In the US, in spite of a weak 217 start, the US economy should continue to do well, supported by the housing market, external demand This could have a rather inflationary impact since the economy is already close to its potential, and unemployment is very low. We expect inflation to keep round the official target of The Fed would probably keep on (cautiously) hiking rates We see the Fed Funds target at 1.5 by year end, 2.25% by mid-218. The Euro area recovery appears to be self-sustaining, also spreading across countries Intra-EU trade continues to build, signalling stronger domestic demand Indeed, corporate investment is doing well, while private consumption is getting stronger along with employment The ECB s QE and zero interest rate policy continues to revive credit and money supply growth. Inflation has rebounded in the wake of higher oil prices, but the core CPI trend remains very subdued, at around 1%, which argues for the ECB to maintain the status quo in 217. GDP Growth Inflation % 216 217 e 218 e 216 217 e 218 e Advanced 1.6 2. 2.1.8 1.7 1.6 United-States 1.5 2.1 2.7 1.7 2.1 1.8 Japan 1. 1.4 1.1 -.1.4.6 United-Kingdom 1.8 1.6 1..6 2.7 2.7 Euro Area 1.8 2.2 1.9.2 1.5 1.4 Germany 1.9 2.2 2..4 1.7 1.6 France 1.1 1.7 1.7.3 1.1.9 Italy 1. 1.4 1. -.1 1.4 1.1 Emerging China 6.7 6.6 6.4 2. 1.6 2.3 India 7.5 7.3 7.8 4.9 4.9 5.2 Brazil -3.6 1. 3. 8.8 3.5 3.8 Russia -.6 1.2 2. 7.1 4.2 4.3 Source : BNP Paribas Group Economic Research (e: Estimates & forecasts)
2 Interest rates, % 217 217 218 ######## ######## ######## End of period Q1 Q2 Q3 Q4e Q1e Q2e Q3e Q4e 217e 218e 219e US Fed Funds 1, 1,25 1,25 1,5 1,75 2, 2,25 2,25 1,5 2,25 2,25 Libor 3m $ 1,15 1,3 1,33 1,4 1,55 1,7 1,8 1,85 1,4 1,85 1,75 T-Notes 1y 2,4 2,3 2,33 2,35 2,6 2,75 2,75 3, 2,35 3, 2,9 Ezone ECB Refi,,,,,,,,,,,25 Euribor 3m -,33 -,33 -,33 -,3 -,3 -,3 -,3 -,3 -,3 -,3,1 Bund 1y,33,47,46,36,65,75 1,1 1,5,36 1,5 1,8 OAT 1y,97,82,75,7,95 1, 1,3 1,7,7 1,7 2, UK Base rate,25,25,25,5,5,5,5,75,5,75 1,25 Gilts 1y 1,7 1,19 1,4 1,3 1,45 1,55 1,9 2,3 1,3 2,3 2,3 Japan BoJ Rate -,6 -,7 -,6 -,1 -,1 -,1 -,1 -,1 -,1 -,1 -,1 JGB 1y,7,9,6,3,8,8,8,8,3,8, Exchange Rates 217 217 218 End of period Q1 Q2 Q3 Q4e Q1e Q2e Q3e Q4e 217e 218e 219e USD EUR / USD 1,7 1,14 1,18 1,15 1,14 1,13 1,18 1,22 1,15 1,22 1,3 USD / JPY 111,43 112,36 112,57 115, 116, 117, 115, 112, 115, 112, 15, EUR EUR / GBP,86,88,88,9,91,9,89,88,9,88,88 EUR / CHF 1,7 1,9 1,14 1,16 1,17 1,18 1,19 1,2 1,16 1,2 1,25 Source : GlobalMarkets (e: Estimates & forecasts) 3 Euro-dollar 4 Interest rates Euro-dollar exchange rate Spot price 1,5 1-déc. 1,4 1,3 1,2 1,19 1,1 1, 211 212 213 214 215 216 217 218 Government Bond Yields (1 year) US Germany 1-déc. 2, 1%,3-1% Spread - - 211 212 213 214 215 216 217 218 5 Interest rates 6 Oil market Government Bond Yields (1 year) France ----Germany 1-déc. Oil price (Brent) $ per barrel, spot 12 1 1-déc. 1%,3,51% 8 6 4 64-1% 211 212 213 214 215 216 217 218 211 212 213 214 215 216 217 218
3 7 US, business climate 8 US, investment cycle vs corporate profits ISM Manufacturing 65 6 55 5 ---- Orders 45 21 211 212 213 214 215 216 217 218 The business climate still looks very healthy, supported by industrial orders. ---- Nonfinancial corporate, fixed investment (% value added) [L] Nonfinancial corporate, net profits (% value added) [R] 2 2 1 1 1 1996 1999 22 25 28 211 214 217 1 1 1 Corporate investment and profits are now relatively far along in the cycle. 9 US, domestic oil market recovers 1 US, consumption is marking a pause US Oil market Oil production (mb/d) ---- Number of drillings [R] 1 9 8 7 6 5 4 21 211 212 213 214 215 216 217 218 After dropping sharply, the number of drillings is on the rise again. US oil production is also recovering. 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 21 211 212 213 214 215 216 217 218 Still trending at around annually. 15% 1 5% -5% -1-15% 11 US, housing market on a good shape 12 US, housing market on a good shape ---- Housing starts, x1 [L] NAHB [R] 3 9 2 5 2 6 1 5 1 3 5 1996 1999 22 25 28 211 214 217 The NAHB index points to an ongoing increase in housing starts. ---- Housing starts, x1 [L] Inventories in months of sales [R] 3 2 5 2 1 5 1 5 1987 1992 1997 22 27 212 217 Inventories are still very low (in months of sales). 14 12 1 8 6 4 2
