Eurozone Economic Watch April 2018
Eurozone: solid growth and broadly unchanged projections, with protectionist risks BBVA Research - Eurozone Economic Watch / 2 Confidence has weakened in 1Q18 since the extraordinary high mood in late 2017. Bad weather and supply-chain constraints could have weighed on recent figures. Protectionism fears are not likely to be much reflected yet in these figures. Some leading indicators from surveys, such as employment or backlogs of work, remain positive. Hard data softened again in February after the good performance in the second half of 2017, suggesting also some moderation in activity, but it is too early to detect a reversal in the trend, especially without significant changes in fundamentals in recent months. Both retail sales and industrial production slowed down, but the recovery in the labour markets and foreign trade continued. Reflecting this, our MICA-BBVA model estimates some moderation in GDP growth at around 0.5% QoQ in 1Q18 (from slightly upward revised 0.7% in ). Both domestic and global fundamentals remain strong although stabilizing: (i) fiscal and monetary policy will continue to be expansionary (the latter decreasing only gradually); (ii) global growth should continued to support foreign trade; and (iii) the narrowing labour market slack and still low inflation should continue to support consumption. We maintain our baseline scenario broadly unchanged, with a GDP growth forecast of 2.3% for 2018 (revised up by 0.1pp) while keeping a gradual slowdown to 1.8% for next year. Core inflation resumed the gradual upward trend in 1Q18, while the easing of the headline rate was driven by non-core components. Headline inflation is projected to hover around 1.5% YoY over next year and to increase gradually afterwards (1.5% in 2018 and 1.6% in 2019) driven by core (1.3% in 2018 and 1.6% in 2019). Risks to our baseline scenario are coming mostly from increasing protectionism and domestic politics.
BBVA Research - Eurozone Economic Watch / 3 01 Economic developments Growth is still strong and balanced but data shows early signs of moderation
Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 BBVA Research - Eurozone Economic Watch / 4 A slight moderation from high growth levels seems to be taking place in 1Q18 The quarterly GDP growth figure of was revised upwards by 0.1pp to 0.7% QoQ. In this context, our MICA-BBVA model points to a quarterly GDP growth of 0.5% QoQ in 1Q18, slightly lower than previously forecasted GDP, contribution by components (%QoQ, pp) 2.5 GDP and MICA forecasts (%QoQ) 1.0 1.5 0.8 0.5-0.5 0.7 0.6 0.4-1.5 0.2 0.0 Imports Change in inventories Public consumption Real GDP Exports Gross fixed capital formation Private consumption CI 20% CI 40% CI 60% Observed
Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 BBVA Research - Eurozone Economic Watch / 5 Optimism has weakened in 1Q18 since the extraordinary high mood in late 2017 Despite that sentiment indicators have extended the downward trend from high levels, the reduced optimism is still consistent with a robust growth pace in early 2018 and in coming quarters PMI and GDP (level, %QoQ) EC confidence survey (level) 62 60 58 PMIs level GDP (% QoQ) 1.2 0.9 120 115 110 105 30 20 10 56 0.6 100 0 54 52 0.3 95 90 85-10 -20 50 0.0 80-30 Real GDP (% QoQ) Manufacturing PMI PMI Services PMI ESI (lhs) Consumer (rhs) Industrial (rhs) Services (rhs)
Jan-18 Feb-18 Mar-18 Jan-18 Feb-18 Mar-18 Jan-18 Feb-18 Mar-18 Jan-18 Feb-18 Mar-18 BBVA Research - Eurozone Economic Watch / 6 In both manufacturing and services PMIs, high confidence continued to soften across major countries during March Bad weather and supply-chain constraints during a prolonged winter could have weighed on recent figures. Nonetheless, some components from surveys, such as employment, remain at high levels PMI survey (level) 5 64 62 60 58 56 54 52 50 2Q17 1Q18 2Q17 1Q18 2Q17 1Q18 2Q17 1Q18 Germany France Italy Spain Composite PMI Manufacturing PMI Services PMI
