Eurozone Economic Watch Higher growth forecasts for 2018-19 January 2018
Eurozone Economic Watch January 2018 Eurozone: Higher growth forecasts for 2018-19 Our MICA-BBVA model estimates a broadly stable pace of growth for GDP in 4Q17, at around 0.6/0.7% QoQ. Hard data rebounded in November after disappointing figures in the previous month, with industrial output and retail sales growing at a solid pace. Confidence figures soared again by the end of the year and reached historical high levels. The increasing optimism is widespread across sectors and countries, signaling a more positive outlook for early 2018. Inflation eased in December (-0.1pp to 1.4% a/a) due to energy base effects with core inflation stable at 1.1% a/a. Inflationary pressures remain subdued so far. We revised up growth forecasts for 2018 to 2.2% (+0.4pp) on account of the strengthening of domestic factors and a better global outlook. The projection moderates slightly to 1.8% in 2019. On the back of higher expectations for oil prices, we revise our inflation forecasts upward to 1.5% in 2018 (+0.3pp), but maintain our view of a gradual increase in core prices. Economic policies will remain supportive while political uncertainty has eased. We continue to expect a gradual monetary normalization with a QE ended over 4Q18, while the fiscal policy stance will remain broadly neutral or slightly expansionary. Lower risks, but some remain latent: uncertainty remains attached to political events (government negotiations in Germany, elections in Italy). 2
Economic developments: Firmer and sustained growth across components and countries January 2018
4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 4Q17 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 Eurozone Economic Watch January 2018 Growth pace likely to remain stable at high levels in 4Q17 GDP, Contribution by Components (%QoQ, pp) 2.5 1.5 0.7 GDP and MICA forecasts (%QoQ) 0.8 0.6 0.4 0.2 - -1.5-0.2-0.4-0.6 Imports Change in inventories Public consumption Real GDP Exports Gross fixed capital formation Private consumption CI 20% CI 40% CI 60% Observed Consumption still resilient thanks to rising incomes and employment Investment resumed in, but favorable financial conditions and higher confidence should continue to support capital accumulation in coming quarters Our MICA-BBVA model suggests a quarterly GDP growth of around 0.6/0.7% in 4Q17 4
3Q16 4Q16 3Q16 4Q16 3Q16 4Q16 3Q16 4Q16 Germany France Italy Spain Eurozone Economic Watch January 2018 while the positive outlook is widespread across large countries GDP, Contribution by components (%QoQ, pp) 2.0 12 1.5 0.8 0.6 0.4 0.8 8 4 0 - - -1.5-4 -8-2.0-12 Germany France Italy Spain Diff. GDP level relative to 2008 Private consumption Public consumption Gross fixed capital formation Change in inventories Exports Imports Real GDP Eurozone GDP Germany accelerates from stronger external demand and grows at +0.8% QoQ in Activity remains stable in France for the third quarter in a row and improves in Italy underpinned by better investment figures and export gains Spain s strong private consumption remains fuelling growth (+0.8% QoQ), despite high uncertainty 5
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 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 Eurozone Economic Watch January 2018 Continued optimism, with confidence soaring to record highs in 4Q PMI and GDP (level, %QoQ) ESI and GDP (level, %YoY) 62 60 58 56 54 52 PMIs level GDP (% QoQ) 1.2 0.9 0.6 0.3 118 116 114 112 110 108 106 104 102 ESI level GDP (% YoY) 4.0 3.5 3.0 2.5 2.0 1.5 50 100 Real GDP (% QoQ) Manufacturing PMI PMI Services PMI Real GDP (% YoY) ESI Confidence levels improved significantly during 4Q17, reaching record levels Optimism is broad-based although mainly in manufacturing, driven by new orders The Economic Sentiment Index reached an all time high in December in almost all countries 6