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] 4 2-2 -4-6 -8 21 211 212 213 214 215 216 217 218 1 The US unemployment rate is close to, a level of NAIRU, a level where wages and inflation are supposed to accelerate. 9% 7% 5% Participation rate 2-64 aged population 79% 77% 75% 26 29 212 215 218 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 1% -1% - - - Energy [RHS] - - Energy 21 211 212 213 214 215 216 217 218 4 3 2 1-1 -2-3 Energy was largely responsible for the past upturn in headline inflation. So far, core inflation (excluding food and energy) has remained rather stable. US Augmented Phillips curve (1985-27) XAxis: Unemployment rate ; YAxis: Real hourly wage rate 2,5%, 31/1/17 R² =,75-2,5% 5% 7% Real hourly wage growth has become slightly positive (coming from zero). However, it is well 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] 1 8 6 4 2-2 -4-6 25 27 29 211 213 215 217 9, 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] 1 Récessions 8 6 1987 1992 1997 22 27 212 217 1 1 A cause for future concern? US companies are heavily in debt again, while their profitability is eroding, a configuration that has often preceded recessions.
5 19 US, low corporate spreads 2 US, trade with Mexico and China US BBB corporate spreads [L] ----Oil price, $ per barrel [R] 4 35 3 125 1 75 China + Mexico share in total US imports 35% 25% 15% 25 2 212 213 214 215 216 217 218 Corporate spreads have become very sensitive to oil prices in the US. One explanation is the size of the highly-leveraged shale oil sector. 5 25 Too big to tax. The Nafta renegotiation mainly focuses on nontariff barriers and what could be done to lower them. 21 US, Fed funds rate and core inflation 22 US, real Fed funds rate and unemployment rate ---- Fed funds Core CPI, yy 5% 1% 21 23 25 27 29 211 213 215 217 219 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. 5% 1986 1991 1996 21 26 211 216 Fed funds rate vs Unemployment Fed funds [Grey = real, LHS] - - - U. Rate [RHS] - 1992 1997 22 27 212 217 1 With such low unemployment, the real Fed funds rate should be positive. But this is not the case, and the Fed is still 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 1977 1982 1987 1992 1997 22 27 212 217 Sources : Thomson Datastream, IMF, BNP Paribas Looking at the real effective exchange rate (trade weighted & adjusted for inflation), the dollar is now near its long-term equilibrium level. Current account balance % GDP - - - 22 25 28 211 214 217 External deficits have narrowed as US consumers get a grip on their debt habit. They also reflect the surge in the shale oil industry, and the reduction in America s energy dependency.
6 25 China, various activity indicators 26 China, change in growth determinants Growth indicators (y/y) GDP Ind. output - - - Electr. output 3 25% 2 15% 1 5% -5% -1 28 29 21 211 212 213 214 215 216 217 218 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] 1 8 6 1999 22 25 28 211 214 217 4 3 2 1 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 45% 4 35% 27 29 211 213 215 217 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 28-29. A contraction began in 215. Credit outstanding as % of GDP Total ----Bank lending 24 22 2 18 16 14 12 1 8 25 27 29 211 213 215 217 Bonds, entrusted loans, bank's acceptances, financial trusts... 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] 3 7 1 5% 15% 35% -5% 21 23 25 27 29 211 213 215 217 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% 21 23 25 27 29 211 213 215 217-35% The Cement industry has experienced its first recession in China between 214 and 215, putting downward pressure on world commodity prices.
