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Global outlook q1 2013
1.
2. Sent to print 21 November 2012 November 2012
Global Outlook www.GlobalMarkets.bnpparibas.com
Global Outlook
Summary tables 2
Summary: Looking for the recovery 4
Risk scenarios 6
US rates: Medium-term forecasts 10
Eurozone rates: Medium-term forecasts 11
US: Avoiding the cliff 12
Eurozone: Slow road to recovery 14
Japan: Anaemic recovery from Q1 16
China: Green shoots 18
Eurozone countries
Germany: Temporary struggle 20
France: Rough seas 22
Italy: Headwinds softening 24
Spain: Recession deepening 26
Netherlands: Pruning for health 28
Belgium: Resilience waning 29
Austria: A wait-and-see attitude 30
Portugal: Not much room left 31
Finland: A narrow escape 32
Ireland: Green streak 33
Greece: Never-ending story 34
Other Europe
Denmark: Recovery elusive 35
UK: Triple dipper? 36
Sweden: Slowing 38
Norway: Holding up 40
Switzerland: Growing from within 42
CEEMEA
Saudi Arabia: Oil output slowing 43
United Arab Emirates: Food-driven inflation 44
Qatar: Inflation pressures rising 45
Russia: Gradual slowdown 46
Ukraine: Hard landing 48
Poland: Sharp rate cuts ahead 50
Hungary: Stagflation for longer 52
Czech Republic: At the zero bound 54
Turkey: Investment worthy 56
South Africa: Weaker growth 58
Asia Pacific
Australia: Shocking stuff 60
India: Delhi deadlock eases 62
South Korea: Low rates 64
Indonesia: Under pressure 66
Taiwan: Forecast table 67
Other Asia: Forecast tables 68
The Americas
Canada: Waiting to exhale 69
Brazil: Take a hike 70
Mexico: Still in a sweet spot 72
Colombia: Will get better, later 74
Chile: Rate hikes likely in 2013 75
Argentina: Growth recovery ahead? 76
Peru: As the world turns (faster) 77
Venezuela: Deteriorating outlook 78
Commodities 79
Long-term economic forecasts 80
Contacts 84
Disclaimer Inside back cover
5. Paul Mortimer-Lee November 2012
Global Outlook 4 www.GlobalMarkets.bnpparibas.com
Looking for the recovery
Our basic macro story at the global level is unchanged from our view three months
ago – growth in 2013 will be a little better than in 2012, but with regional divergences,
while global inflation will remain virtually flat. Within that picture, however, we have
made revisions that are broadly offsetting in terms of global growth.
The largest revision is a 0.6pp cut in our forecast for eurozone growth in 2013. We
now expect the eurozone to see its second successive year of a 0.4% decline in GDP.
This is more pessimistic than the recent European Commission forecast (which was
basically in line with our September projection, though conditions have deteriorated
since then). It is also likely to be about 0.5pp below the upcoming ECB forecast, which
is usually close to the Commission’s estimate.
The revision reflects weaker recent information on activity in the core eurozone
countries. Our downward revisions to Germany and France both reflect how weak
activity in the periphery is dragging them down, with France also being affected by a
tough budget.
Tail risks to the eurozone have fallen and financial tensions have eased. We see this
as one reason to expect growth to pick up over the course of 2013. However, positive
quarter-on-quarter growth may not emerge until the second half of the year.
Softer-than-expected numbers of late are also behind our downward revision to
Japanese growth, which we now put at only 0.2% in 2013, while GDP is expected to
be flat in 2014. The territorial dispute with China has also hurt Japanese growth
prospects.
Our US forecast, which continues to be predicated on the avoidance of serious
damage over the fiscal cliff – the expiry of fiscal measures that would lead to an
increase in taxation and reduction in spending – is for growth of 2.0% in 2013 after
2.1% this year, down only minimally in both cases on our September view. The annual
averages mask the strengthening of growth we expect over the course of next year.
While we see US GDP in Q4 2012 rising only 1.5% y/y, the corresponding figure for
Q4 2013 is 2.5%.
We have revised up our 2013 Chinese growth forecast slightly to reflect increasing
evidence that the economy has turned and is now starting to expand more quickly.
However, China’s growth problems are partly structural and we do not expect the
upswing to be vigorous. We forecast GDP to grow by 8.3% in 2013 after 7.7% in 2012.