Eurozone Economic Watch January 2018 PMI: Confidence gains still suggest further growth momentum across the board PMI survey (level) 64 62 60 58 56 54 52 5 50 48 46 44 Oct- 17 Nov- 17 Dec- 17 Oct- 17 Nov- 17 Dec- 17 4Q17 4Q17 4Q17 4Q17 Germany France Italy Spain Oct- 17 Nov- 17 Composite PMI Manufacturing PMI Services PMI Dec- 17 Oct- 17 Nov- 17 Dec- 17 7
May-13 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 May-17 Aug-17 Nov-17 May-13 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 May-17 Aug-17 Nov-17 Eurozone Economic Watch January 2018 Industrial production bounces back in November and will end the year at a solid clip Industrial production (level, %QoQ) 110 108 IP (level) 2.5 2.0 4 IP capital, investment in machinery and equipment and utilization capacity (%QoQ, %) Inv. M&E, IP capital (% QoQ) 85 106 104 102 100 98 1.3 1.5 3 1.2 83 2 1 81 0.3 0.1 0 79-0.1-1 Capacity utilization 77 IP (%) QoQ) - -2 (%) 75 96 - IP (2012=100) IP (% QoQ) Investment M&E (% QoQ) Capacity Utilization (%) IP Capital (% QoQ) November pick-up in output was at 1% m/m Industrial production improves ahead of expectations and records an annual growth of +2.7% Investment spending is gaining traction from stronger demand, allowing a recovery of the industrial sector 8
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 May-17 Aug-17 Nov-17 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 Eurozone Economic Watch January 2018 Foreign trade figures improved in November but at a slower pace Trade balance ( bn, %GDP) 190 185 180 175 170 165 160 155 150 145 140 Exports, Imports & Trade balance 0.6 0.8 0.9 0.9 0.9 0.8 Trade Balance (% GDP) 0.8 0.8 0.7 1.2 0.8 0.6 0.4 0.2 - -2.0-3.0 Exports contribution by destination (%QoQ, pp) 4.0 3.0 2.0 Trade balance ( bn) Imports Exports Trade balance (%GDP) Other EU countries China LatAm Total Exports United States Asia (ex China) Rest of world 9
May-13 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 May-17 Aug-17 Nov-17 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 Eurozone Economic Watch January 2018 Retail sales growth continued resilient backed by rising incomes, employment gains and higher confidence Retail sales and consumer confidence (%QoQ, pts) 1.5 - - -1.5 Retail Sales (% QoQ) 0.2 1.2 0.3 Consumer Confidence 0.9 5 0-5 -10-15 -20-25 -30-1 -2-3 -4-5 Retail sales and total wage bill (%YoY) 4 3 2 1 0 Employees Real compensation Retail Sales (% QoQ) Consumer Confidence Total wage bill Retail sales Retail sales surprised to the upside in November (+1.5% m/m), offsetting the marked slowdown from the previous month (-1.1% m/m) Overall, household consumption has been favoured by improving labour conditions 10
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-17 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Eurozone Economic Watch January 2018 Headline inflation declined in December due to the energy base effect, but core inflation remained unchanged Inflation and contribution of components (%YoY, pp) 2.0 1.5 - - Core and trimmed-mean inflation (%YoY) 3.5 3.0 2.5 2.0 1.5-1.5 Services Non-energy industrial goods Processed Food Unprocessed Food Energy HICP (% y/y) Trimmed mean inflation Core inflation Headline inflation declined in December 0.1pp to 1.4% but with inflationary pressures still subdued In 2017 inflation averaged an annual increase of 1.5% while core figure posted a milder pick-up at 1.1% Headline inflation could declined further until February due to energy base effects to recover afterwards. Core prices are expected to continue its ongoing gradual increase 11