7 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 21 211 212 213 214 215 216 217 218 Although growth has improved, it still lags behind the US. Private consumption, yy Retail sales, vol., yy - - 29 21 211 212 213 214 215 216 217 218 Consumption continues to be the main driving force behind the euro area recovery, as suggested by healthy retail sales. 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] 7 58 6 54 5 5-21 211 212 213 214 215 216 217 218 Rocketing. 46-21 211 212 213 214 215 216 217 218 Thomson Datastream, *BNP Paribas nowcast model French GDP growth is now trending at a close to annual path. 4 35 France, housing activity bottoms out 36 France, car registrations bottom out Housing market Starts (12m cumulated) ---- Surveys [RHS] 5 2 New car registrations Monthly, x1 25 45 4 35-2 2 15 3 27 29 211 213 215 217 Surveys suggest the housing market recovery will gain momentum in 217-18. -4 1 1983 1988 1993 1998 23 28 213 218 Sources : Thomson Datastream, European Commission BNP Paribas Back to normal levels..
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, 62 GDP, q/q, ann. [L] PMI composite [RHS] ----PMI Manuf. [RHS] 5, 62 2,5% 58 54 2,5% 58 54, 5, 5-2,5% 46 42-2,5% 46 42-5, 21 211 212 213 214 215 216 217 218 38-5, 21 211 212 213 214 215 216 217 218 38 Italian GDP growth is strengthening. The Spanish economy is still on the roll. 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% 23 25 27 29 211 213 215 217 Higher capacity utilisation rates 7 9,5% 23 25 27 29 211 213 215 217 and the stabilisation of profit margins trigger an upturn in corporate investment. 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 15 3 1 11% 3 31% 3 1 12 1 23 26 29 212 215 218 29% Investment in France has been rather resilient compared to other countries, and despite various trends in corporate profits. 11% 9 22 25 28 211 214 217 Credit has been a support factor for investment in France.
9 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 Investment in Mach. & Equipt., 28 = 1 (vol.) Spain ---- Italy 11 1 9 8 7 6 2 22 24 26 28 21 212 214 216 218 The French corporate sector is not the most leveraged in Europe. Yet unlike Germany, its debt ratio has increased significantly over the past decade. 6 28 29 21 211 212 213 214 215 216 217 218 Corporate investment revives in keeping with profit margins, but not at the same pace across the board. 45 Euro area, trend in private debt ratios 46 Euro area, trend in exports Private sector debt ratio (% of GDP) 21 (Q1) 217 (Q1) 2 15 1 5 US UK JP ES FR IT BD Sources : Banque de France, BNP Paribas Have been down everywhere, except in France EU Export Volume Index (s.a., 213 = 1) Intra EU 28 ---- Extra EU 28 13 12 11 1 9 8 21 211 212 213 214 215 216 217 218 Sources : Eurostat, BNP Paribas External trade has been weaker outside Europe, and stronger within. 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] 1 9 8 6 4 2-2 -4 25 27 29 211 213 215 217 The ECB bank lending surveys are improving as lending standards return to normal. The private sector s demand for credit is getting stronger. 75 6 45 3 15-15 -3 Credit to corporates, EURbn (<1y & EUR 1mn) 12m cumulated net flows ----Monthly net flows (annualized) 1-1 -2 29 21 211 212 213 214 215 216 217 218 Credit to corporates (under 1 year and EUR 1mn) is recovering in Spain.
1 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% 5% 1% 25 27 29 211 213 215 217 The convergence of lending rates signals a reduction in fragmentation. Euro are consumer credit 12m cumulated flows, EURbn 5 25-25 29 21 211 212 213 214 215 216 217 218 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) 18 Money base R.Reserves Ex.Reserves D. Facility 2 16 14 12 1 28 29 21 211 212 213 214 215 216 217 218 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. 1 5 1 5 28 29 21 211 212 213 214 215 216 217 218 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, M3 vs core inflation rate 54 Euro Area, ECB refi rate vs determinants CPI Core y/y [L] M3, y/y [R] 3, 2,5% 2, 1,5% 1,,5%, 22 25 28 211 214 217 M3 is bottoming out as investors shift away from longer-term financial liabilities and into liquid assets. The ECB s QE programme is also encouraging this trend. 15% 1 9% - Core inflation rate [L] Unemployment rate [R, inv.] - - - "Refi" rate [L] 4,5% 4, 3,5% 3, 2,5% 2, 1,5% 1,,5%, 25 27 29 211 213 215 217 7% 9% 1 11% 1 1 The refi has held at. since March 16, 216, while the deposit facility rate (DFR) is negative at -.4. The ECB has dropped the Taylor rule at least for now.
