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Europe Economic Outlook: Is There Light at the End of the Tunnel?

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In this presentation, originally recorded as a Moody's Analytics webinar, we discuss the key risks to the outlook, the intensification of the dual banking and sovereign debt crisis in the euro zone, …

In this presentation, originally recorded as a Moody's Analytics webinar, we discuss the key risks to the outlook, the intensification of the dual banking and sovereign debt crisis in the euro zone, the slowdown in emerging markets and geopolitical tensions. Connect with the author, Petr Zemcik: http://www.linkedin.com/profile/view?id=6102616

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  • Nominal unit labour costs: total economy (Ratio of compensation per employee to real GDP per person employed.) (PLCD)http://ec.europa.eu/economy_finance/ameco/user/serie/ResultSerie.cfmSelect item 7, then item 7.7Not declining in Italy and France (high social security charges and minimal wages and unemployment benefits)
  • Cyprus – deposits, banks, loans, high debtItaly – no mortgages for home purchases
  • High unemployment and debt wighs on house prices
  • House price growth greater than growth of income and rents
  • Cyprus – mention your tripEuro not the same in Cyprus and GermanyProblem in Cyprus – high CA deficits & fiscal deficits, oversized banking sector, property loans & greece
  • M=kPY … nominal GDP targeting in principle similar to Japanese quantitative easing.Communication – keep the interest rates low for a pre-specified period of time. Avoid the scenario where expectation of high expectation rates in the future raises interest rates now.Monetary PolicyThe Bank of England’s Monetary Policy Committee voted to hold interest rates steady at 0.5% at the March meeting. All nine members voted in favour of no change in the policy rate.Six of the nine committee members voted to hold the asset-purchase programme at £375 billion. Three members voted to increase purchases by a further £25 billion.Interest rates have been at the record low of 0.5% since March 2009, and the bank restarted quantitative easing in October 2011 but last increased the asset-purchase programme in July 2012.The BoE is expected to expand its asset-purchase programme by £25 billion to £400 billion at the April monetary policy meeting on Thursday. Lending-Total net lending to individuals in the U.K. increased by £1.5 billion in February after rising a revised £800 million in the previous month (previously reported as £600 million).Net lending secured on dwellings increased £900 million after increasing £300 million a month earlier.The number of mortgage approvals for dwelling purchases decreased to 51,653 from 54,187 in the previous month.