Elsewhere in emerging markets, in Latin America, we were already well above
consensus in our Brazilian growth forecasts and are happy to remain there, but we
have nudged up our forecast for Mexico a little. A slower eurozone would not be
expected to be good news for the Central European economies and it isn’t – we have
revised down our forecasts.
Our global inflation projections are virtually flat at close to 3½% in 2013 and 2014, little
changed from 2012. There are differences between regions and countries. As with the
global picture, US inflation is expected to be flat, at around 2¼%, over the forecast
period, a slight increase on last time. Meanwhile, our 2012 and 2013 forecasts for
Japanese inflation have been revised down slightly.
In the eurozone, the rising output gap and reduced reliance on indirect tax increases
are expected to lead to a declining profile for inflation. From 2.5% inflation in 2012, we
forecast a dip to 1.8% in 2013 and 1.5% in 2014. Our 2013 forecast is down by 0.2pp
on last time, mainly due to a 0.4pp lower forecast for Germany, stemming from the
abolition of some medical fees.
Our Asian inflation forecasts are largely unchanged; 2012 Chinese inflation looks a
little lower than expected and we have cut our Indian inflation forecasts by around
0.5pp in 2013 and 2014.
Weaker Japanese
picture
US growth set to
accelerate in 2013
Global growth to pick
up slowly in 2013
Eurozone GDP growth
revised down – below
consensus
More convinced China
has turned the corner
Bullish on Latam, but
bearish on central
Europe
Global inflation to
remain contained
We expect a softening
in eurozone inflation
6. Paul Mortimer-Lee November 2012
Global Outlook 5 www.GlobalMarkets.bnpparibas.com
As regards monetary policy, our view on the US continues to be that in December, the
Fed will announce that its long-end purchases under Operation Twist will be continued
after the end of the year, but the short-end sales will stop. Thus, the Fed will be
acquiring some USD 85bn a month of long assets next year. We expect these
purchases to continue until the middle of 2014. We do not expect the Fed to raise
rates until 2015.
In Europe, we dropped our earlier forecast of another rate cut a few weeks ago. The
ECB appears to feel it has already done a lot to stabilise markets and improve
confidence and seems reluctant to adjust policy much further unless it really has to.
Thus, the eurozone’s current mild recession, which we expect to continue over the
coming months, is not sufficient to prompt the ECB to cut rates unless conditions take
a sudden turn for the worse.
We expect the ECB to use its outright monetary transactions (OMTs), but only after a
memorandum of understanding has been signed by Spain and formally approved. We
expect this to occur in Q1 2013. We have assumed that bond spreads will widen in Q1
in the eurozone, reflecting uncertainties about the Italian election, Greece and
Portugal and the likelihood that Spain will only ask for a programme when it has to.
Pressure on the BoJ to ease is unlikely to diminish after the December snap election,
and with the economy back in recession, we expect the BoJ to keep on expanding its
balance sheet. Not so the Bank of England, where there appears to be a greater focus
on credit easing.
There are a number of countries where we expect further monetary easing – Australia,
India, Sweden and Poland, for example. However, we do not expect any more rate
cuts in China, while in other countries, we expect tightening – in the Latin American
economies, for example.
Tables 1 and 2 show our market forecasts, as agreed with our strategists. In terms of
the major bond markets, we see yields remaining low for a long period, with the US
and eurozone bond yields very flat in the immediate months ahead. As global growth
starts to pick up – with Europe very firmly lagging – we expect the pressure on bond
yields to be gently upwards. With quantitative easing continuing in the US and Japan,
zero rates in most of the large advanced economies and inflation stable, we expect
this to be a drift upward, not a sharp sell-off. In the currency market, the story is a
weak EUR, but a weaker USD, against strong EMK currencies.
