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Atradius Economic Outlook2Editorialn last November’s Economic Outlook we arguedthat we had moved away from the abyss ofanother economic crisis. That position wasfounded on the encouraging policy steps in theEurozone that had been taken in June 2012. Steps,indeed, that had calmed the financial markets: inparticular, European Central Bank (ECB) presidentDraghi’s commitment ‘…to do whatever it takes...’.But at the same time we were seeing a continuationof the significant slide in global economic growththat had begun earlier in the year. The question waswhether this slide would stop.I Secondly, and perhaps even more importantly atthis stage, the monetary transmission mechanismshould be restored. Despite ample liquidity, banksare still reluctant to lend - especially to smallerfirms, which are an important source of (potential)growth.Thirdly, another dangerous feedback loop - the onebetween fiscal consolidation and growth - needs tobe firmly addressed. The IMF has been calling for ascaling back, or at least mitigation, of fiscalconsolidation for the past couple of months andEuropean countries seem increasingly inclined tothis course. But care should be taken to avoid afurther increase in debt levels. This is criticalbecause it is precisely the correction of debt levels,public and private, that largely explains the currentunderlying contraction in advanced economies.Running up debt levels would simply delay thatdeleveraging process and therefore the return togrowth.It didn’t. 2012 ended with just 2.6% global growthand a 0.5% contraction in the Eurozone. So hopesthen turned to 2013: hopes that the crisis would end,pulling the Eurozone out of recession over thecourse of this year and spurring global growth. Onthat assumption, back in November 2012 ourexpectations were for (still muted) global growth of2.8%. Now, in May 2013, it has become increasinglyclear that the Eurozone will again contract this year– probably by 0.4% - and global growth forecastsfor 2013 have been gradually scaled back to 2.6%: alevel supported by Asia (4.8% growth), LatinAmerica (3.4%) and, to a lesser extent, the UnitedStates. For 2014 a similar picture is by and largeexpected to emerge, except that the Eurozone willat last show some recovery (0.9% growth), boostingglobal growth to 3.2%.With the rather weak state of the global economy inmind, it comes as no surprise that the insolvencyenvironment for 2013 remains unfavourable inmany markets, and even deteriorates in quite anumber of them. We qualify that situation asstabilisation at a high level, although with marginalimprovements. Reflecting the pattern of globalgrowth, the trend in insolvencies has improved inthe emerging economies and the US, butdeteriorated in the Eurozone. Indeed, the growingimportance of the emerging economies is reflectedin the focus that we place on them in this report.Financial market recovery in the Eurozone has notbeen sufficient to generate a recovery in the realeconomy. The question then naturally arises ‘Whatdo we need financial markets to do to make realprogress?’ A few, perhaps familiar, answers presentthemselves.My thanks go to my colleagues Paul Burger, MarijnKastelein and Afke Zeilstra for their contributionsto the section on emerging economies, to DaanWillebrands for elucidating the major issues foradvanced economies, to Niklas Nordman for hiswork on the insolvency section of the report, and toDaniel Bosgraaf, the latest addition to our team, forhis support throughout.Firstly, the financial markets can and should becalmed by the resolute implementation of the policysteps towards a banking union that have alreadybeen announced. This is critical, as it breaks thedangerous feedback loop between sovereigns andbanks in parts of the Eurozone.John Lorié, Chief Economist Atradius
Atradius Economic Outlook3Table of contentsExecutive summary ……….……………………...………….……. 41 The global macroeconomic environment ……………...…….……. 52 Prospects and risks in advanced economies ...……………......…… 133 Prospects and risks in emerging economies ...………………..…… 214 Implications for the insolvency environment …..…..……….…….. 32Appendix: Forecast tables ……..…………...…...……..……….….. 39
Atradius Economic Outlook4Executive summaryThe global economic environment has weakenedover the past six months and we expect onlymodest economic growth in 2013. Global growth isprojected to improve at the end of the year due to abetter economic performance in the United Statesand stabilisation of the Eurozone economy.However, there is a high risk that economic growthwill be even slower than pictured in this outlook.Key points Global economic growth is expected to stabiliseat 2.6% this year as growth in advanced marketsremains sluggish and emerging markets continuetheir strong performance. Eurozone GDP is expected to shrink further in2013, at a rate of -0.4%. Growth in the UnitedStates is stable at 2.1%. Asia and Latin Americashow strong and slightly improving growth rates. Risks to the global outlook are high: theEurozone crisis could intensify, fiscalconsolidation may derail the economic recoveryin the United States and growth in emergingmarkets may slow. While the overall insolvency environmentstabilises, we forecast rising insolvencies in 10out of the 22 markets that we track. Eurozonecountries in particular will see a further increasedue to the ongoing weak economic conditions.Global growth is expected to reach 2.6% in 2013,more or less the same rate as last year. The globaleconomy is forecast to gain speed at the end of theyear and improve in 2014 to 3.2%. However, forthis acceleration in growth to take place, a numberof conditions need to be met. Firstly, the Eurozoneshould continue implementing banking union andmake progress on fiscal and political integration.Secondly, the United States should reduce its front-loaded austerity. Thirdly, emerging markets have tomaintain their rapid expansion. These assumptionsare far from certain and therefore the downsiderisks to the outlook remain high.Global trade grew by just 2.5% in 2012: well belowthe long-term average of 5.4%. We now expectslow trade growth in 2013 due to the weak globalenvironment, credit constraints and increasedprotectionism. Trade between emerging markets ishowever expected to continue growing rapidly.Advanced markets are characterised by acombination of fiscal consolidation and loosemonetary policy. Despite the latter, bank lendingconditions for both firms and households are stilltough. The Eurozone will contract again this year,but may resume positive growth in 2014. Financialmarket conditions have improved significantly overthe past six months, but this has yet to translateinto better economic conditions. Unemployment inEurope has reached a record level and consumersremain pessimistic. Economic growth in the UnitedStates of 2.1% in 2013 and 2.7% in 2014 marks arelatively weak but steady recovery.Emerging markets remain the driving force of globalgrowth. Asia, excluding Japan, is expected to grow6.6% this year, largely thanks to China, whosegrowth is projected to reach 8.2%. Latin Americawill benefit from this strong growth in Asia,increasing its growth to 3.4%, up from a moderate2.7% last year. Eastern Europe is heavily influencedby the weak economic conditions in the Eurozone,but growth may pick up to reflect a better Eurozoneperformance in 2014. Emerging markets face risksassociated with large capital inflows, as theexpansionary monetary policy regimes in advancedmarkets seek profitable investment opportunities.The weak global outlook is however consistent witha stabilisation of the insolvency environment inmany markets, with the aggregate insolvencyfrequency even improving marginally in 2013. TheEurozone shows a moderate increase in the alreadyhigh level of insolvencies, while the Eurozoneperiphery will see a more significant increase.Conditions improve in the Asia-Pacific region andthe United States because of their relatively bettereconomic conditions. In general terms, credit risk iselevated and will remain so throughout the forecasthorizon.Return to contents page
Atradius Economic Outlook51. The global macroeconomicenvironmentLight at the end of the tunnel remains faintThe global economic environment has deterioratedover the past six months and 2013 is not expectedto be much better than 2012, although theconsensus is that, in the second half of 2013, mutedgrowth will resume in the Eurozone. That will raiseglobal growth levels, which now rely on emergingeconomies and, to a lesser extent, the US. However,for this to happen, the Eurozone must stickresolutely to its path of policy change to improvethe architecture of the monetary union. This is anissue fraught with risks - as recent events, such asthose in Cyprus, show. Light at the end of thetunnel therefore remains faint.Continued weakening of global growth…Global growth slid further in 2012 as the impact ofthe Eurozone crisis began to spread to the worldeconomy (see Chart 1.1). Growth was weak in thefirst three quarters (2.3% on average year-on-yearcompared to 2.6% in the same period of 2011),followed by a dismal fourth quarter (1.7% year-on-year compared again to 2.6% in 2011).Global growth was dragged down by the advancedeconomies, whose average quarterly growth wasjust 1% in the first three quarters of 2012,compared to 1.4% in 2011. Indeed, especially in thefourth quarter, growth was minimal at 0.5% year-on-year (1.7% in 2011). Emerging markets too wereaffected: in particular, the average quarterly growthin the first three quarters of 2012 was 4.8% year-on-year compared to 6% in 2011, while the fourthquarter did not deviate much from the first threequarters’ average of 4.8% (5% in 2011).…and trade growth under pressureGlobal trade continued to grow in 2012, albeit at alow rate (see Chart 1.2). With an outcome of 2.5%,trade growth was significantly down on 2011’s 5%and well below the 5.4% long-term average.Indeed, this reflected developments in globaleconomic activity, particularly in the advancedeconomies, as well as ongoing trade financeconstraints and protectionism. 1Imports in theadvanced economies grew in 2012 by just 0.4%(down from 2.9% in 2011), and export growthslumped to 1.5% (from 4.6%). While the advancedeconomies trailed behind the 2.5% global figure,emerging economies’ trade grew more prominently:with imports up by 5.4% and exports by 3.5%.Nevertheless, even these economies could notescape the impact of sliding global growth: fallingfrom 2011’s comparable figures of 8.3% and 5.3%respectively.1The WTO reports a slowdown in the imposition of new trade-restrictive measures taken by countries and notes that a minimalmajority of all measures are facilitating trade. But this hardlycontributes to the downsizing of the stock of trade restrictionsand distortions put in place since 2008.
Atradius Economic Outlook6No relief from fiscal policy…low global growth calls for expansionarySgovernment policy, first and foremost in theEurozone, but that is precisely what we are notseeing from the developments in the governmentdeficit. In 2012 the Eurozone deficit was 3.3% lowerthan in 2011 (4.1%). This pattern is visible for theUS and the emerging economies too. Fiscalconsolidation is a global phenomenon and willcontinue to be so in 2013 and 2014. No relief, or atleast very little, can be expected from fiscal policy –and it is worth investigating the reason why this isthe case. Therefore, we will consider the variouseconomic blocks separately (see Chart 1.3).Chart 1.3 Government deficit(Government budget balance as percentage of GDP)-2024681012142007 2008 2009 2010 2011 2012(e) 2013(f) 2014(f)Source: IMFUnited StatesEurozoneEmerging marketsirstly, looking at the US, its fiscal deficit has beenFreduced rapidly from 13.3% in 2009, although theexpected deficit level for 2014 - at 5.6% - is stillsizeable. The very high debt-to-GDP ratio of morethan 100% can still be easily financed due to thedepth of the US financial markets and the reservecurrency role of the dollar (see Chart 1.4). Still, it isnot thought to be sustainable and has to becontained. At the moment this is done by theautomatic spending cuts that we will describe inmore detail in Section 2 of this report, on theadvanced economies, a process that will erode thisyear’s growth by 0.7%. While the size of theconsolidation seems undisputable, the mix of policymeasures can be improved.Chart 1.4 Government debt(Government debt as percentage of GDP)0204060801001202007 2008 2009 2010 2011 2012(e) 2013(f) 2014(f)Source: IMFUnited StatesEurozoneEmerging marketsSecondly, the Eurozone deficit - 3.3% in 2012 - isconsiderably lower than that of the US’s 8.7%. Thatsignals much more fiscal consolidation in theEurozone than in the US which, in combinationwith its lower debt-to-GDP level compared to theUS, suggests some fiscal leeway for the Eurozone.And arguably the Eurozone needs it, because it iscurrently in recession. However, fiscal stimulus is apolitically sensitive issue and currently not on thecards. Deficits will be further reduced in 2013 and2014: to 2.6% and 2.1% respectively. Nevertheless,building on the IMF warning to be careful withfiscal consolidation in a recession, the pace ofconsolidation in countries such as Greece, Portugaland even Spain is somewhat mitigated.Thirdly, the emerging economies have kept theirgovernment deficits at roughly the same percentageof GDP and are expected to continue to do so in2013 and 2014 (1.7% and 1.8%).2With quite lowlevels of debt-to-GDP, they are well placed to injectfiscal stimulus but will be reluctant to do so.3Stronggrowth in emerging markets means that inflationnow looms large: in India inflation stood at 9.3% in2012 and in Russia at 5.1%. Moreover, access tofinancial markets to finance government spendingis a different matter for emerging economies thanfor advanced economies.In summary, no relief can be expected from fiscalpolicy. There is very limited scope for fiscalstimulus in the advanced economies as deleveragingis needed to bring debt to GDP ratios back to preLehman levels. The emerging economies have amuch better position but are constrained by2At the current economic growth levels this implies a significantincrease of government spending.3China in particular has shown that it does not hesitate toincrease government spending if needed. This was evident whenan infrastructure programme worth USD 158 billion wasannounced in 2011, following the threat of a soft landing ofgrowth.
