investment is picking up on the back of a rising trend in capacity utilisation rates 9. 26 28 21 212 214 216 The stabilisation of profit margins could encourage corporate investment to pick up. Uncertainty following the UK referendum could hold back investment decisions though. 94 41 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) 1 14 3 1 3 1 12 1 3 3 1 1 1 2 23 26 29 212 215 29% The rise in corporate profit margins has been building up since 214, supporting the upturn in business investment. 1 21 24 27 21 213 216 8 Credit growth has supported corporate investment in France. However the proportion of investment generating productivity gains is insufficient. 21 February 217 8
Euro area 43 Corporate debt ratio, diverging trends 44 Euro area, trend in corporate fixed investment Nonfinancial corporate debt as % of value added Germany France 14 12 1 8 6 2 22 24 26 28 21 212 214 216 The French corporate sector s debt-ratio has increased significantly over the past decade, contrary to what happened in Germany. Investment in Mach. & Equipt., 28 = 1 (vol.) Spain Italy 11 1 9 8 7 6 28 29 21 211 212 213 214 215 216 217 Very different dynamics of investment in Spain versus Italy, where the gap compared to the pre-recession level remains huge. Euro area, trend in labour costs 46 Euro area, trend in exports Change in unit labour costs 211-215 (Q4) IR PT GR ES BD OE FN BG FR IT NL -2-2 -1-1 - + + +1 +1 Down in many countries of the the EMU periphery (Ireland, Spain, Greece, Portugal). EU Export Volume Index (s.a., 213 = 1) Intra EU 28 Extra EU 28 14 12 1 8 6 26 27 28 29 21 211 212 213 214 215 216 External trade is weaker outside Europe, stronger inside 47 Euro Area, credit to corporates vs bank lending survey 48 Spain, credit to corporates Credit to corporate*, net flows EUR bn [L] Expected tightening, % [R] - - - Expected demand, % [R] 1 2 9 1 8 6 4 2-2 -4 26 28 21 212 214 216 ECB s bank lending surveys are improving with credit standards back to their normal levels. Demand for credit is becoming stronger before Brexit. 75 6 3 15-15 -3 Spain, credit to corporates, EURbn 12m cumulated net flows Monthly net flows (annualized) 1-1 -2 29 21 211 212 213 214 215 216 217 Credit to corporates tends to recover in Spain. 21 February 217 9
Euro area 49 Euro area, financing conditions improve 5 Euro area, consumer credit recover Bank's lending rates to corporates (<1Y & EUR 1mn) Italy Spain - - - France 7% 24 27 21 213 216 The convergence of lending rates shows fragmentation is declining. Euro are consumer credit 12m cumulated flows, EURbn 5 25-25 27 28 29 21 211 212 213 214 215 216 217 After turning positive for the first time in six year in the first half of 215, flows continue to rise. 51 Monetary aggregates, Euro area vs US 52 Euro area, base money surge with the QE Monetary aggregates (28 = 1) EMU (M3) US (M2) 16 15 14 13 12 11 1 28 29 21 211 212 213 214 215 216 217 Monetary support has been much stronger in the US than in the Euro area, looking at broad aggregates. This now may change with the ECB s asset purchase program. Money base R.Reserves Ex.Reserves D. Facility 1 6 1 4 1 2 1 8 6 4 2 28 29 21 211 212 213 214 215 216 217 Base money (bank s holdings to the ECB) was temporarily inflated by the ECB s TLTROs. It is now increasing along with the QE. 53 Euro area, M3 vs core inflation rate 54 Euro Area, ECB refi rate vs determinants CPI Core y/y [L] M3, y/y [R] 3. 2. 2. 1. 1... 21 24 27 21 213 216 M3 is weakening on the back of slower M1 growth. 1 1 9% - Core inflation rate [L] Unemployment rate [R, inv.] - - - "Refi" rate [L] 4. 4. 3. 3. 2. 2. 1. 1... 21 24 27 21 213 216 7% 9% 1 1 1 1 The refi has been lowered to. as of 16 March 216, and the deposit facility rate (DFR) cut to -.4. 21 February 217 1
Markets Italian 1 year rates 56 Spanish 1 year rates Italy, Govt. bond yields 1y 2y Spain, Govt. bond yields 1y 2y 9% 7% Spread - 211 212 213 214 215 216 217 2.1. Back to historical low levels after tensions seen during the Summer of 215. The widening of spreads vs Bunds after Brexit has been limited. Spread 1.6 -.1-211 212 213 214 215 216 217 Same story 57 France, over several maturities 58 Euro, still rather cheap France, Govt. bond yields 1y 5y - - - 2y 1. Trend in the euro (211 = 1) Against the dollar Trade weighted 13 12 11 1 -. -.5-211 212 213 214 215 216 217 Very low everywhere along the curve, and generating substantial savings on debt interest payments ( EUR 44.5bn 216 Financial Law, down EUR1.2bn compared to previous estimate). 9 8 26 28 21 212 214 216 The euro has rebounded in nominal effective terms. However, it looks still cheap by historical standards. 59 Euro-dollar vs interest rates spreads 6 Euro-dollar vs ECB s balance sheet Bund - Treasuries yields spread 5y [R] Euro vs dollar [L] 1.6 1.5 1.4 1.3 1.2 1.1 1. 26 28 21 212 214 216 1... -. -1. -1. -2. The spread between German and US interest rates is likely to stay very negative over the foreseeable future, weighing on the euro. ECB's balance sheet vs euro-dollar ECB Balance Sheet, bn [L] /$ [R] 4 3 5 3 2 5 2 1 5 29 21 211 212 213 214 215 216 217 The introduction of a negative deposit rate in 214 and the anticipation of ECB QE caused a big correction of the euro. More recently, a dovish Fed has caused a strengthening of the euro. 1.5 1.4 1.3 1.2 1.1 1. 21 February 217 11
21 February 217 12