Table 1: Interest-rate forecasts (%) Table 2: FX forecasts
Spot Q4'12 Q1'13 Q2'13 Q3'13 Q4'13 Q1'14
US
Fed Funds 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25
2-year 0.26 0.25 0.20 0.20 0.25 0.25 0.25
10-year 1.67 1.75 1.75 2.00 2.20 2.40 2.50
Eurozone
Refi 0.75 0.75 0.75 0.75 0.75 0.75 0.75
2-year* 0.00 -0.05 0.00 0.10 0.15 0.20 0.20
10-year* 1.41 1.25 1.20 1.30 1.50 1.75 1.85
Japan
ODR 0.30 0.30 0.30 0.30 0.30 0.30 0.30
Call Rate 0.10 0.10 0.10 0.10 0.10 0.10 0.10
2-year 0.10 0.10 0.10 0.10 0.10 0.10 0.10
10-year 0.73 0.75 0.75 0.80 0.80 0.85 0.85
Spot Q4'12 Q1'13 Q2'13 Q3'13 Q4'13 Q1'14
EURUSD 1.28 1.33 1.35 1.32 1.35 1.32 1.31
EURJPY 105 104 103 100 101 99 102
EURGBP 0.80 0.79 0.78 0.76 0.74 0.74 0.72
GBPUSD 1.59 1.68 1.73 1.74 1.82 1.78 1.82
USDJPY 82 78 76 76 75 75 78
USDRMB 6.29 6.20 6.15 6.10 6.05 6.02 6.05
USDBRL 2.09 2.00 2.00 1.98 1.97 1.95 1.98
USDRUB 31.20 30.65 30.15 29.98 30.24 31.47 31.07
End period, spot rates as of 21 November 2012 *Bund yield
Source: BNP Paribas (Market Economics, Interest Rate Strategy)
End period, spot rates as of 21 November 2012
Source: BNP Paribas (FX Strategy)
Fed to carry on
expanding its balance
sheet
No ECB rate cuts,
failing a sharp softening
of activity
Spain to go to ESM in
Q1, opening the door
to OMT
BoJ balance sheet up,
BoE to remain flat
Low-yield environment
to persist; dollar to
weaken
7. Michal Dybula November 2012
Global Outlook 6 www.GlobalMarkets.bnpparibas.com
Risk scenarios
Deeper eurozone crisis – 15% probability (Tables 1 to 4)
Despite a reduction in stress since the summer, the risk of a deeper crisis in the
eurozone remains significant, with a number of potential triggers over the coming
quarters. Although the Greek parliament has approved the budget for 2013, including
new austerity measures and structural reforms, implementation risks remain
significant. While Greece could be given two more years to meet its fiscal targets, a
sizeable breach of its commitments cannot be ruled out. Such a breach could bring
external assistance to a halt, provoking speculation about whether or not Greece
would stay in the eurozone. Meanwhile, in Spain, fiscal consolidation has been
disappointingly slow. Even assuming a bailout for the banking system and lower bond
yields next year, a reduction in the deficit will not be easy. Further austerity measures
could backfire, leading to a deeper and/or longer-lasting recession, with negative
consequences for the budget. Alternatively, market sentiment could be hit by political
uncertainty in Italy ahead of the general election in spring 2013, leading to a rise in
yields and risk premia. In general, there is a risk that additional austerity measures will
spark social unrest, heightening political risk in the peripheral countries. Furthermore,
the reduction in stress during Q3 2012 has again led to political complacency and
further progress towards closer integration of the eurozone, such as setting up a
banking union, has been very slow, at best.
In the event of a renewed deepening of the crisis, we would expect the eurozone
economy to contract by around 1½% in 2013, some 1pp more than we currently
expect, with the weakness being particularly severe in the first half of the year. While
peripheral countries would be affected most, core economies would suffer from
increased uncertainty, too. Because of the bigger firewalls in place, the crisis should
be rather short lived and economic activity would pick up in 2014. Depending on which
particular trigger intensifies the crisis, we would expect policy responses at both the
eurozone and country level. In response to a deeper recession and disinflation risks,
we would expect the ECB to lower its policy rate to 0.50% by mid-2013 and expand
unconventional measures.
Under a scenario of a deeper, yet relatively short setback for the eurozone economy,
the impact on the rest of the world should be relatively small: we assume a 40-60%
pass-through to other countries of any change in eurozone growth relative to the
baseline, because of greater risk aversion and lower trade volumes. Also, assuming
there are effective policy responses from within the eurozone, as well as additional
easing measures in the US and China, a global recession should be averted.
However, as a result of weaker demand and lower commodity prices, inflation would
continue to decline beyond 2014. This would further delay policy normalisation in the
developed economies, keeping bond yields in core countries very low for longer and
resulting in a weaker profile for EURUSD in 2013.
