Europe Outlook Second Quarter 2015 Jorge Sicilia, Chief Economist BBVA
Europe Outlook, Second Quarter 2015
Drivers of growth
Slow implementation of reforms: moral hazard issues
Oil price shock is positive as it is mostly supply-driven Relaxation in fiscal policy, now broadly neutral
Slowdown in Russia Monetary policy: large and open-ended QE programme Uncertainty about Junker’s plan Better-than-expected incoming data
China: downside bias
Greek crisis weighing on confidence
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Europe Outlook, Second Quarter 2015
The ECB announced a larger-than-expected QE… Open ended: Monthly purchases €60bn to expand the ECB balance sheet by about €1.1 trillion (CBPP and ABSPP)
ECB’s expected balance sheet: breakdown by components (EUR bn) Source: Bloomberg and BBVA Research
3500
96
114
Sovereign bonds
3000
60
704
836
24
0 30
176 100
160
CBPP3 & ABSPP CBPP1&2
440
2500
220
MRO and 3M LTRO TLTRO
352
432
512
512
1000 Dec-14
Tender operations
3Y LTRO
212 237
Purchase programs
jun-15
Dec-15
jun-16
Purchases of private assets: CBPP and ABSPP, currently running at about €13 billion a month (250 EUR bn).
SMP 250
2000
1500
European institutions
Dec-16
Purchases of European institutions’ bonds: 12% (114 bn EUR). Risk-sharing.
Other balance sheet items
Purchases of government bonds: around EUR 836 bn EUR. Risk-sharing 8% (EUR 67 bn) Page 3
Europe Outlook, Second Quarter 2015
The ECB announced a larger-than-expected QE that will strengthen the recovery QE channels Porfolio rebalancing channel. Weaker euro Signaling channel (QE + FWG). Still limited impact on relevant interest rates
Impact? Likely lower than US and UK (Bank-based financial system / Later implementation) Impact from purchase of 1% of GDP
US GDP: 0.1/ 0.6pp UK GDP: 0.1/ 0.2pp
Baseline
Dif. GDP level 4Q (pp)
1.2
1.6
(0.4QoQ)
(0.5QoQ)
0.6
Low growth
Reduced uncertainty about financial markets and the economy
2015 2016
1.6
2.2
(0.4QoQ)
(0.6QoQ)
1.2
Source: ECB , Weale et all. March 2015, and BBVA Research
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Europe Outlook, Second Quarter 2015
A larger than expected weaker euro Exchange rate (EURUSD) Source: BBVA Research
1,5 1,4
10%
1,3 Nov-14
1,2 1,1
Jan-15
0.5/0.6%
in eurozone USD/EUR GDPfirst year
EUR against USD
May-15
1,0 0,9
Oct-17
Jun-17
Feb-17
Oct-16
Jun-16
Feb-16
Oct-15
Jun-15
Feb-15
Oct-14
Jun-14
Feb-14
Oct-13
Jun-13
Feb-13
Oct-12
Jun-12
0,8
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Europe Outlook, Second Quarter 2015
The fall in oil prices is positive for growth, and joins to improved confidence Lower oil prices will boost GDP growth in 2015 and 2016‌
Oil price (Brent, USD/b) Source: BBVA Research
130 120 110
0.2-0.5%
Oct-14
More than 30% in 2015-16
100 90 80
May-15
‌ supporting household spending, also underpinned by employment
70 60
Sep-18
Mar-18
Sep-17
Mar-17
Sep-16
Mar-16
Sep-15
Mar-15
Sep-14
Mar-14
Sep-13
Mar-13
Sep-12
Mar-12
Sep-11
Mar-11
Sep-10
Mar-10
50
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Europe Outlook, Second Quarter 2015
Fiscal policy more favourable than in previous years Structural deficit adjustment 2010-2015 (% GDP) Source: BBVA Research and IMF
11
Broadly neutral fiscal policy in 2015
9
7
European Commission more careful not to force pro-cyclical adjustments
5
3
Uncertainty about Juncker’s Plan: Impact of up to 0.5% per year in 2015-17 if successful
1
-1
Eurozone Germany
France
Struct.Def. at the end of 2015
Italy 2015
Spain 2014
Portugal 2013
2012
Ireland 2011 Page 7
Structural adjustment
Europe Outlook, Second Quarter 2015
Forecast: growth will be higher than 1.5% in 2015 EMU: annual GDP growth contributions (pp) Sources: Eurostat and BBVA Research
6
2013
2014
2015 (f)
2016 (f)
-0.4
0.9
1.6
2.2
Private consumption
-0.6
1.0
1.7
1.6
Public consumption
0.2
0.7
0.5
0.9
Investment
-2.4
1.0
1.5
4.4
-0.9
0.8
1.3
2.0
Exports
2.1
3.7
5.2
5.9
Imports
1.2
3.8
4.9
6.1
0.4
0.1
0.3
0.2
Current account balance(% GDP)
2.2
Public deficit (% GDP)
-2.9
2.3 -2.5
2.8 -2.1
2.8 -1.6
CPI, % average
1.4
0.4
0.1
1.3
Activity REAL GDP (% YoY)
4 2 0
Domestic demand (contr. %)
-2
Net exports (contr. %)
-4 -6 -8 -10 2008
2009
2010
Domestic Demand
2011 Exports
2012
2013
Imports
2014
2015
Net exports
2016 GDP
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Europe Outlook, Second Quarter 2015
