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2018 Eurozone Economic Outlook:From Recovery to Expansion

February 2018

Marion Amiot

Senior EMEA Economist

S&P Global Ratings

Copyright © 2016 by S&P Global.

All rights reserved.


Outline

Private & Confidential 2

Synchronized global economic upswing

Eurozone economy: from recovery to expansion

Politics still a cloud over integration efforts

Main downside risks

Synchronized economic upswing



A synchronized global economic upswing

90

95

100

105

110

115

45

50

55

60

65

2010 2011 2012 2013 2014 2015 2016 2017

Global mfg PMI ISM mfg (3mths avg)

China mfg PMI Ifo business expectations (rhs)

Source : S&P Global/ Bloomberg/ CNBS

Index



Global Trade Revived by EMs

-4

-2

0

2

4

6

8

10

( %

y/y

, 3

mm

a)

World Advanced economies Emerging economies

Source: CPB, S&P Global


Monetary conditions still underpin the recovery

6

G4 Consolidated Balance Sheet ($ trillions) Details by central bank

Sources: sources: FED, BOJ, ECB, BoE, Eurostat, Datastream, Bloomberg

Eurozone: From recovery to

expansion


32

36

40

44

48

52

56

60(I

ndic

es)

EZ PMI Composite EZ PMI Manuf EZ PMI Services

8

PMI indices point to strong growth in 2018

Source: Markit/ Bloomberg



The expansion is broad-based

Source: OECD

Source: National Statistical institute/ Oxford Economics

-10

-8

-6

-4

-2

0

2

4

(%yo

y)

OECD 2018 forecast

-10

-8

-6

-4

-2

0

2

4

(%yo

y)

OECD 2018 forecast

Eurozone output gap is closing in 2018 GDP growth since the crisis

85

90

95

100

105

110

115

120

France Germany Italy Spain


Strong labor market recovery boosts household income


Source: Eurostat

0

5

10

15

20

25(%

)

Unemployment rates

Eurozone Germany France Italy Spain


Export revival continues


-70

-60

-50

-40

-30

-20

-10

0

10

20

30

-25-20-15-10

-505

10152025

(In

de

x)

(%Yo

Y)

Eurozone exports Export order-book levels (rhs)

Source: Eurostat, European Commission


Investment accelerates with rising capacity pressure


68

70

72

74

76

78

80

82

84

86

Q1

20

00

Q1

20

01

Q1

20

02

Q1

200

3

Q1

200

4

Q1

200

5

Q1

200

6

Q1

200

7

Q1

200

8

Q1

200

9

Q1

201

0

Q1

201

1

Q1

20

12

Q1

20

13

Q1

20

14

Q1

201

5

Q1

201

6

Q1

201

7

%

Capacity Utilisation LT average (1985-2007 included)

Source: European Commission


Balance sheet adjustment broadly over


-40

-20

0

20

40

60

80

100

120

(€bi

l.)

Eurozone: Loan flows (adj. for sale and sec)

Source: ECB



Monetary and financial conditions still favorable

Source: ECB

-1

0

1

2

3

4

5

6

7

8

2010 2011 2012 2013 2014 2015 2016 2017 2018

(%)

Germany France Italy Spain

Source: Bloomberg

1

2

3

4

5

6

7

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

(%)

Interest rates on overall new loans to Non-Financial corporations

Germany Spain France Italy

10 year government bond yields


Inflation still below ECB target (“below, but close to, 2%”)


-1

0

1

2

3

4

5

Jan 07 Jan 09 Jan 11 Jan 13 Jan 15 Jan 17

% y

oy

CPI CORE CPI

Source: Eurostat


Wage growth slowly kicking in


Source: Eurostat

Wage growth and unemployment

6

7

8

9

10

11

12

130.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2000 2002 2004 2006 2008 2010 2012 2014 2016

Compensation per employee (yoy%) Unemployment rate (%, rhs, inv)

The Eurozone’s Phillips curve steepens

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

-1 0 1 2 3 4

Earn

ings

per

em

plo

yee

(% y

oy)

Unemployment gap (p.p.)