US goes over the fiscal cliff – 15% probability (Tables 5 to 8)
While we expect a compromise resolution of the US fiscal cliff, with discretionary
tightening in the order of 1% of GDP next year, a more adverse outcome cannot be
ruled out. We do not think that an extreme scenario, in which the full scheduled fiscal
tightening occurs and is maintained, is politically feasible, but the US may still go over
the fiscal cliff for a month or so. A subsequent bi-partisan agreement would also
probably result in a greater tightening of fiscal policy than we currently expect, of
about 2% of GDP in 2013.
We estimate the US fiscal multiplier to be in the 0.7-0.8 range, but the impact on
growth even of a temporary fall off the fiscal cliff is likely to be larger than implied by
the multipliers. We would expect US growth in 2013 to be 1.2pp lower than in our base
case, because of the resultant slump in confidence in the early weeks of next year. As
a result, US GDP would fall sharply in Q1 2013 and the slump would simultaneously
hurt global growth, both directly, through a drop in global trade, and indirectly, as risk
aversion surged. In addition, the subsequent recovery would be shallower,
Many factors could
trigger a deeper
eurozone crisis
Eurozone GDP would
fall by around 1½% next
year ...
... but the global
economy would
continue to grow
US could temporarily go
over the fiscal cliff
Weaker US growth
would hurt global
activity
8. Michal Dybula November 2012
Global Outlook 7 www.GlobalMarkets.bnpparibas.com
undermined by tighter US fiscal policy than we currently forecast, even if financial
markets were to stabilise in Q2 on larger QE in the US and further monetary
accommodation by the other major central banks. It is unlikely that monetary
measures would help to engineer a swift rebound in the global economy. For instance,
in this scenario also, we would expect eurozone GDP to fall by close to 1½% y/y in
2013 increasing the risks to the peripheral countries and the bloc as a whole. In
response to weaker activity during 2013, we would expect a sharp drop in commodity
prices, hitting many emerging-market economies, but supporting substantial
disinflation around the globe.
Although the US would be the epicentre of the crisis, the USD would probably
strengthen in early 2013 on a surge in risk aversion. Consequently, we would expect
EURUSD to drop below 1.20 in Q1. Greater eurozone risks would also keep the EUR
weak in Q2 and Q3. However, as the Fed’s loosening of monetary policy would be
likely to be more aggressive than that of the ECB, EURUSD would probably gradually
strengthen to above 1.30 in 2014. In terms of bond markets, the surge in risk aversion
would trigger a flight to safety in Q1 2013. A very weak and fragile recovery, as well as
more quantitative easing, would keep bond yields very low during 2013.
Stronger global recovery – 15% probability (Tables 9 to 12)
Financial and monetary conditions are very accommodative in a number of major
global economies, such as the US, and this is reflected in an easing of credit
standards for the corporate sector. In the eurozone, the reduction in spreads in
autumn 2012 has also improved funding conditions, which should further reduce the
headwinds for the real economy. Meanwhile, in China, the new leadership is likely to
be keen on delivering stronger growth at the start of its term, which is consistent with
additional support measures for the economy. Finally, lower oil prices are also
conducive to a more marked rebound in activity soon.
These factors could lead to a larger growth recovery than forecast. The pace of
recovery in global manufacturing and trade volumes could accelerate from Q2 2013,
supporting corporate investment, labour markets and consumption. While fiscal
adjustment in the eurozone’s peripheral economies suggest it will underperform,
stronger global trade would be of huge benefit to Germany and should gradually feed
into other core European countries. In this scenario, we would expect GDP growth in
the major economies, such as the US and China, to be close to 0.4pp higher than our
base case, on average, in 2013 and 2014. The eurozone is likely to lag in 2013 and
the economy as a whole would still contract in year-on-year terms. In 2014, however,
as the recovery spread to more European countries, eurozone GDP growth would be
0.4pp higher than in our base case.
Stronger growth would push up inflation, initially because of rising commodity prices.
In developed economies, where the output gap would narrow, but remain negative,
core inflation should stay low until late 2014. In emerging-market economies, however,
faster growth and higher commodity prices would boost inflation more markedly,
necessitating more decisive policy tightening from late 2013. As a result, we would
also expect a stronger RMB in 2014. In response to faster growth and higher inflation,
yields at the front end of interest-rate curves in developed economies would rise faster
from late 2013 and curves would flatten in anticipation of an earlier start of monetary
normalisation. While the bar would be high for the Fed to raise interest rates, we
would expect the first hike by Q4 2014, following more than 12 months of above-trend
growth.