Atradius Economic Outlook7inflation and financial market access. Relief shouldcome from monetary policy, which continues to beloose, but is largely ineffective at pushing the globaleconomy to a higher growth path.…but monetary policy loosening continuesWhile fiscal policy is constrained and no relief canbe expected to accelerate the global economy,monetary authorities in the advanced economiescontinue to support demand - or at least attempt todo so. They do this by keeping the official interestrates low and providing ample liquidity to thebanks: the latter policy has actually acceleratedsince our November 2012 Economic Outlook.Real short-term interest rates - our price measure ofmonetary easing (or tightening) - have beenglobally flat since November, with official interestrates and inflation rates hardly moving (see Chart1.5). And, at around zero percent, monetary easingis still in full swing, in line with what the globaleconomy needs. However, this hides a notableconvergence in real interest rates betweenadvanced economies and emerging economies.In the advanced economies, the official rates haveremained low, at 0.125% in the US, 0.5% in theEurozone and 0.5% in the UK. However, because ofthe slightly receding (and low) inflation rates in theadvanced economies resulting from weaker demand(see Chart 1.6), the short-term real interest rate hasrisen and, indeed, this indicates some tightening ofa still (very) loose montary policy.In the emerging economies we see the opposite.Official rates are quite high - Brazil 7.25%, China6%, India 7% and Russia 5.25% - but have generallyfallen since the late summer of 2012: even to theextent that monetary easing can be detected for theemerging economies. Monetary policy is looseningsomewhat in the emerging economies, and this issomewhat puzzling in view of their rather highgrowth rates and relatively high inflation. Weshould therefore look at the second weapon in theCentral Bank arsenal - liquidity provisioning - foran explanation.Liquidity provisioning has continued to be plentifulin the advanced economies, and has arguablyaccelerated as reflected in the balance sheets of theCentral Banks (see Chart 1.7). In December 2012 theUS’s Federal Reserve System (FED) announced thatit would step up its quantitative easing programmefrom the USD 40 billion per month announced inSeptember to USD 85 billion, by purchasing longtreasuries following the expiration of its maturityextension programme. Moreover, the programmewas firmed-up by the announcement that it wouldcontinue as long as the unemployment rate stayedbelow 6.5% (and inflation - and inflationexpectations - remain within boundaries). If, as theInstitute of International Finance (IIF) expects,4theprogramme will continue well into 2014, the FED’sbalance sheet will be expanded by another USD 1.6trillion.4IIF Global Economic Monitor, December 2012, p. 15.
Atradius Economic Outlook8In a bid to pull the Japanese economy out of itsdeflationary spiral, in April the Bank of Japan (BoJ)announced a doubling of the amount of money incirculation. 5Meanwhile, and notably, the ECBbalance sheet has shrunk, as the relative calmnessin the financial markets since August 2012 hasallowed a number of banks to replace Central Bankfunding by other means, such as bond issues. Thisdoes not reflect retrenchment from monetary easing,but simply reflects the reduction in the use of thelong-term refinancing operation (LTRO) programmeof EUR 1 trillion6launched early in 2012 to counterserious problems in the interbank funding market,and bank funding more generally. Banks havesimply found other means to finance theiroperations. ECB monetary liquidity provisioningremains adequate and the global picture is one ofmonetary easing through liquidity provisioning.This policy - and here we make the link withmonetary loosening in the emerging economies -has some side effects. In particular, it poses a threatto monetary stability in the emerging economies asmoney seeks a way into the global financial system.To the extent that such a threat is realistic,authorities react with lower official rates.Indeed, the rate cut of 1.25% by the BrazilianCentral Bank should be considered from thisperspective: it relieves upward pressure on theexchange rate and thus the erosion ofcompetitiveness. Monetary policy, originated in theadvanced economies, therefore has a global impact.75This is a dramatic policy change: the balance sheet of the Bankof Japan (BoJ) will increase by 1.1% per month in 2014, whichcompares to 0.54% of US GDP. Financial Times, April 5, 2013.6As at April, EUR 225 billion of the programme, which originallygenerated EUR 500 billion extra liquidity, has been paid back.7Exchange rate volatility has occurred over the past month as aresult of increased monetary activity: in particular from the FEDand BoJ. This has revived the discussion on currency wars. TheTensions in the banking system ease…In our previous Economic Outlook we stated thatcredit conditions in the advanced economies weretight despite the massive monetary loosening takingplace, particularly in the US. We also pointed at thedifference between the situation in the US and theEurozone where, in the latter, conditions weresignificantly worse. However, in neither region wasmonetary transmission working as it should be.Now we will take stock of the current situation andargue that, despite some positive developments inthe Eurozone, the overall picture of theeffectiveness of monetary policy in the advancedeconomies remains bleak.This is reflected in the share prices of banks overthe past half year: prices for US and Eurozonebanks remain historically low compared to pre-crisislevels (see Chart 1.8). But, crucially, a positivedevelopment can be seen, particularly in theEurozone. The index is 60% higher than its lowpoint in mid 2012.8This is the result of the ECBannouncement of an Open Market Programme thatwe discuss below. In essence, the ECB has said thatit will do everything to prevent the Eurozone fallingapart. It had, and still has, a significant impact:financial market confidence is cautiously returningto the Eurozone.threat is that other countries (like Brazil) will start to address anynegative impact on competitiveness. If conducted on a largescale, a currency war can arise. At this stage, with the ECB andFED focusing on domestic monetary targets, and therefore notforeign competitiveness, such a development seems lessprobable: a G20 agreement announced in February 2013 alsoconfirms this position.8The Standard &Poor’s index for US banks is 12% higher.
Atradius Economic Outlook9Chart 1.9 Private flows to the perifery(in Euro billion)-500-400-300-200-10001002003002007 2008 2009 2010 2011 2012-Jan-Aug2012-Aug-SeptSource: Financial Times, INGLet’s look at some indicators to support this. Firstly,private money flows to the peripheral9countrieshave started to return (see Chart 1.9). Since August2012, around EUR 93 billion has flown into thesecountries. While this is still far below the amount ofEUR 824 billion that has flown out of thesecountries at an accelerating pace since 2010, itdemonstrates a turning point: money is coming back.Chart 1.10 Net balance with Eurosystem(in Euro billion)-1200-900-600-300030060090012002007 2008 2009 2010 2011 2012 2013Source: ECBDNLF (DEU, NLD, LUX, FIN)GIIPS (GRC, ITA, IRL, PRT, ESP)Secondly, the so-called ‘Target2’ balances in theEurozone banking system have started to improve,especially since Autumn last year (see Chart 1.10).The imbalances largely reflect the lack of(inter)bank funding for peripheral countries that wehad already noted in last November’s EconomicOutlook.10By mid January 2013, Central Banksfrom Germany, The Netherlands, Finland andLuxembourg had a claim of EUR 888 billion on theECB, while the Central Banks of Spain, Italy, Greece,Portugal and Ireland were due a similar amount.This EUR 888 billion is down from EUR 1,055 billionin August. While the imbalance is still high, effortsto reduce it have been made: peripheral (inter)bankfunding has improved. Thirdly, US money market9The Eurozone periphery is here defined as; Spain, Italy, Ireland,Greece, and Portugal.10See Cechetti, S., McCauley, R.N. and McGuire, P.M.,Interpreting Target2 Balances, BIS working paper no. 393,December 2012.funds are returning. November 2012 figures showthat US money funds had raised their holdings forthe fifth consecutive month: by 8% to French banksand 26% to German banks. Again, the allocation isstill 60% below the peak of May 2011 when 30.6%of holdings were in European banks.While tensions in the banking system have easedand confidence cautiously returns, the system stillseems vulnerable. In this context we should point atthe holdings of government bonds issued bypheriperal countries that we reported on in lastNovember’s Economic Outlook. The pattern that wedetected at that time - of declining but still sizeableportfolios held by French and German banks andincreasing and large portfolios held by Spanish andItalian banks (of their local governments) -indicated a risk of a so-called ‘negative feedbackloop’.Such risk has not receded since November. On thecontrary, while French and German banks haveindeed further reduced their peripheral governmentholdings, this reduction has been outweighed bythe higher purchase by Spanish and Italian banks:with 24% and 42% respectively added sinceNovember. This development poses an increasedrisk. Firstly, the holding of peripheral governmentbonds by the (still vulnerable) banking sector as awhole seems to have risen. Secondly, the holdingsnow weigh more heavily on the weaker part of theEurozone banking sector: the peripheral one.…but monetary transmission still hamperedAlthough some confidence has returned, theEurozone banking system is still vulnerable. Thereis as yet no visible improvement in the monetarytransmission mechanism, measured by growth inbank lending. Indeed, lending to companies in theEurozone shrank in 2012, while lending tohouseholds remained neutral. That clearly reflectsthe slow growth of economic activity – but is also acause of it as the lack of credit restrains economicgrowth. This is confirmed by the continuedtightening of loan supply conditions in theEurozone - for firms as well as households. Wedescribe this in more detail in Part 4 of this report.Banks are simply very reluctant with their lendingin the periphery and also in other countries. The USdoes a lot better in this respect, with an increase inlending to both firms and households (see Chart1.11). This reflects a higher level of economicactivity – and more besides, as loan supplyconditions are also softening. The banking system
Atradius Economic Outlook10in the US is in better shape following interventionssince the 2008 crisis that have allowed the system,at least partly, to transmit the various doses ofmonetary stimuli provided by the FED.Policy steps in the Eurozone: some progressIn last November’s Economic Outlook we referredto the policy steps that in our view were importantin helping contain last summer’s escalation of theEurozone11, therefore avoiding the recurrence of aLehman type event. These policy steps wereidentified as the Fiscal Compact, the EuropeanStability Mechanism (ESM) configuration, theEuropean Banking Union and the ECB purchase ofgovernment bonds. At the time we pointed out thatthese were indeed important steps to strengthenthe configuration of the Economic and MonetaryUnion (EMU), but that much still needed to be doneand the implementation risk of these measures washigh. Given the importance of these steps and therisk that is still linked to a re-escalation of theEurozone crisis, we will now provide a brief updateof progress on this issue. Fiscal Compact Treaty. The Fiscal Compact ismeant to enhance budgetary discipline in theEuropean Union (EU) - or rather, in the EMU. Itdoes so by enshrining budgetary discipline innational law, including a self-correctingmechanism, with the European Commissionhaving a policing role. The Compact was to takeeffect on 1 January 2013 if at least 12 EUmembers had ratified it and indeed this hashappened, with 17 member states, including 15EMU members, having ratified the Treaty.1211See Atradius Economic Outlook, November 2012, p. 11.12Early in March 2013 the Treaty ratification was still in processin Belgium and The Netherlands. European Stability Mechanism (ESM). TheESM was established in September 2012 tosucceed two existing rescue funds. It has alending capacity of EUR 500 billion available tocountries subject to an IMF programme. Inaddition, it was agreed in October 2012 that thefund could be used to recapitalise banks(without government involvement, thusbreaking the loop between banks andgovernments). However, this is subject to abanking supervisory mechanism being in place -presumably sometime during 2013. A decision isstill pending on the question of whether directbank recapitalisation will be allowed for casesdiscovered before 2013. European Banking Union. The steps forcreating a banking union involve a supervisionmechanism, a mechanism for bank resolutionand a deposit insurance scheme, all at EU level.The ECB has agreed to take on a supervisoryrole for around 150-200 of the EU-wide 6000banks, to become effective by March 2014 atthe earliest. The mechanisms for bank resolutionand deposit insurance are yet to be arranged,with a proposal for the former to be drafted bythe European Commission in the first half of2013. So far, there has been little appetite topush forward the deposit insurance scheme. ECB purchase of government bonds. As afollow-up of the ECB president Draghi statement‘To do whatever it takes’. Open MarketTransactions (OMT) were announced, underwhich the ECB will purchase an unlimitedamount of government bonds, conditional uponthe country involved being subject to an IMFprogramme. The announcement has so far notled to any action by the ECB but has taken thepremium for an EMU break-up out of thegovernment bond yields.On the basis of this overview it can be argued thatthe Eurozone has indeed made progress and thatthe implementation risk is lower than at the timethe measures were announced. The Fiscal Compactis in place, as is the ESM. The ECB has made animportant statement with the announcementregarding the use of OMT as a backstop. It hasprovided (relative) calmness to the financialmarkets as shown above (see also Chart 1.12).
Atradius Economic Outlook11Despite this, the most important, if not critical, step,involving the break of the vicious loop betweenbanks and government finance, via the creation of aEuropean Banking Union and direct bankrecapitalisation by the ESM, still needs to befinalised. Therefore, there is still a significantamount of implementation risk surrounding thesepolicy measures - and uncertainty (whether or notvisible in yields) remains.The threat of an oil price spike drifts awayLarge swings in oil prices are a threat to the stabilityof the world economy and therefore pose a risk thatwarrants continued monitoring. Since our lastEconomic Outlook the oil price has been moving ina band between USD 100 and 120 per barrel forBrent (see Chart 1.13). This relatively stablesituation comes at a time when the geopoliticalthreat of Iran and more broadly unrest in theMiddle East has clearly not abated. Talks betweenIran and the so-called ‘P5+1’ (US, UK, France, China,Russia and Germany) are taking place, but Irancontinues on a course potentially leading to theproduction of a nuclear weapon.In March 2012, Middle East political tensions hadcaused a spike in the oil price of USD 128 per barrelout of fear for a production cut. Such a spike looksless likely now. The global economy is expected togrow at a much slower pace than envisaged at thattime (see below), depressing demand for oil. Thelevel of USD 150 per barrel that the IMF fears willdent growth by 1-1.5% in many parts of the worldtherefore seems some way off: indeed, even furtheraway than in November, when we already signalledan easing of the upward oil price pressure.Despite this current reassuring calmness over the oilprice, volatility is never far away. Tensions in theMiddle East and uncertainty over global economicdevelopments remain. Therefore, moves outside thecurrent USD 100-120 per barrel band, especiallydownwards, are still possible. Oil producers in theMiddle East have attempted to dampen the impactof the Arab Spring by pushing up governmentexpenditure on, amongst other things, socialprogrammes.As a consequence, an oil price of around USD 85-90per barrel would now hurt these countries andprobably prompt Saudi Arabia, in its role as a swingproducer, to prevent the oil price falling below thatlevel. Indeed, there is nothing that may stop the oilprice from rising above that level, at least in theshort run. In the longer term we may see, in ascenario of relatively high prices, further increasesin production from previously uneconomicalsources, reducing price pressure. As we argue in ourOil Market Outlook13of April this year, currentprice levels have already boosted supply from tarsands and light tight oil, particularly in the US. Butanother such revolution, as well as substitution toother energy means, takes time.Downward adjustment of growth forecastsThe continuation of the slide in global GDP during2012 has had a significant impact on the forecastfor growth levels in 2013. In last November’sEconomic Outlook we had warned of a significantlowering of growth projections for 2013. Already,during the period from March to September 2012,expectations for global growth in 2013 had been cutby 0.4 percentage points. This figure was dominatedby the Eurozone adjustment of 0.7%, reflecting theEurozone crisis peak during the summer of 2012,13See Atradius Economic Research ‘Oil Market Outlook’, 2013.