4Q17 4Q17 4Q17 4Q17 4Q17 4Q17 4Q17 4Q17 4Q17 4Q17 4Q17 Eurozone Economic Watch January 2018 Inflation figures declined in the majority of countries in December while core measures kept mostly unchanged Headline and core inflation (%YoY) 3.5 3.0 2.5 2.0 1.5 1.5 2.0 1.8-0.4 0.3 0.7-0.3 0.8 0.6 0.8 0.4 0.6 0.1 0.7-0.2 - Germany France Italy Spain Portugal Austria Belgium Finland Netherlands Greece Ireland Headline Inflation (% YoY) Core Inflation (% YoY) Headline Inflation 2016 Core Inflation 2016 December HICP declined among most countries in the Euro area: slashes were observed in Spain (+1.2% YoY after +1.8%), Germany (+1.6% YoY after +1.8%) and Italy (+% YoY after +1.1%). While in France inflation remained unchanged at +1.2% annual figure. 12
Updated forecasts: Stronger and more balance growth taking root with still subdued inflation January 2018
Eurozone Economic Watch January 2018 Growth drivers for the Eurozone Strengthening domestic factors Improving labour market Increasing profits share Favorable lending conditions 2 Increasing global demand Stronger exports and investment Lower political uncertainty Somewhat clearer political landscape, but uncertainty persists Supportive economic policies Very gradual ECB s exit Slightly expansionary fiscal policy Inflation remains weak and broadly stable Inflationary pressures remain contained, although some push down factors are fading Risks remain contained, but latent German government negotiations; Italian elections and policies of new government. 14
Eurozone Economic Watch January 2018 Eurozone: stronger and more balanced growth taking root GDP growth and forecast (%) Main macroeconomic indicators (% YoY, %GDP) 3.5 3.0 2.5 2.0 1.5 2.4 2.2 2.0 1.8 1.8 2015 2016 2017 2018 2019 2016 2017 (e) 2018 (f) 2019 (f) Real GDP 1.8 2.4 2.2 1.8 Private consumption 2.0 1.8 1.7 1.6 Public consumption 1.7 1.1 1.2 1.1 Investment 4.5 4.1 4.1 3.3 Domestic demand (cont. pp) 2.3 2.2 2.1 1.8 Exports 3.3 4.7 3.7 3.6 Imports 4.7 4.6 3.9 4.1 Net exports (cont. pp) - 0.2 0.1 Current account (% GDP) 3.3 3.3 3.2 3.0 Budget balance (% GDP) -1.5-1.1-0.9-0.8 HICP (avg. %YoY) 0.2 1.5 1.5 1.6 Current Previous We revise up our forecasts driven by stronger domestic demand and a less noisy political outlook Investment still benefits from reduced idle capacity, increased profits and lower policy uncertainty Domestic consumption to remain resilient on the back of better job market prospects Hard data points to a growth moderation over coming quarters, although we remain optimistic due to the very high confidence and export growth Inflation remains stable, but we expect a gradual increase driven by higher oil prices going forward 15
1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 Eurozone Economic Watch January 2018 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 16
1Q00 1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q18 1Q19 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Eurozone Economic Watch January 2018 Solid consumption in 2018-19 despite still moderate wage growth 4 Private consumption and real labour income (% YoY) 5 Unemployment rate and contributions (%, pp) 14 3 4 12 2 1 3 2 1 10 8 6 4 0 0 2-1 -1 0-2 -2-2 Private consumption HH disposable income (RHS) Unemp. rate (-1) Labour force Employment Unemp. rate Private consumption has shown strong growth and adds to buoyant confidence levels Real disposable income to slightly moderate on higher inflation expectations Unemployment rate expected to keep its downward trend 17
1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 4Q17 Eurozone Economic Watch January 2018 Strong global demand boosts exports, while the impact from euro appreciation is still limited Exports, EURUSD and World GDP 2.4 6 Effect of higher Chinese growth on Eurozone GDP growth (pp) 0.35 1.9 1.4 0.9 0.4 4 2 0-2 -4 0.30 0.25 0.20 0.15-0.1-6 0.10 Exports (% QoQ) World GDP (% QoQ) Effective exchange rate (inverted % QoQ, RHS) 5 0 2018 2019 Stronger growth in China could add around 0.2pp to Eurozone GDP growth in 2018-19 External support should underpin a strong growth in the Eurozone -above potential- for a relatively long period of time 18