In this scenario, the EURUSD profile would initially be shaped by stronger US growth
supporting the dollar in mid-2013. Afterwards, as risk appetite increased and the
eurozone recovery caught up, the pair would be likely to rise to 1.40 by late 2013
or early 2014. An earlier start of monetary normalisation in the US than in Europe
would, however, probably underpin dollar strength in late 2014, with the pair falling
below 1.30.
Flight to safety on
surge in risk aversion
in Q1 2013
Soft monetary
conditions could
support a stronger
recovery
Rebound in global trade
would lift growth
everywhere
Faster monetary
normalisation; Fed
would hike before
end 2014
11. David Tinsley November 2012
Global Outlook 10 www.GlobalMarkets.bnpparibas.com
US rates: Medium-term forecasts
Chart 1: Fed funds target rate (%) Chart 2: 3-month rate and Fed funds (%)
92 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
-3
-2
-1
0
1
2
3
4
5
6
7
Nominal
Real (deflated by core CPI)
BNPP
forecast
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
0
2
4
6
Fed funds target rate
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
Mean
3Mth Rate less Fed funds
BNPP
forecast
Source: Reuters EcoWin Pro, BNP Paribas (Market Economics and Interest
Rate Strategy)
We forecast that the Fed will keep policy rates unchanged
until 2015. Real rates will remain well below zero over the
forecast period.
Source: Reuters EcoWin Pro, BNP Paribas (Market Economics and
Interest Rate Strategy)
Given our forecast of a long status quo on policy rates,
the spread between the three-month and the Fed funds
rates should stay relatively flat for some time.
Chart 3: 2-year and Fed funds (%) Chart 4: 10/2-year spread and Fed policy (%)
92 94 96 98 00 02 04 06 08 10 12 14
0
2
4
6
Fed funds target rate
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
US 2-yr less Fed funds
BNPP
forecast
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Percent
-1
0
1
2
3
4
5
6
7-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Fed funds target rate (Inverted, RHS)
10-yr less 2-yr
BNPP
forecast
Source: Reuters EcoWin Pro, BNP Paribas (Market Economics and Interest
Rate Strategy)
The spread between two-year Treasury yields and the Fed
funds rate should also see little change, with the latter not
forecast to start rising until 2015.
Source: Reuters EcoWin Pro, BNP Paribas (Market Economics and
Interest Rate Strategy)
The yield curve is unusually flat relative to the policy
rate. We expect a steepening over the forecast period as
the US and global outlook improves and tail risks fall.
Chart 5: 10-year yield (%) Chart 6: 10-year swap spread (%)
Source: Reuters EcoWin Pro, BNP Paribas (Market Economics and Interest
Rate Strategy)
We expect longer-term yields to rise over the forecast
period because of the removal of eurozone-related tail risk
and a firming in the US growth outlook.
Source: Reuters EcoWin Pro, BNP Paribas (Market Economics and
Interest Rate Strategy)
We expect little change in the swap spread over the
forecast period, because of the Fed’s commitment to
maintain loose monetary policy over the medium term.
12. David Tinsley November 2012
Global Outlook 11 www.GlobalMarkets.bnpparibas.com
Eurozone rates: Medium-term forecasts
Chart 1: Policy rates (%) Chart 2: 2-year rate & ECB policy (%)
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
-1
0
1
2
3
4
5
6
EONIA
Real refi rate (deflated by core HICP)
BNPP
forecast
Nominal refi rate
Source: Reuters EcoWin Pro, BNP Paribas Market Economics and
Interest Rate Strategy
We forecast ECB policy rates to remain at record low
levels through the forecast period. In real terms, the
refinancing rate will remain negative.
Source: Reuters EcoWin Pro, BNP Paribas Market Economics and
Interest Rate Strategy
We forecast German two-year yields to remain very low,
in line with our policy forecast. Over time, the spread to
the policy rate should widen.