Atradius Economic Outlook12with other major regions also seeing downwardadjustments.The faint rays of light in advanced economies, aswe have outlined above, will not become visibleuntil 2014, when the Eurozone is expected to returnto growth - albeit by a very modest 0.9% - and USgrowth is expected to strengthen to 2.7%. For thisto happen, the turning points for GDP growth willhave to become visible in the second half of 2013.We will elaborate on this in the next chapter of thisreport.With the relative calmness in the financial markets,we might reasonably expect to see a positivedirection in growth forecasts. However, on thecontrary, the slide in global growth forecasts haspersisted from October 2012 to March 2013: downby another 0.3 percentage points, one percentagepoint below the forecast slide in the previous period(see Chart 1.14). Again, the Eurozone adjustmentstill dominates the scene (0.6 percentage pointdecline), with other major regions following at aslower pace and showing a more diverse picture.The revised forecast for the US is only -0.2percentage points, and for Asia there has been norecent adjustment.These forecasts are based on the presumption thatthe Eurozone will indeed remain on the path ofreinforcing the EMU architecture by resolutelyimplementing the policy measures discussed above.Indeed, muddling through the crisis, by relying onthe ECB’s promise not to let the Eurozone fall apart,will not be enough. If the necessary implementationhappens, the Eurozone may indeed start to showgrowth in the second half of 2013 and continue itsupward path in 2014 with some slight growth.Chart 1.14 Change in GDP forecast, 2013(Forecast differences in percentage points)-0.8 -0.6 -0.4 -0.2 0Asia PacificLatin AmericaEastern EuropeTotalUnited StatesWestern EuropeEurozoneSource: Consensus ForecastsChange in forecast Oct-Mar 2013Change in forecast Mar-Sept 2012This highlights the most significant downside risk tothe forecast: that of a Eurozone ‘muddle through’scenario without any further convincing steps toreinforce the EMU. Without those steps, events likethe Italian elections and the Cypriot bail-out (orbail-in for that matter) will continue to weighheavily on real economic growth, despite thecalmness in the financial markets. If that happens,the 1% 2014 forecast for the Eurozone will be toooptimistic and global growth lower than currentlyprojected. That is the most significant risk to thecurrent forecast and more likely than a Eurozonebreak up: as we have repeatedly pointed out, weexpect the Eurozone to stay together.14These dynamics leave us with a global growthforecast for 2013 of a rather muted 2.6% (see Table1.1). Asia continues to be the growth engine of theworld economy, with projected growth of 4.8%(4.7% in 2012). Support is coming from LatinAmerica where 3.4% is projected (up from 2.7% in2012). The US’s forecast for 2013 stands at 2.1%,while the Eurozone’s continuing problems arereflected in a forecast contraction of 0.4% (0.5% in2012).Our conviction in this respect is founded not somuch on the soundness of the current EMUconfiguration but rather the necessity for membersto avoid the huge economic (and potentially socialand political) cost of leaving. Therefore, the chancesof a Eurozone break up are limited over the currenttime horizon of our Outlook.Table 1.1 Real GDP growth - Major regions2010 2011 2012 2013f 2014fWestern Europe 1.9 1.5 -0.3 0.0 1.2United States 3.0 1.8 2.2 2.1 2.7Eurozone 1.8 1.5 -0.5 -0.4 0.9Asia Pacific 7.1 4.6 4.7 4.8 4.9Latin America 6.3 4.2 2.7 3.4 3.8Total 4.3 3.1 2.5 2.6 3.2Source: Consensus Forecasts (April 2013)14See our publication ‘Sticking Together; the Future of theEurozone’.Return to contents page
Atradius Economic Outlook132. Prospects and risks in advancedeconomiesA weak outlook across advanced economiesThe already bleak outlook for 2013 presented in ourNovember 2012 Economic Outlook has worsened.Economic growth was disappointing in the fourthquarter of 2012 and expectations for growth in2013 have been revised downwards across alladvanced economies. The main theme driving theforecast revisions is the negative cycle betweengovernment austerity and the resulting damage tothe real economy. Both consumers and producersface higher taxes, lower subsidies and policyuncertainty.In the US, consumer confidence has fallen over thepast six months as consumers feared the ‘fiscal cliff’at the end of the year. In the event, the cliff wasavoided and was replaced by a slower ‘sequester’ ofgovernment spending cuts (see Chart 2.1). Incontrast, Eurozone consumers took confidence inthe eased pressure on the monetary union.However, confidence remains low asunemployment has increased and benefits havebeen cut.Producer confidence shows a similar pattern, withthe US deteriorating and the Eurozone improving(see Chart 2.2). Output in the US grew by a meagre0.1% in the fourth quarter of 2012 compared to theprevious quarter, as companies postponedinvestments in anticipation of the fiscal cliff. TheEurozone actually contracted 0.6% over the sameperiod, although producers seemed to become lesspessimistic.The US is forecast to grow 2.1% this year, downfrom 2.2% in 2012 (see Table 2.1). The Eurozone isexpected to contract by 0.4% after shrinking 0.5%in 2012. The UK is however expected to improvefrom 0.3% in 2012 to 0.7% in 2013. Growth inJapan is projected to moderate from 2.0% in 2012to 1.3% in 2013.Table 2.1 Real GDP growth - Major markets2010 2011 2012 2013f 2014fEurozone 1.9 1.5 -0.5 -0.4 0.9United States 2.4 1.8 2.2 2.1 2.7United Kingdom 1.8 1.0 0.3 0.7 1.6Japan 4.7 -0.5 2.0 1.3 1.3Source: Consensus Forecasts (April 2013)Eurozone: another year in recessionThe Eurozone crisis is not over yet, as evidenced bythe messy bail-out of Cyprus. Tensions in financialmarkets have eased considerably since the secondhalf of 2012 on the new commitments by the ECB,but the real economy shows no sign ofimprovement. Domestic demand is sluggish asconsumer spending contracted in 2012.Governments also continue their strategy of fiscalconsolidation and businesses are unwilling to invest.Current forecasts show an improvement at the end
of 2013 and modest growth in 2014, but theseexpectations are highly vulnerable to downside risk.In terms of the Eurozone’s economic performancethere are broadly two groups. The SouthernEuropean countries of Italy, Spain, Portugal andGreece all contracted sharply in 2012 and are alsoexpected to shrink in 2013 (see Table 2.2). Then,there are countries that show modest growth orstagnation such as Germany, France, Ireland andAustria.This division is also visible in the change in the sizeof the economy since 2008. Germany had alreadygrown beyond its pre-crisis size by the beginning of2011 and is expanding further (see Chart 2.3).However, the economies of Spain, Portugal andItaly are still almost 10% smaller than they were atthe end of 2007. The Greek economy has shrunk bya massive 25% over the past five years: one of theworst performances in modern history.The return of growth to the Eurozone is uncertain.The pick up in growth has to come from increasedexports to non-Eurozone markets and thetransmission of better financial market conditionsto the real economy. But financial markets can beeasily disrupted, as the bail-out of Cyprus hasshown. In the event, the bail-out did not causewidespread concern of contagion, but it could haveeasily ended differently: the Cypriot government issaid to have seriously considered leaving the euro.Uncertainty over the political situation in Italy, thefederal election in Germany in September or newbail-out requests could reignite fear on the financialmarkets and depress economic growth.A difficult business environmentAll Eurozone countries face a difficult businessenvironment. The latest output indicators, based onpurchasing managers information by Markit, showcontinued contraction across most markets in thefirst quarter of 2013. The Eurozone aggregate indexreached 46.5 points, indicating a modest contraction.France in particular is facing a steep deterioration inits economic performance, with the possibility of alarger contraction in the first quarter than in Spainor Italy. Even Germany, which so far had been ableto show modest growth, appears close to stagnation.Principally, those industries dependent on domesticdemand will feel the pinch. Overall, retail trade wasdown 1.4% year-on-year in February. The drop wasalmost 10% in Spain, while retail trade increased inIreland (1.1%) and Germany (2.1%). Theconstruction sector too was under pressure, with a9.1% yearly reduction in production seen inJanuary. Spain did relatively well, despite itshousing ‘bust’, with a contraction of just 1%compared to a drop of almost 10% in France and14% in the Netherlands.The difficult environment for companies translatesinto ongoing upward unemployment levels acrossthe Eurozone. The unemployment rate climbedabove 12% in March: the highest level since theintroduction of the single currency in 1999 (seeChart 2.4). France stands out with a steep increasein unemployment levels to 11% over recent months.Unemployment remains low in Germany (5.4%) andAustria (4.8%). On average, youth unemployment isat 23.9%, but is above 50% in Spain and Greece.Table 2.2 Real GDP growth - Major markets2010 2011 2012 2013f 2014fAustria 2.3 2.7 0.7 0.6 1.5Belgium 2.4 1.8 -0.2 0.1 1.1France 1.4 1.7 0.0 -0.1 0.7Germany 3.6 3.0 0.7 0.7 1.7Greece -4.9 -7.1 -6.4 -4.9 -1.4Ireland -0.8 1.4 0.9 0.9 1.9Italy 1.4 0.6 -2.4 -1.4 0.5Netherlands 1.6 1.1 -1.0 -0.8 0.8Portugal 1.9 -1.6 -3.2 -2.6 0.0Spain -0.1 0.4 -1.4 -1.6 0.2Eurozone 1.9 1.5 -0.5 -0.4 0.9Source: Consensus Forecasts (April 2013)Atradius Economic Outlook14
The case for fiscal reformAs mentioned in Part 1, governments still face largebudget deficits. During the financial crisis of 2008,governments across the Eurozone saw a seriousdeterioration in their fiscal balances as a result oflower tax income and increased expenditure onsocial benefits. Bank bail-outs added to governmentdeficits and debt levels and the sustainability ofgovernment debt has come under severe pressureas a result of these forces. Chart 2.5 shows the fiscalbalance and debt to GDP ratio in a number ofEurozone markets, clearly indicating that Greece,Ireland and Portugal are facing pressure, with veryhigh debt levels and large fiscal imbalances. Theyare closely followed by Spain, Italy and France,where a loss of market confidence would push upfinance rates making it more expensive - orimpossible - for these governments to finance theirdeficits and roll over their existing debt.Chart 2.5 Fiscal sustainability(Percentage of GDP, 2012 values)AT BEFIFRGRITPTESDEIRNL-9-8-7-6-5-4-3-2-10140 60 80 100 120 140 160 180Debt to GDP ratioFiscalBalanceSource: IHS Global InsightGovernment austerity measures have reduced fiscaldeficits substantially since 2009. Eurozonegovernments cut spending and increased taxes in aneffort to improve their budget balances. As a result,the deficit dropped significantly over 2011 and2012 in all markets (see Chart 2.6). The programmecountries - Ireland, Portugal and Greece - saw thebiggest improvement and Spain was also able toreduce its deficit by 3 percentage points in just twoyears. The improvement in Germany was supportedby positive economic growth, which automaticallyreduces government spending on social benefitsand increases tax returns. Fiscal consolidationefforts are likely to continue for some years.Chart 2.6 Change in fiscal balance 2011-12(Percentage point change)012345IR PT DE GR ES FR NL IT AT BESource: IHS Global Insight23Fiscal consolidation by means of austerity measureslimits growth, because such measures deterconsumer spending and business investment. Thelarge-scale consolidation across Southern Europeanmarkets partly explains their poor economicperformance. As a result, the European Commissionis taking a softer stance on the budget target,replacing the 3% deficit target by the more flexiblestructural deficit target. This year Portugal, Spain,the Netherlands and France are once more allowedto overshoot their 3% target, while Spain andPortugal are likely to miss their 3% targets again in2014.The European Commission would like to see morefocus on structural reform instead of austerity.Structural reforms are designed to boostproductivity and stimulate growth. Austerity alonecannot improve the medium and long-term debtsustainability: that also requires economic growth.According to the OECD, the countries with a bail-out package have introduced substantial reformover the past years, with Greece, Ireland andPortugal making notable progress in this respect(see Chart 2.7). Of the Southern European countries,Italy has demonstrated the least reform, feedingworries about its medium-term economicdevelopment. It remains uncertain whether the newgovernment sworn in on 28 April will be able topush through the measures needed to reform theeconomy and improve Italy’s sluggish long-termgrowth rate.Atradius Economic Outlook15
Chart 2.7 Reform efforts across Europe(OECD responsiveness index 2011-2012)0 0.2 0.4 0.6 0.8 1NetherlandsBelgiumGermanyFranceEuro areaItalySpainPortugalIrelandGreeceSource: OECD (2013)Exports to drive growthAnother way to stimulate growth is to increaseinternational competitiveness and boost exports.This can be achieved by an improvement inproductivity or by lowering labour costs. Unitlabour costs have indeed come down significantly ina number of reform countries (see Chart 2.8). Spainhas improved its position considerably since 2010and made large gains in 2012. However, the realeffective exchange rate has improved moremodestly because of a relatively high inflation ratecaused by an increase in VAT. Ireland and Portugalhave also lowered their labour costs, but not so inItaly, where the labour costs rose in 2012, undoingthe gains from earlier years.Chart 2.8 Change in Unit Labour Costs(Percentage change in level index)-12-10-8-6-4-2024ES IR PT EZ FR BE NL AT IT DESource: Eurostat2011-20122009-2012Exports are indeed growing - and not only in thecountries that have implemented reforms. Exportsincreased in all markets in 2012 except for Portugalwhere they stayed more or less unchanged. Thestrongest growth was seen in the Netherlands,Germany and Spain (see Chart 2.9). In recent years,Spain has been the best performing market in thisrespect, with export growing more than 9% since2010: slightly faster than its pre-crisis averagegrowth of 2.8% per year. Growth was greatest inexports to emerging markets, but very limited inexports to other Eurozone countries. The Spanishexperience suggests that it is indeed possible forEurozone markets to improve their exports byreducing labour costs.Chart 2.9 Export growth(Percentage change)-2%0%2%4%6%8%10%NL DE ES EZ IR IT AT BE FR PTSource: Eurostat20122010-2012A long way to goIt will take many years before the Eurozoneeconomy returns to its pre-crisis average growthrate. The reforms and consolidation efforts bygovernments across the Eurozone are medium tolong-term projects. Moreover, the recovery of thelabour market, business environment and bankingsector all take time. The modest growth projectedfor 2014 could make the adjustment process easierfor all parties involved but risks to the fragileoutlook abound: the implementation of the bankingunion should continue, future bail-outs should beresolved more decidedly and governments must putstructural reforms ahead of austerity measures.United States: opposing forcesInvestors seem optimistic about the US economy, asthe Dow Jones index reached a new record high inFebruary 2013. However, the economic recoverycould still be crushed by large scale fiscaladjustment. Optimists point to high companyprofits, increasing consumer wealth and fallingunemployment to vindicate high asset prices, andassume that the economy is strong enough tohandle the government’s ‘fiscal sequester’ ofspending cuts. The budget cuts began in March thisyear and spending could drop by 1.9% of grossdomestic product in 2013 if the government isunable to reach a new agreement.15That wouldreduce growth significantly, risking derailment ofthe economic recovery.15The Economist, 2 March 2013Atradius Economic Outlook16