Eurozone Economic Watch January 2018 Higher commodity prices, but contained Price of oil (Dollars per barrel, %) 61.5 18% 65.9 21.8% Higher oil prices reflect greater global demand, which would account for 60% of the increase However, they also reflect supply factors, linked to geopolitical risks and the inventories correction The increase will push up inflation in the short term, but with limited impact on activity 64.1 We still expect prices to move to $60 per barrel in the medium term, due to increased competition and structural changes in the energy sector -2.8% 4Q17 2018 2019 Change relative to previous period Dollars per barrel Source: BBVA Research 19
mar-07 sep-07 mar-08 sep-08 mar-09 sep-09 mar-10 sep-10 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 91Q1 92Q1 93Q1 94Q1 95Q1 96Q1 97Q1 98Q1 99Q1 00Q1 01Q1 02Q1 03Q1 04Q1 05Q1 06Q1 07Q1 08Q1 09Q1 10Q1 11Q1 12Q1 13Q1 14Q1 15Q1 16Q1 17Q1 Eurozone Economic Watch January 2018 Global and domestic shocks have driven low inflation in the past, but are now gradually fading Eurozone: historical decomposition of inflation (pp) 2.5 Eurozone: unemployment gap (pp) 3 2.0 1.5 - - -1.5-2.0-2.5 2 1 0-1 -2-3 Global Domestic Monetary policy Other Inf Source: BBVA Research Both global and domestic shocks have ceased to weigh negatively on inflation over the past year, which also benefits from the positive contribution from ECB s measures There has been more economic slack in recent years, but now the gap has clearly narrowed 20
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 Eurozone Economic Watch January 2018 The ECB keeps the gradual normalization of monetary policy No changes in our baseline scenario Fed and ECB interest rate (pb) 2.5 The ECB is increasing confidence in the outlook, but normalization is expected to be orderly and prudent 2.0 o Changes in forward guidance possibly by March/April 1.5 ECB End QE o Tapering by early 2018, but QE extended to September 2018 o No interest rate increases before 2019 ECB QE tapering o Focus: avoid a sudden jump in long-term rates No changes in our baseline scenario Still uncertainty: o Changes in the governing council o Macro: possible surprises in inflation and in economies reaction to hither interest rates Fed ECB o Markets: long-term rates and steepness of the curve Source: Fed, ECB and BBVA Research 21
2011 2012 2013 2014 2015 2016 2017 2018 Eurozone Economic Watch January 2018 Draft budgetary plans for 2018 envisage a broadly neutral fiscal stance, but adjustments efforts will be below mid-term targets Annual change in structural balance (% of GDP) 1.6 1.4 1.2 0.8 0.6 0.4 0.2-0.2 A broadly neutral or slightly expansionaryfiscal stance for 2018 Cyclical improvements add to still low interest rates Expectations of both a lower growth of primary expenditures and interest burdens, although public investment is expected to increase in 2018 Revenues are expected to decline, due to adjustment measures and shortfalls for 2018 Change in structural balance (Nov 17) Stability program target (Apr 17) Source: European Commission and BBVA Research 22
Eurozone Economic Watch January 2018 Germany: favorable domestic and external demand are underpinning stronger growth MAIN MACROECONOMIC INDICATORS (% YoY, %GDP) 2016 2017 (e) 2018 (f) 2019 (f) Real GDP 1.9 2.6 2.4 1.8 Private consumption 1.9 2.3 1.9 1.6 Public consumption 3.7 1.2 1.4 1.4 Investment 2.9 4.4 4.3 3.1 Domestic demand (cont. pp) 2.2 2.4 2.4 1.8 Exports 2.4 4.8 4.4 3.5 Imports 3.8 5.1 4.4 3.9 Net exports (cont. pp) -0.4 0.2 0.3 0.1 Current account (% GDP) 8.2 7.9 7.8 7.5 Budget balance (% GDP) 0.8 0.9 HICP (avg. %YoY) 0.4 1.7 1.8 1.8 Recent data and figures suggest that growth pace will prevail in coming quarters GDP growth forecast revised upwards for this year from 1.8% to 2.4% A well balanced investment and consumption will lead growth. Private consumption fueled by confidence and labour market gains A better global outlook will continue to support strong trade figures and investment Public expenditure expected to grow steadily given a broadly unchanged fiscal policy stance Inflation upturn should weight in the softening of private consumption 23