Chart 3: 10/2-year spread & ECB policy (%) Chart 4: 10-year/3-month spread & ECB policy (%)
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.00.00
0.25
0.50
0.75
1.00
1.25
1.50
1.75
2.00
2.25
ECB refi rate
(Inv. RHS)
BNPP
forecast
10/2-yr spread
Source: Reuters EcoWin Pro, BNP Paribas Market Economics and
Interest Rate Strategy
The 10/2-year spread is likely to remain low in relation to
the policy rate in coming quarters. Risk aversion is
expected to recede over the forecast period.
Source: Reuters EcoWin Pro, BNP Paribas Market Economics and
Interest Rate Strategy
Uncertainty about the future of the eurozone has
diminished. The curve should, therefore, steepen relative
to the level of policy rates.
Chart 5: US − German yield & policy spreads (%) Chart 6: 10-year bund yields (%)
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Percent
-1
0
1
2
3
4
5
6
Real (deflated by core HICP)
BNPP
forecast
10-year Bund
Source: Reuters EcoWin Pro, BNP Paribas Market Economics and
Interest Rate Strategy
We expect the spread between US and German yields at
the long end to widen significantly in 2013, before
stabilising. This reflects the US’s quicker move to
‘normalisation’.
Source: Reuters EcoWin Pro, BNP Paribas Market Economics and
Interest Rate Strategy
We expect Bund yields to rise over the forecast period,
though the real yield should stay close to zero over 2013.
13. Julia Coronado November 2012
Global Outlook 12 www.GlobalMarkets.bnpparibas.com
US: Avoiding the cliff
The US economy has, once again, registered stable, if unspectacular growth
throughout 2012, despite a global slowdown and uncertainties over Europe and the
domestic fiscal policy outlook. Divergence has emerged in recent quarters in the
components of GDP, between an improving housing market, hiring and consumer
spending, which have remained moderate and stable, and business investment, which
has fallen off sharply. We attribute the decline in capital spending to political
uncertainties and the downswing in the global manufacturing cycle. Therefore, we look
for a rebound next year that will gradually strengthen to an above-trend growth rate by
the end of 2013.
Fiscal policy is the main source of uncertainty in terms of the US outlook. As the
domestic private sector heals, the public sector is focusing on a return to a more
sustainable fiscal position. At the time of writing, post-election negotiating positions
over the fiscal cliff and longer-term outlook were still being established. However, we
expect an extension of most elements of the cliff before year end to allow time for
more in-depth and, inevitably, complicated negotiations on a medium-term budget
package. Reasonably orderly negotiations with bi-partisan compromise will help to
prevent ratings downgrades and have a positive knock-on effect on business and
consumer confidence. The more divisive and unproductive the talks, the more likely a
downgrade from at least two ratings agencies by the end of the year and a negative
spill-over to growth through elevated uncertainty and a loss of confidence.
The FOMC has signalled that the bar for ceasing its balance-sheet expansion is a
sustained and sustainable improvement in the labour-market outlook, something we
expect to take more than a year to materialise. We expect mortgage and Treasury
buying to continue at a similar pace in 2013, with a tapered pace of purchases
continuing into mid-2014.
Chart 1: Hiring has held up, but has not accelerated
Source: Reuters EcoWin Pro, BNP Paribas
Chart 2: Capital spending has fallen sharply
Source: Reuters EcoWin Pro, BNP Paribas
Chart 3: Trend-like growth will keep the Fed easing
Source: Reuters EcoWin Pro, BNP Paribas
Chart 4: The fiscal outlook is the key uncertainty
14
16
18
20
22
24
26
Q1 1970 Q1 1977 Q1 1984 Q1 1991 Q1 1998 Q1 2005 Q1 2012
Govt. revenues (% of GDP)
Govt. expenditures (% of GDP)
Bars mark recession
Source: Reuters EcoWin Pro, BNP Paribas
Growth in 2013 should
gradually strengthen to
an above-trend pace
Fiscal policy is the main
risk to the US outlook
We think the cliff will be
avoided and the Fed will
stay accommodative
15. Ken Wattret November 2012
Global Outlook 14 www.GlobalMarkets.bnpparibas.com
Eurozone: Slow road to recovery
Weakness has spread from the peripheral to the core countries and the eurozone is
set for a further decline in activity. With momentum indicators failing to signal a return
to growth any time soon, we have lowered our GDP forecast for 2013 by 0.6pp to a fall
of 0.4%, the same size as the drop forecast for 2012.