The upside: a strong recoveryDespite the weak 0.1% quarterly growth in the lastquarter of 2012, the US economy is showing signsof strong recovery. According to Markit, themanufacturing sector is expected to expand at arobust quarterly rate of around 2% in the firstquarter of 2013. Markit’s index of manufacturingproduction, based on purchasing managers, hasshown great improvements since November 2012:reaching 54.3 points and indicating solid expansion.Output has also improved: in February achieving itsbest growth since March 2012, thanks to anincrease in new orders.Investment in the construction sector has alsorecovered markedly since 2010, as a result of thestabilisation of the housing market. Investment inresidential and non-residential constructionincreased 7% in 2012, while housing starts were up37%. The recovery is based on rising house prices.House prices bottomed out in the second half of2011 after contracting by almost 60% (see Chart2.10). Prices rose slowly throughout 2012 and arelikely to continue to improve in 2013. As a result,delinquency rates have stabilised, but remain wellabove their pre-crisis level.The industry has received a further boost from theoil and shale gas revolution, which has reducedprices and increased income for domestic energyproducers. Gas production increased by almost 30%between 2005 and 2011 and oil production rose bymore than 10%. Production levels are expected tocontinue to rise in the coming years. Both oil andgas prices in the US are below world prices, creatingan advantage for energy-heavy industries overtheir foreign competitors.Eventually the US may become energy independentand already the drop in energy imports has led to asubstantial improvement in the current accountbalance, reducing the US’s dependence on foreignfinancing.Better business conditions are also benefitingconsumers as the labour market picks up: theunemployment rate decreased from 10.0% in 2009to 7.7% in February 2013 (see Chart 2.11). However,as we said in last November’s Economic Outlook,the improvement in the employment figures istaking longer than in previous economic recoveries.Data on the participation rate – the proportion ofpeople actually employed - reveals a deeperproblem: that the rate has dropped significantlyover recent years and was just stable throughout2012. This suggests that the reduction inunemployment is mostly the result of peopledropping out of the labour force – i.e. simplystopping looking for work. Recent figures on jobcreation may indicate a more positive development,with 236,000 jobs added in February this year,while the number of claims for unemploymentinsurance has also reached a new low.Consumer wealth received a boost from improvinghousehold balance sheets, thanks to higher houseprices and increased stock market values. Totalhousehold asset value increased by 7.4% in 2012:growing by 22% since its lowest point in 2009. Bythe end of 2012, households had also reduced theirdebt levels to an average of USD 47,000 per capita:down 1.6% on 2011. The ratio of financialobligations to disposable income is even better andis now at its lowest level for thirty years.Atradius Economic Outlook17
Increased net wealth and slightly betteremployment conditions are encouraging householdsto spend and, as a result, consumer spendingincreased by almost 2.0% in 2012. While this is stillslightly below the 2.9% average growth in spendingbetween 2001 and 2007, it still indicates a positivetrend. Car sales also rebounded in February - to644,500 - back to their pre-crisis level (see Chart2.12). Nevertheless, consumer confidence remainssubdued by uncertainty over spending and taxingpolicies from Washington.Downside: the fiscal sequesterThe government deficit came down to 7.0% in 2012,but remains unsustainable in the medium term.There are two reasons; Actions to combat the deep financial crisispushed down revenues and increased publicspending. The deficit increased to 10% in thewake of the financial crisis and has reduced onlymodestly since then; Government spending on Medicare andMedicaid is expected to increase rapidly overthe next decade. The Congressional BudgetOffice estimates that government spending onhealth insurance for the elderly, disabled andpoor will double over the next decade from USD717 billion in 2012 to USD 1,475 billion in 2023.The government avoided the fiscal cliff (i.e. theabrupt introduction of large scale spending cuts andtax increases) at New Year, but was unable to stopthe subsequent ‘sequestration’ of USD 1.2 trillion inautomatic spending cuts over the next decade thatbegan on 1 March.The sequestration was part of the 2011 BudgetControl Act intended to force Republicans andDemocrats to agree on a more sensible way toreduce the deficit by USD 1.2 to 1.5 trillion. Theyfailed to reach an agreement. A last-minute politicaldeal pushed the implementation of thesequestration from 1 January to 1 March andreduced the level of the spending cuts to aboutaround USD 64 billion in 2013.If the spending reductions are implemented in full,they will lower economic growth by 0.7% in 2013,according to estimates by Roubini GlobalEconomics 16. Unemployment will also suffer,reducing far less than previously anticipated.Defence will be hit hard by cuts of around 8% whilenon-defence spending will be cut by 5%. The harshpotential effects of the measures mean thatpoliticians continue to try to reach a new agreement.The Democrats need the support of the Republicansto get any agreement past the Senate, and this isproving extremely difficult. President Obama wantsto increase tax revenue over the next decade tocover part of the budget reduction. Republicansargue that the increase in tax revenues of aroundUSD 650 billion over the next decade, part of thesmaller fiscal cliff deal proposed by Obama inDecember, is sufficient and that the rest of thereduction should come from cuts in spending. Anydeal would only partly reduce the total amount ofsequestration; large scale budget reform isinevitable.Overall, the US economy is gaining in strength, butgrowth remains muted by federal spending cuts.The outlook for the medium term is positive as thefiscal rebalancing is most effective during 2013. Asa result growth is expected to improve to 2.7% in2014.United Kingdom: a weak recoveryThe UK barely avoided a recession last year, butgrowth is currently expected to gain some tractionin 2013 and 2014. The economy grew by 0.3% in2012, while output fell by 0.3%, quarter-on-quarter,in the final quarter. Growth is projected to increaseto 0.7% in 2013 and to 1.6% in 2014, in line withslowly improving conditions across Europe.The UK lost its sovereign triple-A rating from creditagency Moody’s and Fitch on 22 February and 19April respectively, because of its ongoing economic16RGE, ‘Self-inflicted Wounds: Sequestration Hits the U.S.’, 28February 2013Atradius Economic Outlook18
problems. According to Moody’s, three factorsincrease the degree of sovereign risk: the medium-term growth outlook continues tobe weak; this weak growth makes it more difficult for thegovernment to balance its books; and high and rising government debt means there islittle room to absorb new shocks.The rating change reduced the government’screditworthiness, but has not had any effect onfinancing conditions and the real economy.Not all sectors are in bad shape. Business volumesin the service sector have been improving formonths, according to Markit’s purchasing managers’index. Payroll numbers have also increased andconfidence in the outlook has improved to itshighest level in ten months. However, the index foroutput in the construction sector indicatescontraction and, in March, new orders received byconstruction companies fell for the tenthconsecutive month. The manufacturing sector isalso expected to show a modest contraction in thefirst quarter of 2013, with manufacturers reportingfalls in both new orders and production in March.Consumer confidence improved substantiallythroughout 2012, but has remained stagnant sinceNovember. Better conditions on the labour marketstimulate confidence. The unemployment ratedropped from a peak of 8.4% at the end of 2011 to7.8% in December last year, but still has some wayto go regain 2007’s rate of 5%. Consumerconfidence was further stimulated by stabilisinghouse prices (see Chart 2.13). Prices have actuallybeen increasing since the second half of 2012,boosting household wealth and spending power.The government is implementing a harsh austerityprogramme to reduce the large budget deficit. Thedeficit widened from 2.5% in 2007 to 11% in 2009as the financial crisis hit (see Chart 2.14).Adjustments have since reduced the deficit to 6.5%in 2012. However, the austerity measures havetaken their toll on both consumer demand andbusiness investment, lowering economic growth.Subject to the government remaining in power afterthe next election, its plans are likely to continuebeyond 2020. Record low interest rates and largescale intervention by the Central Bank arestimulating the economy (the Bank of England hasexpanded the monetary base four times since 2009).The positive outlook for higher economic growth in2013 could be countered by the more negativeimpact of government measures on growth orweaker than expected economic performance acrossmainland Europe.Japan: massive quantitative easingThe Japanese economy may benefit from the newgovernment’s drastic changes being designed to pullthe country out of its decade-long periodof deflation. Consumer prices are forecast to grow0.1% in 2013 and 1.9% in 2014. Businessinvestment and industrial production are alsoforecast to grow robustly in 2014 (by 3.4% and3.6% respectively). Overall, economic activity isexpected to increase 1.3% in both 2013 and 2014.This is slightly lower than the 2.0% recorded in2012, as the economy recovered from the 2011earthquake and tsunami.At the beginning of this year, the new governmentof Prime Minister Shinzo Abe focused on improvingthe economy. The general course of action outlinedby the government is threefold:Atradius Economic Outlook19
Atradius Economic Outlook20 push the Bank of Japan towards a loosemonetary policy; employ a flexible fiscal policy combiningmeasures for short and mid term stimulus; and initiate a programme to stimulate potentialgrowth.On 23 January the Japanese government declaredthat it will commit to a new fiscal stimulus packageof 23 trillion yen. The government has alreadyannounced that it will spend 10.3 trillion yen of thispackage on post-quake reconstruction, stimulus forinvestment and welfare measures. An immediatedrawback is that the government deficit is likely toexceed 11% of GDP in 2013 (see Chart 2.15) andthis could prove detrimental to Japan’s alreadyrecord debt-to-GDP ratio.The goal of loose monetary policy is tosimultaneously achieve depreciation of the yen(see chart 2.16) and avoid further deflation. Thenew Bank of Japan governor Haruhiko Kuroda,appointed in March this year, supports the PrimeMinister’s policy.Following his appointment, Kuroda declared thatthe Bank of Japan will abandon interest rates as atarget and focus instead on the monetary base.Indeed, the Japanese Central Bank is aiming toalmost double the monetary base by the end of2014. Subsequently, on 4 April, Kuroda announcedthat the monetary base will be substantiallyexpanded and that the Bank of Japan is committedto bringing inflation up to 2%, seamlessly aligningthe goals of the Bank of Japan with those of thegovernment.At the same time, the Prime Minister is hoping thisradical course will help him to win back the upperhouse this summer. Since household expectationsabout unemployment have improved, the economicsituation is regarded more positively, businesssentiment among manufacturers is soaring and theyen is steadily depreciating, the Prime Minister hasevery reason to be optimistic.However, there is concern about the lack ofstructural reform: overcapacity, high public debtand an ageing and shrinking population willcontinue to depress growth. Furthermore, eventhough the yen is steadily depreciating, there are noconclusive signs of increased demand for Japaneseexports. Japan will have to carefully assess its debtposition as it maintains the world’s highest debt-to-GDP ratio and the second largest public debt,second only to the US.Return to contents page
Atradius Economic Outlook213. Prospects and risks in emergingeconomiesStrong and stable growthEconomic growth in the emerging economies hasslowed in recent years due to the stagnation in theEurozone and the US, but remains significantlyhigher than in the advanced economies. Comparedto advanced countries, emerging markets have moreroom to manoeuvre in the event of an economicslowdown. However, looking in more detail weconclude that there is quite some differencebetween various less developed markets. All havetheir own internal problems, which should beaddressed to sustain high economic growth. In theshort term we will not see a return to the highgrowth figures of before the financial crisis.Table 3.1 Real GDP growth - Regional aggregates2012 2013f 2014fAsia (excluding Japan) 6.1 6.6 6.7Eastern Europe 2.4 2.7 3.6Latin America 2.7 3.4 3.8Middle East & North Africa 3.6 2.5 3.8Source: Consensus, IHS Global Insight (April 2013)Asia: the persistent economic driving forceAsia remains the driving force of the worldeconomy. For the region as a whole, economicgrowth is estimated at 4.8%, more or less the sameas last year (4.7%).Table 3.2 Real GDP growth - Asia2010 2011 2012 2013f 2014fChina 10.4 9.2 7.8 8.2 8.0Hong Kong 7.0 5.0 1.4 3.5 4.1India 8.5 6.8 5.1 6.1 6.8Indonesia 6.1 6.5 6.2 6.3 6.3Singapore 14.8 4.9 1.3 2.5 3.8Taiwan 10.7 4.0 1.3 3.6 4.0Source: Consensus Forecasts (April 2013)Most countries in the region are export-orientedand benefit from increasing demand from China.For countries exporting technology products andcommodities, China is one of the main exportdestinations.China: still going strongChina’s economic growth has decelerated since mid2011 because of weak demand for its exports and aslowdown in property investment growth. However,the economy regained momentum in the lastquarter of 2012, thanks to the government’sstimulus programme, loose monetary policy and animprovement in external demand. The stimulusprogramme included investment in publicinfrastructure such as railways and, athough muchsmaller than 2008’s programme, it proved to be aneasy way to spur economic growth.Overall economic growth decelerated last year to7.8% - the lowest figure for 13 years - from 9.2% in2011. Economic growth is expected to accelerate to8.2% this year as the increase in publicinfrastructure projects and real estate developmentsupport investment growth. Exports will benefitfrom increasing external demand while privateconsumption will continue to rise in line withincreasing incomes.Reasonable solid fundamentalsMaintaining economic growth of around 7.5% is apriority and, as in earlier years, this will be thefocus of government policies. Although thegovernment has emphasised that rebalancing