  • 1. Europe Economic Outlook:Is There Light at the End of the Tunnel?DR. PETR ZEMCIK, DIRECTOR – ECONOMIC RESEARCHWEBINARJune 6, 2013
  • 2. 2Independent provider of credit ratingopinions and related information fornearly 100 yearsResearch, data, software, and relatedprofessional services for financial riskmanagement2MA Extends Moody’s Brand Beyond Credit RatingsMoodys Analytics operates independently of the credit ratings activitiesof Moodys Investors Service. We do not comment on credit ratings orpotential rating changes, and no opinion or analysis you hear during thispresentation can be assumed to reflect those of the ratings agency.Leading global provider of credit rating opinions, insight, and tools for credit riskmeasurement and management
  • 3. 3Access essential expertise on the economic and consumercredit trends that impact your business and investmentsEconomic & Consumer Credit AnalyticsEconomic, Consumer Credit, andFinancial DataForecasts withAlternativeScenariosEconomic ResearchConsumer CreditAnalyticsRisk Management, Strategic Planning, Business and Investment Decisions
  • 4. 4Please send your questions tohelp@economy.com
  • 5. 5Outline• Today’s economy• Structural adjustment• Private debt and the real economy• Austerity and tight credit• Banking union• Monetary policy• Outlook
  • 6. 6Today’s Economy1
  • 7. 7Source: Moody’s AnalyticsExpansionIn recessionAt riskRecoveryMay 2013Global Business Cycle Status
  • 8. 8Source: Moody’s AnalyticsExpansionIn recessionAt riskRecoveryMay 2013Europe Business Cycle Status
  • 9. 9Structural Adjustment2
  • 10. 109010011012013014015000 01 02 03 04 05 06 07 08 09 10 11 12 13F 14FGermany IrelandGreece SpainFrance ItalyPortugal CyprusLabor Costs Declining in Some CountriesUnit labor costs, 2000=100Sources: EU Commission, Moody’s Analytics
  • 11. 11-10 -8 -6 -4 -2 0 2 4 6 8 10 12NetherlandsGermanyIrelandAustriaEuro areaItalySpainPortugalFranceGreeceU.K.Cyprus201120122013FCompetitiveness Improves on the PeripherySources: Consensus Economics, Moody’s AnalyticsCurrent account, % of GDP
  • 12. 12Private Debt and the Real Economy3
  • 13. 13Private Debt High in Cyprus and Low in ItalySources: Eurostat, Moody’s AnalyticsPrivate sector debt as % of GDP5010015020025030000 01 02 03 04 05 06 07 08 09 10 11France Germany ItalyPortugal Spain CyprusU.K.
  • 14. 140 20 40 60 80GermanyFranceItalyEuro zonePortugalSpainCyprusGreece*Jobless rateYouth unemploymentLabor Market Dualism Needs to Be ReducedSources: Eurostat, Moody’s AnalyticsUnemployment rate in Mar, %* as of Feb 2012
  • 15. 15506070809010011012006 07 08 09 10 11 12 13U.K. SpainIreland PortugalNetherlandsUnemployment Weighs on House Prices…House prices, 2006Q1=100Sources: National statistics offices, Moody’s Analytics
  • 16. 168010012014016006 07 08 09 10 11 12 13NorwaySwedenSwitzerland…Although There Are ExceptionsHouse prices, 2006Q1=100Sources: National statistics offices, Moody’s Analytics
  • 17. 17Austerity and Tight Credit4
  • 18. 18Government Debt Rising Sharply Across EuropeSources: IMF, Moody’s AnalyticsItaly GreeceSpain Slovenia
  • 19. 19Cyclically adj balance,% of potential GDPFiscal space, ppts2010 2011 2012 2013 Sep-12 Dec-12 Apr-13Germany -3.5 -1 0.1 0.0 158.9 158.3 154U.K. -8.6 -6.5 -5.4 -4.3 137.4 136.7 128.7France -5.1 -3.9 -3.1 -1.9 112.3 128.7 103.4Ireland -8.7 -7.0 -6.0 -5.5 57.8 93.1 97.6Spain -8.3 -7.6 -5.1 -4.2 0.0 0.0 85.1Portugal -9.7 -3.6 -3.0 -3.0 0.0 0.0 0.0Italy -3.4 -2.8 -1.2 -0.2 0.0 0.0 0.0Greece -12.2 -8.2 -2.7 0.2 0.0 0.0 0.0Does Austerity Bear Fruit?Sources: IMF, Moody’s Analytics
  • 20. 203456789May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13Germany Spain France Italy PotugalBorrowing Costs Higher in Spain, Italy & PortugalSources: ECB, Moody’s AnalyticsInterest rates, new loans, NFCs, maturity 1-5 yrs, up to €1 mil, %
  • 21. 21Banking Union5
  • 22. 2280859095100105110Jul-11 Jan-12 Jul-12 Jan-13Cyprus SpainItaly PortugalGreece SloveniaBank Runs Are a PossibilityBank deposits, Jul 2011=100Sources: Bloomberg, Moody’s Analytics
  • 23. 23Assets 30.4 Liabilities+equity 30.4Loans 24.9 Central and other banks 10.2Other 5.5 Deposits 17.9Loans 1.4Equity 1Bail-In Now AcceptableAssets 36.2 Liabilities+equity 36.2Loans 30.8 Central and other banks 4.1Other 5.4 Deposits 27.9Loans+other 1.9Equity 2.3Laiki Bank, 2012Q3, ₡ bilBank of Cyprus, 2012Q3, ₡ bilSources: Public financial statements, Moody’s Analytics
  • 24. 24Monetary Policy6
  • 25. 25-10-5051015Mar-02 Sep-04 Mar-07 Sep-09 Mar-12Policy rate Euro zoneSpain GermanyOne Size Does Not Fit AllTaylor rule implied policy rate, %Sources: ECB, Bloomberg, Moody’s Analytics
  • 26. 263005007009001,1001,3001,5001,700200250300350400450500550600650700Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13Italy (L) Spain (L) Cyprus (R)OMTs announcedItaly’s electionsBailout for CyprusYield Spreads May Rise AgainSources: Bloomberg, Moody’s AnalyticsSpread on 10-yr government bond yield vs. German bund, bpsLTROs
  • 27. 27-10-505101520253004 05 06 07 08 09 10 11 12 13Japan Euro zone U.S. U.K.**M4Central Banks May Refocus on Money SupplyAnnualized growth of money supply, M3, %Sources: Central banks, Moody’s Analytics
  • 28. 2829031033035037039041043004 05 06 07 08 09 10 11 12Actual nominal GDPAn illustrative precrisis nominal GDP trendWill the BoE Target Nominal GDP?GDP, £ bilSources: ONS, HM Treasury, Moody’s Analytics
  • 29. 290510152025303540455013 14 15 16 17 18Risk of Stagflation in the U.K.Stagflation probability under the baseline assumptions, %Source: Moody’s Analytics
  • 30. 30Outlook7
  • 31. 31Recipe for Growth?• Restructuring of the banking sector• Fiscal consolidation- Cut spending rather than raise taxes- Long-term view: pensions, healthcare, welfare- Tax collection• Privatization• Structural reforms- Labor market- Goods and services market: energy, housing,tourism
  • 32. 329510010511011512012512 13 14 15 16 12 13 14 15 16 12 13 14 15 16 12 13 14 15 16Euro zoneWill Europe Ever Get Its Groove Back?Real GDP, 2008Q1=100Sources: Government sources, Moody’s AnalyticsWorldU.K.U.S.
  • 33. 33024681012 13 14 15 16 12 13 14 15 16 12 13 14 15 16 12 13 14 15 16RussiaEmerging Markets Drive Global GrowthReal GDP growthSources: Government sources, Moody’s AnalyticsChinaBrazilIndia
  • 34. 34For more analysis and research on Europe and the global economyplease visit www.economy.com or e-mail us at help@economy.com
  • 35. www.economy.comUnited States121 North Walnut StreetSuite 500West Chester PA 19380+1.610.235.5299AustraliaLevel 101 OConnell StreetSydney, NSW, 2000Australia+61.2.9270.8111United KingdomOne Canada SquareCanary WharfLondon E14 5FA+44.20.7772.5454PragueWashingtonova 17110 00 Prague 1Czech Republic+420.22.422.2929
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