High and rising unemployment is weighing on household income and consumer
sentiment, while uncertainty and credit constraints are holding back investment. Fiscal
policy will also remain a headwind to domestic demand, though the aggregate
tightening at the eurozone level will ease somewhat in 2013. The eurozone will remain
highly sensitive to developments in external demand. A gradual improvement in global
trade conditions in 2013 should feed through to exports, particularly from H2. The
improvement in financial and monetary conditions due to the ECB’s outright monetary
transactions (OMTs) should also filter through to the economy, but the recovery will be
gradual at best and patchy at the national level.
OMTs are the policy tool of choice for the ECB near term, though their potential use
remains dependent on political factors. The door remains open for further ECB
measures in the event of a more pronounced deterioration in economic and/or
financial market conditions than we have assumed in our central forecast.
Inflation remains above 2% due to energy price rises and indirect tax increases.
However, underlying price pressures are subdued due to the weakness of domestic
demand and we forecast inflation to fall below 2% in H1 2013.
The prospect of OMTs has reduced tail risks, but uncertainty remains high. German
and Italian elections in 2013 will be focal points. Continued belt tightening is likely to
lead to further social unrest and political disagreement about support packages.
Chart 1: Eurozone financial stress index
Source: Reuters EcoWin Pro, BNP Paribas
Chart 2: Recovery patterns (GDP, 2008=100)
Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1
08 09 10 11 12
94
95
96
97
98
99
100
101
102
103
104
France
Spain
Italy
Eurozone
Germany
Source: Reuters EcoWin Pro, BNP Paribas
Chart 3: Survey indicators
98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
35
40
45
50
55
60
65
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
Eurocoin
Composite
PMI (RHS)
Source: Reuters EcoWin Pro, BNP Paribas
Chart 4: Inflation dynamics
99 00 01 02 03 04 05 06 07 08 09 10 11 12
7.0
7.5
8.0
8.5
9.0
9.5
10.0
10.5
11.0
11.5
12.0-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
Unemployment rate (%, RHS inv.)
Core HICP (% y/y)
Compensation per
employee (% y/y)
Source: Reuters EcoWin Pro, BNP Paribas
OMT announcement
has reduced tail risks,
but uncertainty remains
The recovery will be
delayed to H2 2013
Annual GDP will
contract in 2012 and
2013
J a n
1 1
M a r M a y J u l S e p N o v J a n
1 2
M a r M a y J u l S e p N o v
StandardDeviationAbove(+)/Below(-)Long-TermAverage
0 .0
0 .5
1 .0
1 .5
2 .0
2 .5
3 .0
3 .5
4 .0
3 - y r L T R O s
N o v 2 0 1 2
O M T
J u l 2 0 1 2
17. Ryutaro Kono November 2012
Global Outlook 16 www.GlobalMarkets.bnpparibas.com
Japan: Anaemic recovery from Q1
Japan looks to be in recession. Real GDP fell in Q3 as global growth slowed and the
fiscal stimulus faded. Exports have been falling since May and consumption has
softened as post-quake pent-up demand has waned and weaker production has
started to take its toll on wages. In addition, the end of subsidies in September led to a
large drop in vehicle sales. Fixed investment has also weakened, reflecting
heightened uncertainty about the global economy. Because of the lingering impact of
the end of vehicle subsidies and the damage to exports from strained ties with China,
another fall in GDP is likely in Q4. We expect economic growth to resume from Q1
2013, thanks to a recovery in global activity.
The consumption tax is scheduled to be raised 3pp from April 2014. A pre-hike surge
in consumption should push up growth by 0.5pp in FY2013 while the subsequent
pullback in spending should depress growth by 1.0pp in FY2014 (the CY-based
impact will be smaller, at 0.3pp in 2013 and ‒0.6pp in 2014). As for the impact on
prices, we have lowered our projection, as entrenched deflationary expectations
suggest that not all of the tax hike will be passed on and we now expect the tax hike to
raise the core CPI by only 1.4pp. At any rate, with underlying CPI inflation likely to
remain below the BoJ’s price stability goal of 1%, the zero-rate regime should remain
in place throughout the forecast period.
The next government, whether led by the DPJ or LDP, is likely to press for more
easing to revive the economy and ensure a hike in the consumption tax. We expect
the BoJ to ease roughly once every three months, but the next move may come as
early as December should the Fed decide to increase bond purchases when
Operation Twist ends. As in late October, the BoJ will probably continue to expand its
asset purchase programme, raising not only purchases of JGBs, but also risk assets.