Jun-13 Oct-13 Feb-14 Jun-14 Oct-14 Feb-15 Jun-15 Oct-15 Feb-16 Jun-16 Oct-16 Feb-17 Jun-17 Oct-17 Feb-18 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 May-17 Aug-17 Nov-17 Feb-18 BBVA Research - Eurozone Economic Watch / 7 Industrial output growth moderates further in February Production declined again in February (-0.8% MoM), but the weakness in early 2018 took place after a high dynamism in 2H17 (around 1.6% QoQ on average) Industrial production (level, %QoQ) IP capital equipment, investment in M&E and capacity utilization (%QoQ, %) 112 110 108 106 104 102 100 98 96 IP (level) 0.3 1.4-0.1 0.8 1.9 IP (%) QoQ) 1.4 3.0 2.5 2.0 1.5 1.0 0.5 0.0-0.5-1.0 6 5 4 3 2 1 0-1 -2 Inv. M&E, IP capital (% QoQ) Capacity utilization (%) 85 83 81 79 77 75 IP (2012=100) IP (% QoQ) Investment M&E (% QoQ) Capacity Utilization (%) IP Capital (% QoQ)
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 May-17 Aug-17 Nov-17 Feb-18 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 Exports are still growing but at a more moderate pace in 1Q18, while imports seem to be declining BBVA Research - Eurozone Economic Watch / 8 Trade balance ( bn, %GDP) Exports by destination (%QoQ, pp) 200 190 180 Exports, imports & trade balance ( bn) 0.9 0.8 0.7 0.8 1.2 1.0 0.8 4 3 2 1 170 0.6 0 160 150 Trade balance (% GDP) 0.4 0.2-1 -2-3 140 0.0 Trade balance ( bn) Exports ( bn) Imports ( bn) Trade balance (%GDP) Other EU countries China LatAm Total Exports United States Asia (ex China) Rest of world
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 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 4Q10 2Q11 4Q11 2Q12 4Q12 2Q13 4Q13 2Q14 4Q14 2Q15 4Q15 2Q16 4Q16 2Q17 BBVA Research - Eurozone Economic Watch / 9 Retail sales softened at the start of the year despite strong consumer confidence Consumer confidence gains has stabilized at high levels in 1Q18 despite increased market volatility and political uncertainty Retail sales and consumer confidence ((%QoQ, pts) Retail sales and total wage bill (%YoY, pp) 1.5 1.0 0.5 0.0 Retail Sales (%QoQ) 1.0 0.5 0.2 0.3 0.8 0.4 0.4 5 0-5 -10 4 3 2 1 0-0.5-15 -1-2 -1.0-1.5 Consumer Confidence -20-25 -3-4 Retail Sales (%QoQ) Consumer Confidence Employees Total wage bill Real compensation Retail sales
Feb-15 May-15 Aug-15 Nov-15 Feb-16 May-16 Aug-16 Nov-16 Feb-17 May-17 Aug-17 Nov-17 Feb-18 BBVA Research - Eurozone Economic Watch / 10 The labour market slack continued to narrow in 1Q18 The unemployment rate declined to 8.5% in February, which is 1% lower than a year ago The decline in unemployment is concentrated in the group of prime-aged men Unemployment rate by country (%) 20 Annual unemployment change by gender & age (millions) 0.0-0.2 15-0.4-0.6-0.8 10-1.0-1.2 5-1.4-1.6-1.8 0 Feb-17 Jan-18 Feb-18 Eurozone Germany France Italy Spain Women 25-74Y Men 25-74Y Men < 25Y Women < 25Y Total
Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Feb-12 Feb-13 Feb-14 Feb-15 Feb-16 Feb-17 Feb-18 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 Headline inflation increased in March pushed by foods while core measure remained broadly stable BBVA Research - Eurozone Economic Watch / 11 HICP Inflation increased to 1.3% YoY (+0.2pp) driven mostly by unprocessed food Core inflation picked-up a bit to 1.3% YoY, still showing a gradual recovery Inflation and contribution of components (%YoY, pp) Core and trimmed-mean inflation (%YoY) 2.0 3.5 1.5 1.0 3.0 0.5 2.5 0.0-0.5 2.0-1.0 1.5-1.5 1.0 0.5 Unprocessed Food Energy Processed Food Non-energy industrial goods Services HICP (% y/y) 0.0 Trimmed mean inflation Core inflation