Atradius Economic Outlook22economic growth is important, until now themeasures taken have only aggravated theimbalances. Therefore, this policy is unsustainableand reforms are needed to reduce China’s over-dependence on investment-led growth.Some analysts have pointed to the rather unreliableChinese statistics and assume that the share ofconsumption in GDP is larger than the currentfigures show. The downside risks for the Chineseeconomy come from its over-heated real estatesector, which will have consequences for both localgovernments and the Chinese banking sector.The transition of leadership last November wasfollowed by a change in government in March thisyear. For the next ten years, Xi Jingping will be thenew President and Li Keqiang the premier, dealingwith the day-to-day running of the country. Achange of economic policy is not expected as policyhas been broadly encompassed by the 12thFive-Year Plan for 2011-2016. Premier Li Keqiang hasreiterated that sustainable economic growth is apriority, emphasising in one of his first speechesthat increasing income inequality and corruption bygovernment authorities must also be addressed.The Chinese premier’s statements on theimportance of urbanisation for the future areexpected to lead to the issuing of new guidelinesregarding China’s rigid household registrationsystem: the so-called ‘Hukou’ system. Rules onmigration are currently very restrictive andresidency is heavily regulated, causing a clear splitbetween the urban and rural population, so thatmillions of the latter are not allowed to settle in thecities nor benefit from welfare and servicesavailable to city dwellers. Changing these rulescould help rebalance the economy: urbanisationboosts private consumption as city dwellers havehigher incomes, more access to education andservices, and spend more on non-basic items.As labour is not as abundant as in past years, therewill be continued upward pressure on labour costs.According to UN statistics, the ratio of working agepopulation to total population will peak in twoyears time. If rising labour costs are accompaniedby productivity gains, the negative impact could belimited. Some industries have relocated to theinterior provinces, where wages are lower, butlqbour costs will still continue to rise because of thegovernment’s decision to increase minimum wagesto support consumption. Nevertheless, labour-intensive companies will continue to outsource theirproduction and China will climb into the highervalue production chain: already, low-costmanufacturing has moved to other countries suchas Vietnam and Bangladesh.The surplus on China’s current account isdiminishing (see Chart 3.2). This year a surplus of1.8% of GDP is expected, compared to last year’s2.6%. Import and export growth go ‘hand in hand’as Chinese imports consist largely of componentsthat are assembled in Chinese factories and thenshipped overseas. However, an increasing numberof imports will in future be for consumption in thedomestic market. As the current account surplus isdeclining, the accumulation of internationalreserves is slowing. The liberalisation of the capitalaccount will progress slowly.Inflationary pressures mean that the Central Bankwill probably end its accommodative policy stancethis year. Inflation is expected to increase from2.6% in 2012 to 4.3% this year, due mainly toincreased demand.Structural issuesThe Chinese banking sector is quite weak anddominated by large state banks which prefer tochannel money to state companies and projectsrather than to privately owned businesses. Itscontribution to GDP is considerable compared toother emerging economies: according to Fitch, bankcredit is around 128% of GDP and, if off-balancesheet credit is included, 190% of GDP (compared to128% in 2008). Low or even negative depositreturns have spurred off-balance activities in thebanking sector. This shadow banking includes, forexample, securitisation, wealth managementproducts and informal network lending. Precise datais not available and therefore the risks to theeconomy are difficult to assess. However, most of
Atradius Economic Outlook23the activity is linked to the real estate sector.Although the non-performing loans portfolio is low- just 1% at the end of September 2012 - rapidcredit growth will eventually lead to a deteriorationin asset quality. In the past year many loans havebeen rolled over instead of being repaid.Another weakness in the Chinese economy is thefinancial status of local governments. No clear datais available, but it is widely assumed that localauthorities’ finances have deteriorated. In 2009-2010 local government borrowed heavily, resultingin local government debt rising to 26.5% of GDP atthe end of 2010 from 17.7% of GDP at the end of2008 – and in 2011 many local government loanswere rolled over. Spending by local governments isfinanced mostly by earnings from land sales and, ifthe property sector experiences a correction, thiscould lead to financing difficulties.Central government finances are healthy. Thebudget deficit was just 1.6% of GDP in 2012 andwill rise only slightly - to 2.0% of GDP - this year asspending increases. Central government debt wasaround 16.7% of GDP in 2012 and we can thereforeassume that the government has room to supportthe economy in the event of an internal or externalshock.Challenges in the period aheadChina faces some challenges in the coming years,not just in its economic development but also as aconsequence of its years of focusing only on higheconomic growth. Recent problems with air qualityin Beijing, protests over corruption and waterpollution are indicative of what is in store. Topreserve high economic growth in the medium termand to steer the economy away from itsoverdependence on investments and exportstowards consumption, government reforms tostimulate private consumption are vital.Government spending on health services, educationand pensions will increase.In addition, the government will introduce taxreforms, support substantial pay increases andreform the household registration system. Financialliberalisation - such as a more flexible exchange rate,freeing interest rates and opening up the capitalaccount - are also underway. State ownedcompanies and private companies should berestructured, but progress will be slow due tovested interests.If economic growth decelerates sharply this willaffect the world economy. As in the past decade,increasing demand from China for commodities andother products was one of the driving forces behindthe world’s economic growth. The impact of aChinese downturn will vary from country tocountry, depending on their level of exports toChina as a percentage of their total exports or GDPand on how well diversified their exports are.However, in the short term, a downturn in theChinese economy is unlikely.India: performing below potentialThe fragmented political landscape in India hasbecome even more disjointed since the rulingUnited Progressive Alliance lost its majority inparliament in late 2012, after the withdrawal of thesmall Trinamool Congress. Although the rulingcoalition is not expected to collapse, its decisivenesswill be weak for the remainder of its term, whichends in May 2014. The Indian economy has notreturned to the very high growth rates we saw upto 2011. In fact, economic growth has deceleratedto 5.5% this year, with all the main components ofthe GDP aggregate showing a similar slowing trend(see Chart 3.3).India is also running a double deficit: both thegovernment budget balance and the currentaccount show negative signs (see Chart 3.4).Fortunately the public deficits can be financed quiteeasily domestically, so that India can keep itsexternal debt at a relatively low and manageablelevel. Since the current account deficit has to beoffset by the capital account, it is essential thatIndia attracts foreign capital.
Atradius Economic Outlook24For that reason, a more welcoming approach toforeign capital is recommended. India’s total publicdebt (domestic and foreign) is high (66% of GDP)but is decreasing as a proportion of GDP. Inflationhas levelled off and is expected to remain in singledigits for the next few years (8.2% in 2013) but isstill high enough to prevent the Reserve Bank ofIndia from significant monetary expansion.Structural economic reforms are needed to allow areturn to the high growth path of 9% per annumthat many analyst consider feasible in the mediumterm if more structural reforms are implemented.The most urgent reforms include investment inphysical infrastructure, education, achieving a moreflexible labour market and cutting red tape.However, vested interests and government capacityconstraints are likely to continue preventing thesereforms, at least in the short term.Nevertheless, the Indian government has taken afew steps in the right direction, such as theliberalisation of the multi-brand retail(supermarket) and aviation sectors and thereduction of fuel subsidies. These are importantsteps, since inefficient food retail is believed to bean important cause of India’s high inflation, whilethe subsidies on fuel (food and fertilisers) are seenas the main causes of the persistent fiscal deficits.India’s banking sector is conservatively managedand traditionally focused on granting credit to thecorporate sector. A recent trend is the supply ofcredit to consumers: in particular mortgages andauto loans. The Indian banking sector is wellcapitalised and credit quality is considered to berobust. India’s sovereign and country risk willremain good, but economic growth (although stillsignificant) may continue to disappoint.South East Asia: diverse but risingIndonesia remains the star performer of South EastAsia. Economic growth has been above 6% perannum since 2010 and, for 2013, 6.5% is forecast:with private consumption, investment and netexports the main growth drivers (see Chart 3.5).Indonesia is able to achieve this impressive growthwhile simultaneously keeping inflation and thegovernment budget balance under control. Thecurrent account showed a small deficit in 2012 afteryears of surpluses.Like India, Indonesia struggles with necessarystructural economic reforms. Infrastructure and thebusiness environment need to be improved,corruption combatted, fuel subsidies reduced andthe labour market made more flexible. None ofthese issues is likely to be tackled in the short term.As a result, Indonesia’s growth rate is likely to bebelow its potential but nevertheless the currenthigh growth rate is considered sustainable. As alarge and relatively closed economy, Indonesia isnot vulnerable to negative developments in theEurozone. Indonesia’s exports are dominated bycommodities: mainly towards China. Its sovereignpayment capacity, businesses and banking sectorare generally in good health.Vietnam is slowly recovering from a difficultperiod. Decelerating economic growth, highinflation, a large double deficit, decreasing foreigninvestment, a weak banking sector and problems ata number of state-owned enterprises dragged theVietnamese economy into dire straits. However, itnow seems to be over the worst. The currentaccount has improved, foreign exchange reservesare rising (albeit from a very low level), inflationhas fallen and economic growth has proved to berelatively resilient. Vietnam’s foreign debt level
Atradius Economic Outlook25remains manageable but the country is still relianton foreign capital and has little buffers in case ofrenewed trouble.After years of political unrest, the government ledby Yingluck Shinawatra has restored stability inThailand. The premiership of Yingluck, the sisterof the controversial former prime minister Thaksin,has resulted in a return of Thaksonomics: thepopulist policies which include an expansionaryfiscal policy, the introduction of a minimum wageand investment in infrastructure and rural areas.These policies will result in healthy economicgrowth of 4.4% this year but also in a fiscal deficitof similar size. In spite of the government’s budgetdeficit, Thailand’s external debt will fall as apercentage of GDP.Malaysia remains one of the most developed andeconomically stable countries in the region. It ischaracterised by strong macroeconomicfundamentals, sound economic policies and ahealthy financial sector. Economic growth isconsistently high and projected to be 5% this year,driven by private consumption and investment inthe oil and gas sector and in infrastructure, whileinflation can be kept at a very low 2.2%. Theeconomy is highly dependent on its oil and gasindustry which allows Malaysia to run structuralsurpluses on its budget balance and current account.Private consumption is buoyed by a robust labourmarket and government transfers.Myanmar is regarded as the last big frontiermarket in the region. The country has been apolitical and economic pariah state for decades, butrecently the ruling military junta has become moreserious about political reform and rapprochement toParis Club creditors: a debt restructuring wasachieved in January. Myanmar has extensiveeconomic potential: the country is fertile, withnatural gas reserves, and offers opportunities forboth tourism and labour intensive industry. Itslocation between China and India is favourable fortrade and transport. Economic growth is forecast tobe 6.3% for 2013. However, it remains to be seenhow serious the military junta is about political andbadly needed economic reforms.Advanced Asian marketsImproved external demand will support the SouthKorean economy. This year, acceleration ofeconomic growth is expected: to 2.8% from lastyear’s 2.1%. The main driver of economic growth isprivate consumption, encouraged by lowunemployment and low interest rates. Inflation in2012 was 2.2%: below the Central Bank’s target.Last year a new president, Park Guen-Hye, waselected. She will continue the pro-businessapproach but faces the challenge posed by thethreat from North Korea. So far, in response to thejoint military exercise by the US and South Korea,North Korea has used only harsh rhetoric. Mostanalysts believe that it will stay a verbal threat andthat military action is unlikely.Taiwan’s export-oriented economy benefited fromthe acceleration of economic growth in China at theend of 2012. Economic growth was 1.3% in 2012and is expected to increase to 3.5% this year.Private consumption is one of the main drivers asunemployment and interest rates are both lowwhile real wages are increasing. As inflation ismoderate, the Central Bank can keep its interestrate at the already low level. The government willtighten its fiscal stance from the loose fiscal policyit has followed in recent years to support economicgrowth.Singapore is the main financial and transport hubof the region and therefore the most connected toother parts of the world. This makes its economyvulnerable to the crisis in Europe and todisappointing growth in the US, and this will havean impact on Singapore’s exports. Nevertheless,ongoing economic growth in China and the morerecent boom in South East Asia has partially offsetthe effects of the depressed economic situation inthe West. Singapore narrowly avoided a recessionin the last quarter of 2012 but is expected togenerate significant economic growth (2.9%) in2013, driven by investment in public infrastructureand by private consumption. The city state’sdependence on cyclical sectors such as financialservices and electronics is somewhat cushioned bythe increasing importance of the pharmaceuticalindustry.Latin America: uncertain recoveryAfter the economic moderation of last year, realgross domestic product in Latin America is set toincrease: from 2.7% in 2012 to 3.3%. But the paceof the recovery is far from certain. First of all, it isdependent on developments in the industrialisedcountries of the US and Europe: both importantmarkets for Latin American products. However, asthe emphasis of world trade shifts towards the