Across countries, Germany will continue to lead France and Italy GDP forecast by country (%) Sources: Eurostat and BBVA Research
2,5 2,0
•
Germany: strong growth will continue to be driven by domestic demand
•
France: the pace of recovery depends on continued structural reforms and reinforcing competitiveness
•
Italy: finally out of recession in 2015, though the recovery is slow and mainly exports driven
1,5 2,2
1,0
1,6
1,6
0,5
1,9
2,2 1,8 1,3
1,1
0,9
0,7 0,4 0,4
0,2
0,0 -0,4
-0,4
-0,5 -1,7
-1,0 -1,5
EMU
Germany
New projection (Apr-15)
France
2016
2015
2014
2013
2016
2015
2014
2013
2016
2015
2014
2013
2016
2015
2014
2013
-2,0
Italy
Last projection (Jan-15) Page 9
Europe Outlook, Second Quarter 2015
Inflation very low in 2015, below the ECB target in the forecast horizon Eurozone: demand and inflation Source: Eurostat and BBVA Research
2.5
4.0
2.0
3.0
Very low inflation due to slow recovery of domestic demand
1.5 2.0 1.0 0.5
1.0
0.0
0.0
-0.5
-1.0
Negative inflation due to energy prices that will continue to shape inflation in 2015… …but the through should be behind us
-1.0 -2.0 -1.5 -3.0
-2.5
-4.0
Lower risk of deflation
1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17
-2.0
Domestic demand (cycle, pp, LHS) Core (% YoY, RHS) Headline (% YoY, RHS) Page 10
Europe Outlook, Second Quarter 2015
Europe faces important challenges and risks Greece: uncertainty weighs on investment
Russian crisis worsening (with significant financial spillovers)
Slow implementation of reforms
Several elections in 2015-16, risk of unstable governments
Risk of stagnation and deflation
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Europe Outlook, Second Quarter 2015
Low potential growth in the EZ vs the US US and EZ projected potential GDP growth (pp) Sources: Eurostat and BBVA Research
US
2,8
Lower potential well below that in the US
2,3
1,8
EMU
Slower population dynamics and productivity growth are the main reasons of the gap
1,3
0,8
0,3
-0,2 2014-2022 Capital growth Population 15-65 growth Productivity growth
2014-2022 Higher participation rate Fall of structural unemployment
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Europe Outlook, Second Quarter 2015
Where do we stand after the crisis? GDP Note: Q1-2008=100 Sources: Eurostat, Haver and BBVA Research
110,0
109,6
107,5 105,0 103,9 102,5
101,4
100,0 98,1
97,5
96,3 95,0
94,2
92,5
93,1
90,0
90,5
Eurozone
Germany
France
Italy
Spain
USA
Portugal
Ireland
Dec-14
Sep-14
Jun-14
Mar-14
Dec-13
Sep-13
Jun-13
Mar-13
Dec-12
Sep-12
Jun-12
Mar-12
Dec-11
Sep-11
Jun-11
Mar-11
Dec-10
Jun-10
Sep-10
Mar-10
Dec-09
Sep-09
Jun-09
Mar-09
Dec-08
Sep-08
Jun-08
Mar-08
87,5
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Europe Outlook Second Quarter 2015 Jorge Sicilia, Chief Economist BBVA
Europe Outlook, Second Quarter 2015
Germany: growth gains momentum
Activity REAL GDP (% YoY) Private consumption Public consumption Investment Domestic demand (contr. %) Exports Imports Net exports (contr. %) External sector Current account balance (% GDP) Public finances General Govt. Balance (% GDP) Prices CPI, % avg.
2013
2014
0.2 0.9 0.7 -0.4 0.7 1.7 3.2 -0.5
1.6 1.2 1.1 3.4 1.2 3.8 3.3 0.4
1.9 1.9 1.2 2.2 1.7 4.6 4.9 0.2
2.2 1.8 0.9 4.0 1.9 5.6 6.0 0.2
6.7
7.5
7.6
7.9
0.1
0.6
0.5
0.3
1.6
0.8
2015 (f) 2016 (f)
0.3
1.4
Private consumption begins to grow at rates consistent with the favorable labor market conditions Uncertainty caused by geopolitical conflicts could lead companies to continue delaying their investment plans to 2016
Net exports will play a minor role in contributing to growth
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Europe Outlook, Second Quarter 2015
Germany: strong domestic fundamentals Deviation from the EA18 average Source: BBVA Research and Eurostat
GDP per working age population
+18.2pp
-2.5pp
+9.9pp
Public consumption / GDP ratio Employment rate
Positive divergence with the average of the area is gradually broadening
Increasing public investment would help correct the current account surplus
Unemployment rate reached a historic low in March (4.7%)
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Europe Outlook, Second Quarter 2015
France: recovery will move up in 2015
Activity REAL GDP (% YoY) Private consumption Public consumption Investment Domestic demand (contr. %) Exports Imports Net exports (contr. %) External sector Current account balance (% GDP) Public finances General Govt. Balance (% GDP) Prices CPI, % avg.