1Q18 1Q18 1Q18 1Q18 1Q18 1Q18 1Q18 1Q18 1Q18 1Q18 1Q18 BBVA Research - Eurozone Economic Watch / 12 Core inflation has increased in most countries in early 2018 Headline and core inflation (%YoY) 3.0 2.5 2.0 1.5 1.0 0.5 0.0 1.7 1.5 1.2 1.3 0.6 0.8 2.0 1.1 1.6 1.3 2.2 2.2 2.2 1.6 0.8 0.5 1.3 0.9 1.1 0.6 0.3 0.0-0.5 Germany France Italy Spain Portugal Austria Belgium Finland Netherlands Greece Ireland Headline Inflation (% YoY) Core Inflation (% YoY) Headline Inflation 2017 Core Inflation 2017
BBVA Research - Eurozone Economic Watch / 13 02 Updated forecasts Solid growth but moderating in the forecast horizon
BBVA Research - Eurozone Economic Watch / 14 Growth drivers for the Eurozone Resilient domestic factors Narrowing labour market slack Profit gains still on track Favourable lending conditions Strong global demand Positive spillovers from higher US growth China s good performance Some setbacks from market volatility Protectionist narratives and political stalemate could weigh on confidence Still supportive economic policies Very gradual ECB s exit added to slightly expansionary fiscal policy Inflation remains weak and increasing slowly Inflationary pressures remain contained, reinforced by the euro appreciation Wage growth still subdued Global risks intensify Higher risk of possible escalation of protectionist measures Domestic risks, mostly from politics
BBVA Research - Eurozone Economic Watch / 15 Slightly more upbeat outlook in the short-term in the EZ, but a gradual slowdown ahead is still expected Minor upward revision in 2018 GDP growth (+0.1pp to 2.3%) to account for stronger exports A gradual slowdown is still expected over the forecast horizon with growth reaching a plateau Despite a slightly lower contribution from domestic demand, the investment recovery remains on track, adding to resilient consumption Still subdued inflationary pressures while core inflation resumed its gradual upward trend in 1Q18 Eurozone GDP growth and forecast (%) Main macroeconomic indicators (% YoY, %GDP) 2.0 1.8 2.5 2.3 1.8 2016 2017 (e) 2018 (f) 2019 (f) Real GDP 1.8 2.5 2.3 1.8 Private consumption 1.9 1.7 1.6 1.6 Public consumption 1.8 1.2 1.3 1.1 Investment 4.5 3.2 3.5 3.0 Domestic demand (cont. pp) 2.3 1.9 1.9 1.8 Exports 3.4 5.4 5.1 4.0 Imports 4.8 4.5 4.6 4.2 Net exports (cont. pp) -0.5 0.6 0.4 0.0 2015 2016 2017 2018 2019 Current account (% GDP) 3.4 3.5 3.5 3.3 Budget balance (% GDP) -1.5-1.1-0.8-0.6 HICP (avg. %YoY) 0.2 1.5 1.5 1.6 Current Previous
1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 4Q08 4Q09 4Q10 4Q11 4Q12 4Q13 4Q14 4Q15 4Q16 3Q08 3Q09 3Q10 3Q11 3Q12 3Q13 3Q14 3Q15 3Q16 2Q08 2Q09 2Q10 2Q11 2Q12 2Q13 2Q14 2Q15 2Q16 2Q17 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 BBVA Research - Eurozone Economic Watch / 16 Investment remains on track, slowly regaining pre-crisis levels Investment by country (1Q18=100) 120 110 100 90 80 70 60 50 Eurozone Germany France Italy Spain Total Construction M&E
1Q00 1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q18 1Q19 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Solid consumption in 2018-19 despite still moderate wage growth BBVA Research - Eurozone Economic Watch / 17 Private consumption has shown strong growth and adds to buoyant confidence levels Unemployment rate expected to keep its downward trend Real disposable income to slightly moderate on higher inflation expectations Private consumption and real labour income (% YoY) Unemployment rate and contribution (%, pp) 4 5 14 3 2 1 0 4 3 2 1 0 12 10 8 6 4 2-1 -1 0-2 -2-2 Unemp. rate (-1) Employment Private consumption HH disposable income (RHS) Labour force Unemp. rate