Atradius Economic Outlook26emerging markets, GDP growth there has becomeequally relevant to the Latin American countries.With economic growth in Asia buoyant again, LatinAmerica’s economic activity will receive a boost thisyear as the continent is an important supplier ofcommodities, industrial products and goods toAsian markets.Table 3.3 Real GDP growth - Latin America2010 2011 2012 2013f 2014fArgentina 9.2 8.9 1.9 2.7 2.4Brazil 7.5 2.7 0.9 3.1 3.7Colombia 4.3 5.8 4.0 4.1 4.6Chile 5.2 6.0 5.6 5.1 4.8Mexico 5.5 3.9 3.9 3.4 4.0Peru 8.8 6.9 6.3 6.1 6.2Venezuela -1.5 4.2 5.6 1.5 2.3Source: Consensus Forecasts (April 2013)Brazil: a disappointing performanceRecent economic developments in Brazil have notbeen as positive as expected at the end of 2012,when a mild recovery to fuel a broad-baseddomestic upswing in 2013 was anticipated.However, the outcome is still rather subdued. Firstquarter GDP figures were not particularly promising,especially as real domestic demand did not show amarked rebound. In the boom year of 2010,Brazilian consumers accumulated debts so heavilythat they are still paying off their debts. And,despite the fact that interest rates have come downsignificantly, consumers still show little appetite toincrease their spending (see Chart 3.6).At least 2012’s recession in Brazil’s industrial sector,which cut real output by 2.6%, seems to have cometo an end, and this year manufacturing productionwill rise moderately - by 3% - thanks mainly toexports.Although the official Selic interest rate has been leftunchanged in the early months of 2013, a monetarytightening in the course of the year cannot be ruledout despite the fragility of the economic upswing.The monetary authorities may have to opt forhigher rates in the fight against inflation -stubbornly high at more than 5% annually. In fact,in February the annual rate climbed to 6.3%: not farshort of the Central Bank’s target ceiling of 6.5%.Higher interest rates may deter a rebound indomestic demand, in which case exports willbecome an even more important driver of theeconomic upswing this year.A rebound is also influenced by the exchange rateof the Real. Foreign investors seeking to profit fromhigh domestic interest rates are driving up the Realexchange rate and ultimately undermining thecompetitiveness of Brazilian exports. That hasalready been happening since 2009: surpluses onthe capital account have far exceeded deficits onthe current account of the balance of payments. In2011 capital imports totalled USD 112 billion andthe deficit on the current account remained at USD52 billion, causing upward pressure on the Realexchange rate and, after intervention by the CentralBank, an accumulation of reserves.Regional snapshots: a mixed bagMexico’s new administration has unfolded long-awaited measures (‘Pact for Mexico’) to restructurean economy that has for decades been characterisedby a lack of competition in product and labourmarkets. President Enrique Peña Nieto, who wonlast December’s elections with a convincingmajority, has taken the first steps to reformingcertain sectors and enhancing more (foreign)competition. Still uncertain though are his plans foropening up the ‘hermetically sealed’ energy sector
Atradius Economic Outlook27and the state-run oil company Pemex. Such areform is needed to stop the falling domestic oilproduction of the last few years.Meanwhile, the Mexican economy seems destinedto continue its moderate but still positive growthrate of 3.5% in 2013. The final outcome will dependlargely on developments in its northern neighbour,the USA: recipient of more than 80% of Mexicanexports. The success of these exports also dependson the peso exchange rate which is feeling constantupward pressure from the influence of globalmonetary policies and the subsequent capitalimports. The strength of the peso against the USdollar has already prompted the Central Bank to cutthe interest rate to 4% in March this year. Mexico’srate of inflation is still fairly moderate (3.6% perannum in February) but remains structurally abovethat of the US.Although Argentina is recovering from the lowgrowth of 1.9% in 2012, real GDP growth willremain under pressure in 2013: 2.8% at best.Moreover, statistics in Argentina are unreliable sothe final outcome will be even more uncertain. Thecontrols implemented in 2012 to save foreignexchange will hurt business activities this year, aswill the social unrest that emerged in 2012 andwhich will remain a negative factor in any eventualeconomic recovery. The protests are directed at thefast pace of inflation, which is set to be muchhigher than the officially reported 10.8% in 2012(see Chart 3.7). Consensus’ estimate, made inFebruary this year, is for an annual rate of morethan 25%.Argentina’s weakened international liquidityposition, as reflected by a declining level of foreignexchange, will force the monetary authorities tocontinue to impose import restrictions and currencycontrols in 2013. These measures will complicateforeign trade, and contribute to payment delays byArgentine importers and to even more capital flight.A devaluation of the peso seems unavoidable.The death of Venezuela’s long-serving leader HugoChavez will not change its economic policy in theshort term. Vice president Maduro sought to profitfrom Chavez’ popularity in April’s elections, but inthe event won by just a narrow, and currentlycontested, margin. He will continue hispredecessor’s erratic policy that proved a barrier tofree market economic activities, created supplyshortages, deterred foreign investors and frustratedreal economic growth that could raise the livingstandards of the population. Inflation in Venezuelais high (above 20% in 2012) and there is acontinuing risk that the Bolivar exchange rate willbe devalued for a second time this year.The other markets in Latin America have shownsustained GDP growth rates so far in 2013.Colombia, Peru and Chile are main exporters ofminerals and commodities and therefore highlyreliant on developments in Asia. As thosedevelopments continue to be positive, these threecountries can expect healthy external finance andeconomic growth rates this year.MENA: political uncertaintyEconomic growth in the countries of North Africa isaffected by internal political uncertainty and theproblems in the Eurozone as, for most of them,Europe is the main export market and the mainsource of tourism and remittances. Vulnerability toexternal shocks has increased as high oil prices anddisappointing export revenue have led to higherdeficits on the government budget and currentaccount.While Tunisia has recently accepted an IMFprogramme, Egypt is still delaying the decision toaccept one. It is not that Egypt doesn’t need such aprogramme, but the authorities are reluctant assome measures in the IMF programme would bepainful for the population. To reduce the largedeficits on the government balance, the subsidysystem should be reformed, but such reforms wouldbe an unpopular move.
Atradius Economic Outlook28Table 3.4 Real GDP growth - MENA2010 2011 2012 2013f 2014fEgypt 5.1 1.8 2.2 2.7 4.2Morocco 3.6 5.0 2.5 3.9 4.6Qatar 16.7 14.8 4.6 4.2 4.8Saudi Arabia 5.1 7.1 6.8 3.5 4.4Tunisia 3.5 -1.5 2.5 3.1 4.3UAE 1.3 4.2 4.2 2.7 3.3Source: IHS Global Insight (April 2013)To prevent a balance of payments crisis Egyptneeds IMF funding. Its small current account deficitis accompanied by large capital outflows, resultingin a deficit on the balance of payments and a sharpdrop in its international reserves. However, therecent inflow of foreign aid from Qatar, Turkey andLibya has eased concerns of a balance of paymentscrisis in the short term. Economic growth in Egypt issupported by private consumption and governmentspending, but political uncertainty is constraininggrowth.Sub Saharan Africa: high growthSub Sahara is continuing its decade-long economicadvance. Assisted by structurally high commodityprices (stemming largely from Asian demand) andalso by increased political and macroeconomicstability, the continent has achieved economicgrowth of around 6% per annum since the early2000s, in spite of unfavourable economicdevelopments in Europe.Table 3.5 Real GDP growth - Sub-Saharan Africa2010 2011 2012 2013f 2014fGhana 8.0 14.4 8.4 7.7 7.5Kenya 5.8 4.4 3.6 4.2 5.3Nigeria 7.2 7.9 6.7 6.4 6.1South Africa 3.1 3.5 2.5 2.9 3.5Source: IHS Global Insight (April 2013)Africa’s largest and most developed economy,South Africa, is the odd one out. South Africa’seconomy was hit badly by the financial crisis andthe recovery has been disappointing. Socialinstability came to the surface last year whenminers at the Marikana platinum mine organisedwildcat strikes that were violently oppressed by thepolice. The unrest in the mining sector is likely topersist during 2013.Economic growth is forecast to be 2.8% this year,due mainly to the government’s ongoing fiscalstimulus. This has led to persistent governmentbudget deficits, but these can be financed largelydomestically and therefore South Africa’s solvencyremains solid.As already mentioned, the situation in the rest ofSub Saharan Africa is much rosier, and politicaldevelopments in Kenya are particularly interesting.The recent parliamentary and presidential electionswent without significant civil unrest, in sharpcontrast to the 2007 elections which degeneratedinto large scale tribal violence. The outcome of thepresidential elections – the choice of UhuruKenyatta as the new president - will complicateinternational relations, since Kenyatta has beensummoned to attend the International CriminalCourt in The Hague. Nevertheless, the quiet courseof the elections gave a boost for East Africa’s mostdynamic economy and growth is expected toaccelerate to 4.8% this year.Angola’s economy is driven by oil. Besides its lackof diversification, Angola has to deal withchallenges stemming from weak institutionalcapacity, corruption and poor social indicators.However, it is making progress in tackling theseshortcomings and economic policy is strengthened.Oil production will increase in the coming years,and the oil price is currently high. Economic growthhas received a further boost from the LNGproduction which has begun at the Soyo plant:growth is projected to reach an impressive 8.3%.The CEE region: Eurozone contagionAn economic upswing in the countries of Centraland Eastern Europe (the CEE region) will be modestand uncertain. After the 2.4% real GDP growth lastyear, 2013 will probably end only a little better: at2.7%. Analysed by sub-regions, economicperformance differs markedly. With 3.4% economicgrowth, the Comonwealth of Independent States(the CIS countries) headed by Russia will registerthe same business conditions as last year. Thecountries in south east Europe may be able to shrugof the recession of 2012 (-0.3%) and return tomoderate real growth of 1.2%. The weakestperformance is to be expected in the countriesclosest to the Eurozone: Poland, the Czech Republic,Slovakia, Hungary and Slovenia will together realisejust 0.8% real GDP growth - little better than lastyear’s 0.6%. Broadly speaking, it is obvious that thenearer the countries are to the borders of the
Atradius Economic Outlook29Eurozone, the poorer the economic results will be.Moreover, the prospect for those economies israther uncertain, depending on a far from assuredrecovery in the Eurozone.Table 3.6 Real GDP growth - CEE2010 2011 2012 2013f 2014fCzech Rep. 2.2 1.7 -1.3 -0.1 1.7Hungary 1.2 1.7 -1.7 -0.1 1.3Poland 3.9 4.3 2.0 1.4 2.8Romania -1.3 2.5 0.5 1.7 2.6Russia 4.0 4.3 3.4 3.2 3.8Turkey 9.0 8.3 2.2 3.9 4.8Ukraine 4.2 5.2 0.2 0.9 3.5Source: Consensus Forecasts (April 2013)In addition to the real economic contagion from theEurozone crisis, there is a financial impact throughthe channel of the banking system. Many banks inthe CEE region are subsidiaries of banks in theEurozone. If the parent institutions have financialproblems, their subsidiaries in the CEE have toreconsider their portfolios (i.e. deleverage) with aconsequent impact on their ability to providefinance in those markets - and thus on realeconomic activity there.So far the Polish economy has been able to escapethe Eurozone turmoil, as evidenced by its fairlyreasonable growth rates up to 2012. However, lastyear both private consumers and investors began tobe more reluctant to spend, contributing to a muchweaker domestic market. This less upbeat sentimentwas only partially mitigated by a more positiveexport performance, ultimately leading to real GDPgrowth of just 2%, compared to 4.3% in 2011.Already we can see that 2013 will be hardly anybetter. Monetary easing by the Central Bank, madepossible by the sustained moderation of theinflation rate, may contribute to more impetus todomestic spending in the course of the year but,with the unemployment rate reaching 14% and agovernment aiming for the 3% GDP criteria neededto apply for Eurozone entry, economic prospects inPoland have become even more subdued.The social protests in Bulgaria and Romaniaagainst more austerity gained ground in 2012,resulting in the collapse of the governments in Sofiaand Bucharest. After the deep recession of 2009,real GDP growth in Bulgaria had remaineddisappointing because of poor domestic demandand a rather weak export performance due to thecrises in the Eurozone and Greece.The pegging of the lev against the euro gives themonetary authorities little room to implement anindependent policy and propel the economy.The Romanian currency, the leu, is floating againstthe euro and will come under pressure in the eventof more political volatility in the country, as wasevidenced last year. Like its southern neighbour,Romania has not been able to recoup 2009’s bigGDP loss. Economic performance has been quitepoor until now, with many households stillreluctant to spend and exports within the CEE andto the Eurozone hardly flourishing. The economynarrowly escaped another recession in the secondhalf of 2012.The economy of Ukraine was precarious in 2012,and will remain so this year. The low price of steel,the country’s main export, has curbed exportgrowth and contributed to a sustained fall ininternational reserves. Large current accountdeficits, high foreign debt service obligations and alack of IMF-funded financial support mean that thesituation will remain fragile throughout 2013. Arecovery in the steel market depends on a morepronounced global recovery and is thereforeunlikely in the short term. Moreover, the politicalclimate in Ukraine is proving a deterrant to westerninvestors.Its impressive growth rates since the 2009 recessionwarrant the question whether Turkey has earnedthe title ‘new tiger of the Bosphorus‘. After realeconomic growth of 9% per annum in 2010/11, lastyear saw a marked cooling of the economy,although this may be only temporary. A new surgein consumer and investor spending is on the cards,together with a sustained growth in Turkish exports.However, some factors threaten to spoil the party: the unsettled political situation in the region(Syria, Iraq); the high rate of inflation and the deficits on thecurrent account of the balance of payments thatrise as the domestic economy grows; And Turkey’s high dependence on imports of oil andother commodities to satisfy its (energy) needs,a constant burden on its external accounts.