11 55 Italian 1 year rates 56 Spanish 1 year rates Italy, Govt. bond yields 1y ----2y 1 1-déc. 1,6 -,2-211 212 213 214 215 216 217 218 Rebounding, albeit from historical lows. Spain, Govt. bond yields 1y ----2y 1-déc. 1,41% -,3-211 212 213 214 215 216 217 218 Still relatively low. 57 France, over several maturities 58 Euro, still rather cheap France, Govt. bond yields 1y 5y - - - 2y 1-déc. Trend in th euro (211 = 1) Against the dollar ---- Trade weighted 13 12 11 1%,51% -,2-1% -,67% 211 212 213 214 215 216 217 218 Few tensions across the board, at all maturities. 1 9 8 27 29 211 213 215 217 The euro is weak relative to all currencies, especially the USD. PPP is 1.3. 59 Euro-dollar vs capital flows 6 Euro-dollar vs ECB s balance sheet Direct & PF investments (12m cumulated net flows, bn) In Out 4 2-2 -4-6 -8 29 21 211 212 213 214 215 216 217 218 Net outflows from the EMU (direct and portfolio investments) have retraced, causing the rebound in the euro 1,5 1,4 1,3 1,2 1,1 1, ECB's balance sheet vs euro-dollar ECB Balance Sheet, bn [L] ---- /$ [R] 5 4 5 4 3 5 3 2 5 2 1,5 1,4 1,3 1,2 1,1 1 5 1, 29 21 211 212 213 214 215 216 217 218 while the ECB s asset purchase programme, combined with a negative deposit facility rate, put continuous downward pressure on the exchange rate.
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 12 1 8 6 US stock market S&P5 ----Annual EPS (adjusted to scale) 2 4 2 1 6 1 2 2 642 4 22 25 28 211 214 217 Operating earnings are near their long-term trend. 8 23 25 27 29 211 213 215 217 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] - 22 25 28 211 214 217 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 24 22 2 18 16 14 12 1 X Axis: Gross debt as % of GDP (216) Y Axis: 1y yield spread vs Germany (1-12-17) 2 PT IT ES 1 FR NL FI IR AT BE 5 75 1 125 15 GDP Gen. Gov. fiscal balance Interests payment Public debt Total Primary Struct. Total 217 bn bn %GDP %GDP %GDP bn %GDP Av. rate bn %GDP Rating S&P Germany 3 259 29,7,9 2,1,9 39,6 1,2 1,9 2 11 64,8 AAA France 2 286-65,4-2,9-1,1-2,4 41,2 1,8 1,9 2 215 96,9 AA Italy 1 715-36,5-2,1 1,7-2,1 65,6 3,8 3, 2 266 132,1 BBB- Spain 1 164-36,4-3,1 -,6-3,1 29,2 2,5 2,6 1 145 98,4 BBB+ Netherlands 733 5,2,7 1,7,3 7, 1, 1,6 423 57,7 AAA Belgium 438-6,7-1,5 1,1-1,5 11,4 2,6 2,6 455 13,8 AA Austria 369-3,7-1,,9 -,9 6,9 1,9 2,3 29 78,6 AA+ Greece 179-2,2-1,2 2, 2,5 5,8 3,2 1,8 321 179,5 B- Portugal 193-2,8-1,4 2,5-1,8 7,6 3,9 3,1 244 126,4 BB+ Finland 224-3,2-1,4 -,4-1, 2,2 1, 1,6 14 62,7 AA+ Ireland 29-1,2 -,4 1,6-1,3 5,9 2, 2,9 23 69,9 A+ EMU 11 154-124,5-1,1,9-1, 226,2 2, 2,3 9 957 89,3 UK 2 318-49,6-2,1,5-2,5 61,8 2,7 3,1 2 7 86,6 AA EU 15 32-186,8-1,2,8-1,7 39,7 2, 2,5 12 779 83,5
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