2013
2014
0.4 0.3 2.0 -0.8 0.3 2.4 1.9 0.1
0.4 0.6 1.9 -1.6 0.7 2.7 3.8 -0.3
1.1 1.5 1.0 0.0 1.0 4.4 3.8 0.1
1.8 1.4 1.0 3.5 1.7 5.5 5.1 0.1
-1.4
-2.3
-2.2
-2.2
-4.1
-4.0
-3.6
-3.0
1.0
0.6
2015 (f) 2016 (f)
0.1
1.1
The recovery in 2015 and 2016 will be based on domestic factors, especially consumption
The delay in the deficit adjustment should also help
The loss of competitiveness is the main issue in the medium term
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Europe Outlook, Second Quarter 2015
France: fiscal targets loosening to help economy recover Deviation from the EA18 average Source: BBVA Research and Eurostat
+12.4pp
GDP per working age population
Income is stable above the average
+1.6pp
Evolution of ULC %2008-14
Wage growth have hampered competitiveness during the crisis
Current account balance % GDP
France hasn’t corrected the current account deficit in last years, as other countries did
-4.6pp
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Europe Outlook, Second Quarter 2015
Italy: out of recession in 2015
Activity REAL GDP (% YoY) Private consumption Public consumption Investment Domestic demand (contr. %) Exports Imports Net exports (contr. %) External sector Current account balance (% GDP) Public finances General Govt. Balance (% GDP) Prices CPI, % avg.
2013
2014
2015 (f) 2016 (f)
-1.7 -2.8 -0.3 -5.8 -2.5 0.7 -2.2 0.8
-0.4 0.3 -0.9 -3.2 -0.6 2.4 1.6 0.3
0.7 0.6 -0.5 -0.2 0.1 4.5 2.7 0.6
1.3 0.8 0.0 3.0 0.9 4.9 4.0 0.4
1.0
1.8
2.0
2.6
-2.8
-3.0
-2.6
-2.0
1.3
0.2
0.0
0.9
We continue to expect a slow recovery in 2015 (0.7%), driven by exports
Investment will still be affected by uncertainty linked to the slow pace of reforms
The growth potential is very low but could recover, should fiscal and labour market reforms underway be completed
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Europe Outlook, Second Quarter 2015
Italy: reforms needed to increase the growth potential Deviation from the EA18 average Source: BBVA Research and Eurostat
-9.5pp
+40.2pp
-8.2pp
GDP per working age population
Income has worsened notably in the last two decades and counting
Debt / GDP ratio
Slow privatization programme is delaying the debt reduction (132.1% of GDP in 2014)
Employment rate
Measures taken lately to encourage youth and female employment
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Europe Outlook, Second Quarter 2015
Spain: growth revision to the upside in 2015
Activity REAL GDP (% YoY) Private consumption Public consumption Investment Domestic demand (contr. %) Exports Imports Net exports (contr. %) External sector Current account balance (% GDP) Public finances General Govt. Balance (% GDP) Prices CPI, % avg.
2013
2014
2015 (f) 2016 (f)
-1.2 -2.3 -2.9 -3.8 -2.7 4.3 -0.5 1.4
1.4 2.4 0.1 3.4 2.2 4.2 7.6 -0.8
3.0 3.1 0.8 5.7 3.0 6.1 6.5 0.0
2.7 2.4 0.6 6.4 2.7 7.5 7.8 0.1
1.4
0.1
0.9
1.0
-6.3
-5.7
-4.4
-3.0
1.4
-0.2
-0.2
1.4
Both in 2015 and in 2016, activity will grow steeply, supported by internal and external factors The recovery in the fundamentals and the change in tone of fiscal policy will contribute to the sustained recovery in domestic demand
The contribution of net external demand to growth will be virtually nil
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Europe Outlook, Second Quarter 2015
Spain: the labour market is improving, but challenges remain Deviation from the EA18 average Source: BBVA Research and Eurostat
-22.4pp
+10.8pp
-7.9pp
GDP per working age population
Income is still well below the average of the eurozone
Labour productivity %2008-14
Most of the gains in labour productivity were due to job destruction
Employment rate
But between 2015 and 2016 1,000,000 jobs will be created
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