Atradius Economic Outlook30Russia: no reforms but reasonable growthIn our November 2012 Outlook we highlighted theimpact of the re-election of Vladimir Putin asRussian president. In brief, it comes with politicalstability, but also with increased repression17andambitious economic reform plans such as thoserelated to the business environment.Russia is 112th in the World Bank’s ‘DoingBusiness’ survey, scoring especially poorly onstarting a business, construction permits and crossborder trade – and its bureaucracy is notoriouslycumbersome. However, far reaching economicreforms, badly needed to address the businessenvironment and to diversify the economy awayfrom the dominant oil and gas sector, are unlikely.That expectation is based on president Putin’srecord in power and the vested interests of hissupporters. Indeed, the current privatisationprogramme does not look ambitious enough, giventhat the Russian state controls 50% of the economy.Minority stakes in VTB Bank, Alrosa (mining), SibirAirlines and TGK-5, a regional electricity producer,are to be sold in 2013, followed by planned sales of,among others, stakes in Aeroflot and Rosneft in2016.The government has voiced its opposition tocorruption, but any sweeping plan of action has yetto materialise. The one positive note - Russia’sentry into the World Trade Organisation (WTO) - isexpected to have an economic impact in the longerterm. Oil and gas exports (50% of export revenue)are subject to hardly any tariffs in the importingcountries. Average tariffs will fall from 13.2% to10.8%, and that of manufactured goods from 9.5%to 7.3%. More sensitive reductions - on cars, porkand aircraft - will not take effect until 2019/20. Theimportance of oil to the Russian economy isillustrated by its export dynamics (see Chart 3.8).17In our earlier reports we have noted a rising tendency ofrepression. One example is the so called ‘Pussy Riot’ affair,which ended in jail sentences for the band’s mocking of thepresident. A new wave of inspections of NGOs has also beeninitiated as part of an attempt to crack down on civil society(often referred to as the ‘third sector’ in society aftergovernment and business).The economy continues to perform at near to fullcapacity, with potential and current growth almostoverlapping at 3.4% in 2012 as the crucial oil pricelevel remained quite benign. But growth fell from4.3% in 2011 and was lower than expected becauseof the political uncertainty in early 2012 and poorglobal growth. This slower growth trend hascontinued into 2013 as domestic demand softens:retail sales in January and February saw growth of2.5% and 3.5% year-on-year. Inflation, a drop insentiment and the deceleration of credit expansionhave all taken their toll.For the forecast period, little change is expected.Assuming an oil price above USD 100 per barrel, weexpect 3.3% GDP growth in 2013 and 3.8% in 2014.Higher growth cannot be expected, as an increase inoil production is hampered by oil firms strugglingwith depleted oil fields and more difficult extraction.Moreover, investment remains relatively low,reflecting the dismal Russian business climate.Macro indicators show a more upbeat picture.The fiscal balance for 2012 stood at a 0.1% deficit:compared to a 0.8% surplus in 2011. Excluding oiland gas revenues, the deficit would have been10.6%, also worse than 2011’s 9.5%. However, thebudget for 2013 signals budgetary tightening as realspending growth will be neutral throughout 2013-2015. A deficit of 0.8% is envisaged in 2013, 0.2%in 2014 and a balanced budget in 2015. Thesefigures assume real GDP growth of 3.6% and an oilprice of USD 97 per barrel, which seems realistic.Government debt stood at 7.8% in 2012, and isexpected to hover around that level in 2013 and2014: 8.1% and 8% respectively. Moreover, theFiscal Rule18should help increase the buffer in theReserve Fund from USD 87 billion in 2013 (4.7% ofGDP) to USD 150 billion in 2015 (5.7% of GDP).18The ‘Fiscal Rule of 2012’ introduces decoupling of governmentspending from oil price movements and lowering of the break-even oil price: for 2013 estimated at USD 105 per barrel.
Atradius Economic Outlook31Inflation rose during the second half of 2012 due toa poor harvest, increases in utility prices, temporarymonetary easing and a weaker rouble. But theoverall figure of 5.1% was considerably lower than2011’s 8.4%. In early 2013 the underlying trend offalling inflation resurfaced, with the figure droppingto 7% year-on-year in March from 7.3% inFebruary. The Russian Central Bank is aiming for5%-6% inflation for 2013 and 4-5% for 2014. Atthese inflation rates and with an official rate of8.25%, the real interest rate is relatively low,indicating a case for further monetary tightening(see Chart 3.9).At the current rather benign oil price levels,Russia’s oil dominated exports are keeping thecurrent account in healthy territory, at a 4% of GDPsurplus in 2012: but lower than the 5.2% in 2011(see Chart 3.10). Even the capital account improvedas Russian banks were able to massively tap theinternational financial markets: resulting in recordcapital inflows of USD 23.6 billion. However, thismasks Russia’s ongoing and increasing underlyingproblem with capital outflows in the non-financialsector. Indeed, the outflows recorded in that sectorreached a record USD 80.4 billion: up from USD 5.4billion in 2011. Again, this is arguably the result ofthe lack of investment opportunities in Russia andunderscores the need for reforms. For 2013 andonwards, the current account surplus is expected toshrink on the back of increased internal demandand an appreciating real exchange rate. This willinevitably have an impact on capital outflows.Return to contents page
Atradius Economic Outlook324. Implications for the insolvencyenvironmentInsolvencies at a high level in 2012Globally, the number of business failures continuedto decrease slightly in 2012, mainly as a result of animproved insolvency environment in the Asia-Pacific region and North America. Europe presenteda mixed picture. On the one hand the UK and theNordic countries experienced quite stableinsolvency dynamics while, on the other,insolvency risk continued to rise across theEurozone, driven by the sharply deterioratingeconomic conditions in the Eurozone periphery.Chart 4.1 Insolvency developments(Index, 2007 = 100)501001502002503003504002007 2008 2009 2010 2011 2012TotalEurozoneEurozone PeripheryNordicsDeveloped Asia-PacificUnited KingdomUnited StatesSource: Atradius Economic ResearchDespite this slight improvement in insolvency risk,the general frequency of default is still high. Thiscan be seen in our insolvency index19, which showsthat a mere stabilisation in the total insolvencylevel took place (see Chart 4.1). In GDP-weightedterms, we estimate the aggregate insolvency levelto be roughly 50% higher than in 2007, i.e. beforethe onset of the crisis.19The insolvency index is based on the estimated number ofbusiness failures measured within calendar years. The regionalaverages have been calculated as GDP-weighted (at currentexchange rates) country indices: Developed Asia-Pacific(Australia, Japan and New Zealand); Nordics (Denmark, Finland,Norway and Sweden); Eurozone Periphery (Portugal, Ireland,Italy, Greece and Spain); Total represents all 22 markets.Insolvency trends across various regionalaggregates show marked differences. In developedAsia-Pacific, the insolvency index is even lowerthan in 2007. However, this is an exception. In theUK the default level is 30% higher than in 2007 andin the US the corresponding figure is slightly above40%. In the Nordic region the insolvency indexstands at 162, i.e. roughly 60% higher than beforethe downturn. The common denominator across theregions mentioned above is that the insolvencyenvironment has improved, at least marginally,since 2010.This is not the case for the Eurozone as a whole,which has continued to deteriorate in every post-crisis year: the estimated default frequency in 2012is almost twice that of 2007. Not surprisingly, thedeterioration has been most accentuated in thecountries at the centre of the sovereign debt crisis.In 2012, roughly 3.5 times as many defaults tookplace in the Eurozone periphery compared to 2007.It is against this background that we must view theinsolvency projections for the period ahead: there isstill a long way to go to return to pre-crisis defaultlevels.
Atradius Economic Outlook33Box 4.1 Insolvency assessment methodologyOur insolvency forecast framework deliversexpectations of insolvency conditions by market,given the current economic outlook. We focus on aselection of 22 countries where we have access tosufficient statistics. Two dimensions are importantwhen describing insolvency conditions: theexpected change in the number of insolvent firmsover the coming period (i.e. the insolvency growthforecast) and the current level of defaults (i.e. theproportion of defaulting firms among the totalnumber of enterprises).The level of defaults gives information on whattype of market a particular country represents interms of default dynamics, and indicates the generallikelihood of firms going bankrupt. The insolvencygrowth forecast reflects our expectation of how thedefault level will develop (i.e. it shows whether thelevel of risk is likely to stay the same or change).DeterioratingStableImprovingLow Average HighFigure 4.1 Risk MatrixLevelChangePresented in a ’matrix’, the countries included inour insolvency assessment framework are classifiedaccording to their level and expected change (seeFigure 4.1). The vertical axis depicts the expectedchange in the default level in 2013 (i.e. whether theinsolvency growth forecast is positive, neutral ornegative). As such, all countries expected to seedeterioration in their insolvency environment thisyear are to be found in the top row of the matrix.The horizontal axis depicts the absolute level ofdefaults (i.e. whether the frequency of defaults in acountry is assessed as low, average or high). Assuch, all countries that are perceived as marketscharacterised by comparatively high defaultfrequencies are to be found in the right handsegment. This classification provides a high-leveloverview of underwriting risks across our mostimportant markets for short-term credit insurance.Our insolvency assessments are based on analysisof historical insolvency statistics for each market.We use these insolvency statistics to produce acorporate failure growth proxy, assuming that theobserved insolvency counts are proportional to thetotal number of (partly unobserved) businessfailures. The default level assessment is anindication of the relative frequency of insolvencieswithin a country over time and has been designedto facilitate comparability across countries.On average, insolvency growth dynamics tend torespond more or less instantaneously to changingmacroeconomic conditions. Although the empiricalrelationship varies in strength, insolvency growthdisplays a certain degree of co-movement with thebusiness cycle across most markets: when economicgrowth in a country accelerates above its trend, thisis usually associated with falling insolvencynumbers; and conversely, when economic growthslows, it is usually accompanied by risinginsolvency numbers.The level, however, influences the insolvencygrowth dynamics. A country that alreadyexperiences an elevated insolvency level is lesslikely to respond as strongly to cyclical movementsas a market that shows a low insolvency level. Asour ultimate aim is to link current expectations ofmacroeconomic performance in the year ahead toimplied insolvency movements, we use up-to-datecountry-specific forecasts of macroeconomicperformance to estimate an insolvency response.Based on country-specific information on the trendin actual insolvency, this mechanical response isadjusted, in a second step, by expert judgement.Structural conditions and other country-specificfeatures are manually taken into account whendetermining the insolvency forecasts.