1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 1Q18 Upward revision of US growth forecasts could add further support to global demand, while the impact from the euro strength is still limited BBVA Research - Eurozone Economic Watch / 18 Exports, EURUSD and World GDP 2.4 1.9 6 4 Effect of higher US growth on Eurozone GDP growth (pp) 0.35 0.30 1.4 0.9 0.4-0.1 2 0-2 -4-6 0.25 0.20 0.15 0.10 0.05 Exports (% QoQ) World GDP (% QoQ) Effective exchange rate (inverted % QoQ, RHS) 0.00 2018 2019 2018 2019 EE.UU. EZ
BBVA Research - Eurozone Economic Watch / 19 The risk of a protectionist escalation creates uncertainty about the global economic outlook Exports, EURUSD and World GDP 14 12 10 8 6 4 2 0 2.9 Value represents % of total exports in each country 0.2 0.7 0.5 0.9 0.1 1.2 0.3 0.7 CAN MEX EU KOR RUS CHN BRA JAP UAE Steel Aluminium US tariffs on steel and aluminum have a small direct impact on activity: They represent only a small share of total exports Exemption for many countries until May The greatest negative impact may come from indirect effects and possible reaction of the countries concerned The mutual tariff increase between the US and China (25%, 50bn USD in 2017): Larger effect: 38% exports to China (3% of the total US exports) and 11% of exports to the US (2% of the total chinese exports) They can only be the beginning of a major escalation EU faces a potential loss of USD2.6bn (0.1% of good exports) according to US Commerce Department estimation Source: BBVA Research
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 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Oct-19 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 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Oct-19 BBVA Research - Eurozone Economic Watch / 20 Headline inflation to hover around 1.5% over next year and to increase gradually afterwards driven by core components Core inflation resumed the gradual upward trend in 1Q18, as expected, while the easing of the headline rate was driven by non-core components Broadly unchanged inflation projections: more evident gradual increase in core inflation from 2019 onwards Private consumption and real labour income (% YoY) 3.0 2.5 2.0 1.5 1.0 0.5 0.0-0.5-1.0 Unemployment rate and contribution (%, pp) 3.0 2.5 2.0 1.5 1.0 0.5 0.0 20% 40% 60% 80% 20% 40% 60% 80% Source: BBVA Research
BBVA Research - Eurozone Economic Watch / 21 The ECB is making progress on the QE exit, but avoiding tensions QE The QE will end in 2018 Monthly purchases of assets (30bn EUR) up to September Interest rates As we approach the end of QE, the focus shifts to the rate hikes: when and at what pace Purchases withdrawal between September and December But the ECB will remain in debt markets: reinvestment of maturities The challenge for the ECB is to manage the interest rate expectations (forward guidance) Key issues in QE exit: Long interest rates and risk premium Exchange rate (Euro) Expectations on interest rate hikes
BBVA Research - Eurozone Economic Watch / 22 Germany: solid growth based on the strength of domestic demand Main macroeconomic indicators (% YoY, %GDP) 2016 2017 (e) 2018 (f) 2019 (f) Real GDP 1.9 2.5 2.4 1.8 Private consumption 1.9 2.1 1.7 1.6 Public consumption 3.7 1.6 1.7 1.6 Investment 2.9 3.9 3.8 3.1 Domestic demand (cont. pp) 2.2 2.3 2.1 1.9 Exports 2.4 5.3 6.5 4.1 Imports 3.8 5.6 6.6 4.8 Net exports (cont. pp) -0.4 0.2 0.4 0.0 Current account (% GDP) 8.5 8.1 8.3 7.9 Budget balance (% GDP) 0.8 0.9 1.0 1.0 HICP (avg. %YoY) 0.4 1.7 1.7 1.8 Recent data suggest that economic activity is still favoured by external demand GDP growth forecasts are kept unchanged, characterized by a gradual deceleration going forward Private consumption will moderate due to a tighter labour market, the gradual upturn of inflation and softer confidence The still positive global outlook will continue to support strong trade figures and investment Public expenditure expected to grow steadily given an unchanged fiscal policy stance Local risks coming mostly from a weakened government coalition that could weigh on the potential reform agenda