Eurozone Economic Watch January 2018 France: reforms and the better external environment are positively weighing on the outlook MAIN MACROECONOMIC INDICATORS (% YoY, %GDP) 2016 2017 (e) 2018 (f) 2019 (f) Real GDP 1.1 1.9 1.9 1.6 Private consumption 2.1 1.2 1.7 1.5 Public consumption 1.2 1.5 1.4 1.2 Investment 2.7 3.6 3.1 2.7 Domestic demand (cont. pp) 1.9 2.5 2.0 1.6 Exports 1.9 3.1 3.8 3.3 Imports 4.2 4.6 3.7 2.9 Net exports (cont. pp) -0.8-0.6-0.1 Current account (% GDP) -0.9-1.1-1.3-1.3 Budget balance (% GDP) -3.4-2.9-2.7-2.7 HICP (avg. %YoY) 0.3 1.1 1.3 1.5 Recent data showed more positive. Private consumption surprised to the upside in and adds to higher inventory investment We revised up GDP growth in 2018 from 1.7% to 1.9%, while the reforms have favored a positive environment for investment and growth Investment growth is improving on the back of lower policy uncertainty, reduced taxes and higher infrastructure expenditures A better global outlook will underpin exports growth, but higher imports will weight on the net contribution of trade Private consumption to benefit from labour gains, higher confidence and subdued inflation 24
Eurozone Economic Watch January 2018 Italy: better prospects for 2018, despite political and financial vulnerabilities MAIN MACROECONOMIC INDICATORS (% YoY, %GDP) 2016 2017 (e) 2018 (f) 2019 (f) Real GDP 1.1 1.6 1.5 1.3 Private consumption 1.5 1.5 1.2 1.1 Public consumption 0.8 0.4 0.4 Investment 3.0 3.2 3.8 2.7 Domestic demand (cont. pp) 1.2 1.5 1.4 1.3 Exports 2.6 5.1 3.5 2.8 Imports 3.3 5.5 3.7 2.9 Net exports (cont. pp) -0.2 Current account (% GDP) 2.7 2.6 2.1 2.0 Budget balance (% GDP) -2.5-2.1-1.8-1.5 HICP (avg. %YoY) -0.1 1.4 1.4 1.7 Solid and stable growth figures, led by exports and the ongoing recovery of investment We revise upwards GDP growth forecasts from 1.3% to 1.5% in 2018 driven by the impact of a better regional outlook over investment Private consumption should gradually moderate due to higher inflation Despite a null contribution of net external demand, exports will continue to benefit from improved global growth Policy uncertainty remains latent -given March elections- and continue to be a handicap for the enhancement of potential growth 25
Eurozone Economic Watch January 2018 Spain: unchanged outlook amid high policy uncertainty MAIN MACROECONOMIC INDICATORS (% YoY, %GDP) Recent economic data reinforce our view to keep the outlook unchanged 2016 2017 (e) 2018 (f) 2019 (f) Real GDP 3.3 3.1 2.5 2.3 Private consumption 2.9 2.5 2.2 1.9 Public consumption 0.8 1.2 1.8 1.9 Investment 3.3 5.0 3.7 4.4 Domestic demand (cont. pp) 2.5 2.6 2.4 2.3 Exports 4.8 5.1 4.4 5.2 Imports 2.7 3.9 4.4 5.8 Net exports (cont. pp) 0.7 0.2 Current account (% GDP) 1.9 1.8 1.9 1.7 Budget balance (% GDP) -4.3-3.1-2.3-1.7 HICP (avg. %YoY) -0.2 2.0 1.6 1.7 GDP growth moderation will continue in 2018 and 2019, with forecast at 2.5% and 2.3%, respectively External fundamentals are still favourable and support a relatively strong recovery, but domestic demand is expected to moderate A neutral fiscal stance in coming years Domestic risks seem still related to political uncertainty, fiscal adjustment and wage pressures 26
Eurozone Economic Watch Higher growth forecasts for 2018-19 January 2018
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