Atradius Economic Outlook342013: a year of stabilising conditionsApplying our insolvency assessment framework (asoutlined in Box 4.1), we expect the number ofinsolvencies to remain more or less stable acrossmajor markets in 2013. The aggregate insolvencyfrequency improves marginally, by less than 2%, in2013. Since 2012 saw a relatively poor insolvencyenvironment across advanced economies, thedegree of forecast improvement is small. In regionalterms, the insolvency situation in 2013 isanticipated to closely resemble the conditions of theprevious year.Table 4.1 Insolvency growth (% per annum)202010 2011 2012* 2013fAustralia -1 5 1 3Austria -8 -8 3 2Belgium 2 7 4 6Canada -20 -11 -12 -5Denmark 13 -15 0 -2Finland -13 3 0 -2France -5 -1 3 4Germany -2 -6 -6 -4Greece 30 33 30 10Ireland 10 -7 0 -5Italy 21 17 15 10Japan -14 -4 -5 -2Luxembourg 33 5 8 -5Netherlands -10 -1 21 4New Zealand -6 -12 -8 -3Norway -12 -2 -12 -2Portugal 16 17 20 5Spain 2 14 38 5Sweden -4 -4 7 3Switzerland 20 7 3 -2United Kingdom -16 5 -4 -3United States -7 -15 -16 -6Source: National bureaus, Atradius Economic ResearchThe insolvency environment continues to improvemarginally in the Asia-Pacific region, with Japanand New Zealand seeing insolvencies drop by 2%and 3%, respectively (see Table 4.1). Similarly, theNordic region is expected to improve slightly:Denmark, Finland and Norway are all anticipated tosee the number of insolvencies drop by 2% thisyear. Conversely, insolvency risk is forecast to20Note: *) Final figures for all countries except Greece, Ireland,Italy and Portugal. f) Forecast.continue to rise across the Eurozone: while theoverall insolvency level climbs moderately, theEurozone periphery increases more significantly.Our anticipation of shrinking economic activity in2013 for a number of countries is broadly consistentwith deteriorating insolvency conditions. Except forFinland, Germany, Ireland and Luxembourg, weexpect insolvencies to increase this year. The mixeddefault outlook for the Eurozone reflects the largeand growing differences in economic performancebetween the core and the periphery.Some countries show deterioration…The top-right field of the insolvencymatrix holds the countries whereinsolvencies are at a high level andexpected to climb further (see Figure 4.2). Inaddition to the countries in the south of theEurozone (i.e. Greece, Italy, Portugal and Spain),Belgium and France also belong to this cluster.Deteriorating SwedenAustralia,NetherlandsBelgium, France,Greece, Italy,Portugal, SpainStableFinland, Japan,NorwayAustria,SwitzerlandDenmarkImprovingCanada,Germany, NewZealandUnited StatesIreland,Luxembourg,United KingdomLow Average HighFigure 4.2 Insolvency matrix for 2013While Belgium and France are expected to stagnatein 2013 (as reported in the second part of thisoutlook), economic growth is expected to benegative for a third consecutive year in theperiphery. These markets have experienced amassive deterioration in their default environmentsince the previous downturn and, given theprotracted recessionary conditions, the insolvencysituation is set to deteriorate further.The remaining two fields in the top-row of Figure4.2 contain countries where insolvencies are at arelatively lower level, but expected to climb in theperiod ahead. The Netherlands suffered a secondsharp insolvency increase in response to the
Atradius Economic Outlook35economic contraction in 2012: insolvenciesincreased 21%, reaching an all-time high (see Chart4.2). As the Dutch economy shrinks in 2013,insolvencies are expected to increase further thisyear. Although the default level has increasedconsiderably since the previous crisis, theNetherlands still represents an average defaultmarket. Australia belongs to the same default typeas the Netherlands and is expected to seeinsolvency growth of 3% in 2013.The insolvency rate has remained comparativelylow in Sweden since the crisis. In line with the sharpmoderation in economic activity, insolvencies grew7% in 2012. Given that the negative insolvencytrend persisted in the first quarter, a slight rate ofdeterioration is also expected for 2013.…and some remain stable…As mentioned earlier, the forecastinsolvency growth figures for 2013 aresmall by comparative measures: theexpected growth rates range from -6% to +10%.Since many countries have experienced insolvencygrowth in excess of 25% for several consecutiveyears recently, the forecast movements are almostmarginal. Markets that fall in the range of -2% to+2% we label ‘stable’. Japan, together with Finlandand Norway, are all low-default countries expectedto see marginal improvements.The same goes for Switzerland, which belongs tothe average level default category. In Austria,however, we expect to see a marginal increase of2% in insolvencies. In Denmark insolvencies are at avery high level, but are expected to decreaseslightly in 2013. This is in contrast to its Nordicneighbours, which all belong to the low defaultsegment in Figure 4.2. The anticipated 2%improvement in Danish insolvencies is reflective ofa gradual adjustment back towards a long-rundefault level rather than a sign of underlyingeconomic strength.…while we also see room for improvementThe bottom-left field of the risk matrixshows countries where default conditionsin terms of frequency risk are mostfavourable (i.e. those that display a low level ofinsolvencies and are likely to see furtherimprovement). Here for example, we find Canada,which has performed better than its peers in termsof economic growth over the last period. Itsdeclining insolvency trend is expected to continuein 2013. New Zealand too remained a low defaultmarket throughout the previous crisis. As theinsolvency trend is benign and economic conditionsare expected to develop in line with potential, weforesee a slight reduction in the number ofinsolvencies in 2013.Despite the deep rate of economic contraction in2009 – and the rather sharp moderation ineconomic growth in 2011 – German insolvencieshave developed in a stable way throughout the pastyears and the default environment has remainedrelatively benign (see Chart 4.3). Althougheconomic growth in Germany is expected to be slowin 2013, it represents unchanged conditions. Giventhe current positive default trend, the insolvencysituation is expected to improve somewhat in 2013.Insolvencies in the US continued to decrease in2012 and, in view of the relatively favourablebusiness cycle performance, insolvencies areexpected to decrease by another 6% in 2013.Although the level of insolvencies is still high byhistorical standards, the US is again regarded as an‘average’ default market.
Atradius Economic Outlook36Almost half the countries included in ourinsolvency framework are currently classifiedas ’high’ insolvency markets, i.e. situated in theright half of Chart 4.4. There are also a number ofcountries where default rates are perceived as highbut are expected to improve as their economiesslowly recover in 2013. Ireland, Luxembourg andthe UK all display these characteristics. Broad-based insolvency dynamics, applying to both smalland large firms, are not only determined byeconomic growth performance: these dynamics arealso influenced by the prevailing credit conditionsand the ability of firms to finance themselves. Andlending conditions are strained at present, adding tothe vulnerability of firms that are highly leveraged.This is an important factor behind insolvencydynamics at the moment, in particular acrosscountries in the European periphery.Chart 4.4 Insolvency overview 2013(Insolvency frequency proportional to GDP)CAN DEUNZLUSAIRELUXGBRSWE AUSNLDBELFRAGRCITAPRT ESPFINJPNNORAUTCHEDNKInsolvency levelInsolvencygrowthHighLow0Source: Atradius Economic ResearchTight bank lending behaviour in EuropeIn recent years the stuttering banking system hasbeen a dominant factor of economic developmentsin Europe. As negative news has been abundant, itis of importance to monitor changing conditions inthat part of the economy. For Europeandevelopments, the quarterly bank lending officersurvey published by the ECB offers a goodyardstick. Constrained lending behaviour across theEU continued in the first quarter of 2013 (see Chart4.5). About 15% of the banks stated that they hadtightened their credit standards as applied to theapproval of loans or credit lines to enterprises: thetightening was more profound in long-term lendingand lending to large enterprises than for small andmedium eterprises (SMEs).In addition to stricter loan approval conditions, theterms of credit have also tightened considerably.More than a quarter of banks stated a price increaseon loans of all risk classes, with other factors beinga reduction in the size of loans and higher collateralrequirements. At the same time, only 1% of banksindicated that they have eased their creditstandards. The result is a continuation of thetightening credit environment that has beenongoing since the second half of 2007.Even though the trend in credit supply did notchange much, we see a fundamentally differentpicture in the driving factors behind the tightening.As detailed in previous editions of our EconomicOutlook, banks have struggled with balance sheetconstraints and the negative impact of thesovereign debt crisis in Europe. However, thesefactors seem to be of less importance today: morethan 93% of the banks state that the sovereign debtcrisis no longer affects their lending behaviour andfunding conditions. The driving force behind thetightening in 2013, as stated by the bank officials, isinstead a generally pessimistic outlook for economicactivity in the period ahead.Against the background of weak future growthprospects it is not surprising that firms’ demand forcredit has also declined. In net terms, more than aquarter of banks reported falling demand in the firstquarter of this year. The importance of falling creditdemand cannot be ignored, especially as reductionsin fixed investments are the most commonly statedreason. Besides indicating falling businessconfidence about earnings capacity in the next fewyears, reductions in fixed investment across Europeare eroding the future economic potential.
Atradius Economic Outlook37In addition to developments already mentioned,new regulatory requirements are affectingEuropean banks. In an effort to strengthen theircapital positions, banks are decreasing their riskyasset positions and demanding higher prices forrisks. Both have a negative effect on the realeconomy as credit supply is further constrained.Looking forward, it is reasonable to assume thatcredit conditions will tighten further in Europethroughout 2013. Against the background of oureconomic outlook, as presented in the secondsection of this report, it is difficult to see asubstantial improvement in credit conditions inEurope taking place before 2014.Large firms: not so different from smallConsistent with the persistently elevatedinsolvency levels outlined above, the marketperception of risk across large firms has remainedrelatively high since 2010. Nevertheless, we haverecently experienced a general improvement indefault expectations in large European firms.Expected Default Frequencies (EDFs) have broadlydeclined since the middle of last year acrossEuropean countries (see Chart 4.6).21Chart 4.6 Median EDF, Europe(Default risk 12 months ahead, percent)0.00.51.01.52.02.53.03.54.02005 2006 2007 2008 2009 2010 2011 2012 2013Source: Moodys KMVFranceGermanyItalyNetherlandsSpainUnited KingdomThe general stock market uplift and low volatilityenvironment during the past six months lies behindthese developments. Just as in the case of theinsolvency index, it should be stressed that thecurrent risk level still is considerably higher thanpre-crisis. In spite of the recent improvements, theEDF evolution across Eurozone markets directlyaffected by the Eurozone debt crisis implies thatrisk still hovers at very high levels.21The Expected Default Frequency (EDF) tracks default riskamong stock listed companies. Combining balance sheet andstock market information for a particular firm yields a 1-yeardefault forecast. The median EDF, as referred to in the chartsbelow, represents the 50th percentile in the total countryaggregate of firms.Suppressed equity valuations combined with highdebt levels on corporate balance sheets haveresulted in a Greek median default expectation inexcess of 8%. The corresponding figure for Portugalis just below 4% and in Italy the median EDF standsat roughly 1.5%. In North America the EDFs havecontinued to fall, which is in line with itssignificantly better economic performance, Themedian EDF in the pool of US firms has fallenfurther below 0.4%, implying a level similar to theone that prevailed in the fourth quarter of 2005(see Chart 4.7).Chart 4.7 Median EDF, United States(Default risk 12 months ahead, percent)0123452005 2006 2007 2008 2009 2010 2011 2012 2013Source: Moodys KMVA similar pattern of general default risk is alsovisible in other metrics of corporate credit risk.Credit Default Swap (CDS) spreads, a usefulexternal benchmark for the price of credit risk, havealso been stuck at a relatively high level since 2010.Some reduction in risk has taken place over the pastsix months, but the current level indicates that theperception of corporate credit risk remains high (seeChart 4.8). The pool of large firms in the listedcorporate universe is associated with significantlyhigher default risk than five years ago.Chart 4.8 Credit Default Swap spreads(5-year segement, basis points)0501001502002503002007 2008 2009 2010 2011 2012 2013Source: BloombergEurope (ITraxx)United States (CDX)As reflected in the actions of rating agencies, thetrend of general deterioration in credit quality hascontinued over the same period. Negative ratingactions (from the three major rating agencies) are
Atradius Economic Outlook38continuing to dominate positive ones in bothWestern Europe and North America. But thesituation in Europe is definitely worse: consistentwith an expected poor business climate in theperiod ahead, there were about five downgrades foreach upgrade in the first quarter. In North America,the ratio between upgrades and downgrades is stillbelow one, but with an improving trend over recentquarters: in the US at least, credit ratings are finallyshowing faint signs of improvement.An uncertain environment: downside riskThe current scenario for economic performance in2013 implies another challenging year forbusinesses, particularly in Europe. Although, asnoted in this report, a global economicimprovement is expected in 2014, the outlinedsituation is still representative of rather bleakconditions. And there are significant downside risksto this already stretched scenario throughout theforecast horizon. Further economic contractionahead contributes to upward pressure on businessfailures in markets already characterised by highdefault rates.In view of the expectations of a weak andprotracted Eurozone recovery in 2014 and beyond,demand conditions will remain sluggish over themedium term. Financing conditions for firms arealready very tight, hampering the possibilities ofmaking productive investments. Moreover, weanticipate further tightening of lending conditionsin Europe throughout 2013.Although several important political steps havebeen taken to address the problems in the Eurozone,the debt crisis remains critical and is pulling the realeconomy further into recession.Uncertainty around the current outlook for globaleconomic activity is unusually high, with amultitude of risk factors suggesting a fairly largelikelihood of weaker developments. In other words,the current outlook is associated with substantialdownside risk.The most recent developments in Cyprus underlinethe extreme challenges facing European crisismanagement. Through financial and trade linkages,governments and firms across the globe arevulnerable to an escalation of the Eurozone crisis,which therefore still represents a large risk factor tothe global outlook. As discussed in the first part ofthis report, we expect the Eurozone to remain intact,but the risk of the sovereign debt crisis eventuallyleading to an exit of one or more member states isnot negligible.A global recession, or double-dip, could materialiseas a result of the compounded effects of multipleadverse developments (e.g. if the Eurozone debtcrisis worsens again, US politicians fail to tackle themedium-term solutions to the large fiscal deficit, orgrowth in several major emerging market economiesdecelerates). In addition to this, there is alsogrowing geopolitical instability. The heightened riskthat the dispute between North and South Koreamay escalate into military clashes emphasises otherlatent conflicts and power struggles in the region.Return to contents page
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