BBVA Research - Eurozone Economic Watch / 23 France: growth revised up thanks to the support of net exports Main macroeconomic indicators (% YoY, %GDP) 2016 2017 (e) 2018 (f) 2019 (f) Real GDP 1.1 2.0 2.0 1.6 Private consumption 2.1 1.3 1.6 1.5 Public consumption 1.2 1.6 1.4 1.2 Investment 2.7 3.8 3.7 2.7 Domestic demand (cont. pp) 1.9 2.3 2.0 1.6 Exports 1.9 3.3 4.9 3.5 Imports 4.2 4.1 4.3 3.2 Net exports (cont. pp) -0.8-0.4 0.0 0.0 Current account (% GDP) -0.9-1.2-1.0-0.9 Budget balance (% GDP) -3.4-2.8-2.6-2.6 HICP (avg. %YoY) 0.3 1.2 1.3 1.5 Exports and investments surprised to the upside at the end of 2017 We revised up GDP growth in 2018 to 2.0% (+0.1pp), while keeping a view of growth moderation in 2019 Private consumption to benefit from reduced labour market slack, high confidence and low inflation Reforms will continue to spur investment and prolong the positive business cycle Nonetheless, imports growth will partly offset the higher contributions of exports coming from the recovery in global trade The reform agenda and fiscal consolidation are on track but could be delayed by the risk of heightened social discontent
Italy: the growth gap with the Eurozone persists despite a better performance BBVA Research - Eurozone Economic Watch / 24 Main macroeconomic indicators (% YoY, %GDP) 2016 2017 (e) 2018 (f) 2019 (f) Real GDP 1.0 1.6 1.5 1.3 Private consumption 1.4 1.4 1.1 1.0 Public consumption 0.6 0.1 0.3 0.4 Investment 3.3 3.9 4.2 2.2 Domestic demand (cont. pp) 1.3 1.4 1.4 1.1 Exports 2.6 6.0 5.0 3.3 Imports 3.8 5.7 5.2 3.1 Net exports (cont. pp) -0.3 0.2 0.1 0.1 Current account (% GDP) 2.7 3.0 2.8 2.4 Budget balance (% GDP) -2.5-2.2-1.9-1.6 HICP (avg. %YoY) -0.1 1.3 1.3 1.6 Broadly stable growth figures, despite coming somewhat below expectations in We keep our GDP growth forecasts at 1.5% and 1.3% in 2018 and 2019, respectively Investment figures have surprised to the upside and will continue to underpin growth Private consumption should gradually moderate, mostly dragged down by higher inflation The recovery in global trade will support higher exports dynamism, consolidating a positive contribution from net external demand Policy uncertainty and risks of populism remain latent after the elections
Spain: upward revision in growth in spite of the economic policy uncertainty BBVA Research - Eurozone Economic Watch / 25 Main macroeconomic indicators (% YoY, %GDP) 2016 2017 (e) 2018 (f) 2019 (f) Real GDP 3.3 3.1 2.9 2.5 Private consumption 2.9 2.4 2.2 2.0 Public consumption 0.8 1.6 1.7 1.9 Investment 3.3 5.0 4.8 5.4 Domestic demand (cont. pp) 2.5 2.8 2.6 2.6 Exports 4.8 5.0 4.8 6.1 Imports 2.7 4.7 4.2 6.9 Net exports (cont. pp) 0.7 0.3 0.3-0.1 Current account (% GDP) 1.9 1.7 1.5 1.1 Budget balance (% GDP) -4.3-3.1-2.4-1.7 HICP (avg. %YoY) -0.2 2.0 1.5 1.6 Recent economic data point towards a stronger GDP growth (+0.4pp to 2,9% in 2018 and +0.2pp to 2.5% in 2018) Consumption is slowing down gently, but exports and investment show clear signs of recovery Uncertainty in Catalonia remains high, but decreasing External fundamentals driven by global demand still support a relatively strong recovery Political uncertainty, fiscal adjustment and a non inclusive recovery are the main local risk
Eurozone Economic Watch April 2018
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