Q1 2003-Q3 2008 Q4 2008 - Q3 2013

Q4 2013 - Q1 2016 Q2 2016 - Q4 2017

Q4 2017 (f)

Source: Eurostat, S&P Global Ratings


Inflation expectations re-anchoring to target


Source: Bloomberg

1.2

1.4

1.6

1.8

2.0

5-Year, 5-Year Breakeven Inflation Swap Rate, %

Eurozone


… but strong Euro remains a concern


1

1.1

1.2

1.3

1.4

1.5

1.6

1.7-2.5

-2

-1.5

-1

-0.5

0

0.5

1

1.5

2

2.5

Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Jan 16 Jan 17 Jan 18

2 yr swap rates (US-EZ, inv) EUR/USD (rhs)

Source: Bloomberg

Euro strength not in line with monetary policy divergence …but exchange rate pass-through more muted in times of economic upswing

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

0.0

0.5

1.0

1.5

2.0

2.5

Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Jan 16 Jan 17 Jan 18

Core HICP (% yoy) Import prices (core consumer prices, % yoy, rhs)

Source: Eurostat

Political shocks still cast some

shadow


0

10

20

30

40

01 Nov 17 18 Nov 17 05 Dec 17 22 Dec 17 08 Jan 18 25 Jan 18

(%)

Italian 2018 election polls

Centre-leftCentre-rightM5SLeUOthers

No Itexit?


Source: Winpoll, Youtrend, Index, Euromedia, EMG, IPR, Demopolis, Ipsos


Brexit: What next?



UK Indicators: big hit hasn’t come so far?

22

MODERATE GROWTH CONTINUES IN Q2

Source : ONSSource: ONS

SLOWDOWN IN RETAIL SALES

Source: Bloomberg, Markit

FALL IN REAL DISPOSABLE INCOMES

Source: ONS

(2.0)(1.5)(1.0)(0.5)0.00.51.01.52.02.53.0

(Co

ntr

ibu

tio

n t

o y

/y g

row

th)

Net Exports Household Consumption

Stocks and statistical discrepancies Government Consumption

WEAK P0UND PUSHES INFLATION UP

(1)

0

1

2

3

4

5

6

Jan

09

Jan

10

Jan

11

Jan

12

Jan

13

Jan

14

Jan

15

Jan

16

Jan

17

CPI (YoY, %) Core CPI (YoY, %)

-10

-5

0

5

-25

-15

-5

5

15

2012 2013 2014 2015 2016 2017

Consumer confidence indicator Retail Sales (rhs, YoY,%)



But no upside scenario in the Long-term



But no upside scenario in the long-term (cont’d)


Ever Closer European Union?


Short-term priorities:- Complete Banking Union:

- European deposit insurance scheme to cut the linkbetween sovereigns and banks

- Foster a Capital Market Union: - increase risk sharing within EU

Avenues for long-term institutional reforms:- Fiscal Union (e.g. common budget)- … not without Political Union (e.g. Eurozone Minister of the

economy)- No consensus yet

Main downside risks


What are the main downside risks in EMEA?

• A more rapid increase in long-term rates

Driven by a faster pace of rate hikes by the US Fed, or the rise in term premium

Could derail the upswing in the EZ via contagion effects

Outlook for the euro-$US exchange rate a major uncertainty

Among EMs, Turkey's economy remains one of the most

vulnerable to the tightening of global liquidity conditions

Tighter financial conditions could weigh on a highly leveraged global economy

• Political/Geopolitical risks have not disappeared

Brexit, Germany, Italy, Spain

US sanctions on Russia, Turkey.


Thank you!

Marion Amiot

Senior Economist, EMEA

Tel: +44 20 7176 0128

[email protected]


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marion amiot senior emea economist s&p global ratings 2018 ...... · no itexit? private &...

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