However, foreign-bond buying is unlikely, as currency policy is the MoF’s domain.
Chart 1: Real exports (sa, JPY bn)
4000
4500
5000
5500
6000
6500
7000
7500
08 09 10 11 12
Source: MOF, BoJ, BNP Paribas
Chart 2: Sales of new motor vehicles (saar, mn)*
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
08 09 10 11 12
Monthly
Quarterly
Source: Japan Automobile Dealers Association, Japan Mini Vehicles
Association, BNP Paribas *including mini vehicles
Chart 3: Capital goods shipments (sa, 2005=100)
60
70
80
90
100
110
120
08 09 10 11 12
Quarterly
Monthly
Source: METI, BNP Paribas
Chart 4: Output gap estimated from Tankan data (%)
-6
-4
-2
0
2
4
6
Q1 90 Q1 94 Q1 97 Q1 00 Q1 03 Q1 06 Q1 09 Q1 12
Source: BoJ, BNP Paribas
Economy entered
recession in mid-2012
We now expect the 3pp
consumption tax hike to
raise the CPI by
only 1.4pp
BoJ is likely to ease
policy further due to
strong political
pressure
19. Chen Xingdong November 2012
Global Outlook 18 www.GlobalMarkets.bnpparibas.com
China: Green shoots
Chinese economic indicators have improved significantly since September. Some
70% that we closely monitor have picked up. Manufacturing PMI surveys have seen a
rebound in new orders, especially domestic ones, while the inventory cycle appears to
be turning. Both industrial value-added output and exports have avoided a deeper
downturn. Meanwhile, growth in fixed-asset investment (FAI) has accelerated, led by
infrastructure. Moreover, funding conditions are easing. Hence, we conclude that the
7.4% y/y GDP growth rate in Q3 is likely to have been the bottom in this cycle.
Inflation remains benign in the early stages of the recovery. In recent months, inflation
has been softer than expected and looks likely to remain below 3% for the rest of 2012.
Thus, we have lowered our inflation forecast from 3.0% to 2.7% for 2012, but are
keeping our forecast of 3.6% for 2013. Industrial deflation may also have come to an
end, with PMI input prices posting large gains in October. But reflation will be slow, as
global commodity prices have retreated after the initial effects of the latest round of
developed-market quantitative easing.
The improving economy reduces the need for policy easing. The end of the 18
th
Party
Congress will reduce political uncertainty and boost activity. We no longer expect an
interest rate cut this year or next. The PBOC prefers reverse repos to manage both
liquidity and interbank rates flexibly. But it is still too early to worry about tightening.
Incoming policymakers still regard reasonably high growth as a precondition to solving
China’s structural issues.
We have raised our GDP growth forecast for 2013 slightly, from 8.0% to 8.3%, on the
basis of a cyclical recovery in H1 2013, which will remain limited by structural
constraints from Q4 2013. If significant progress is made on reform, boosting
confidence, there may be upside risks to our forecast.
.
Chart 1: Exports remain a drag on the economy (% y/y)
-20
-10
0
10
20
30
40
50
01 02 03 04 05 06 07 08 09 10 11 12
-20
-10
0
10
20
30
40
50Delivery value for export
Value added of industry (RHS)
Source: NBS, BNP Paribas
Chart 2: Rising orders and falling inventory
-4
-3
-2
-1
0
1
2
3
4
08 09 10 11 12
40
42
44
46
48
50
52
54
56
Final goods inventories
(%, inverted, RHS)
HSBC/Markit PMI new orders minus output
Source: CFLP, BNP Paribas
Chart 3: FAI driven by infrastructure (% y/y)
-10
0
10
20
30
40
50
60
05 06 07 08 09 10 11 12
FAI
Infrastructure
PropertyManufacturing
Source: NBS, BNP Paribas
Chart 4: Rise in inflation reduces need for a rate cut (%)
-4
-2
0
2
4
6
8
10
12
14
16
06 07 08 09 10 11 12
-4
-2
0
2
4
6
8
10
12
14
16Real rate deflated by PPI
1-year benchmark lending rate
Source: NBS, PBOC, BNP Paribas
Green shoots since
September suggest Q3
was cyclical bottom
Reduced need for
additional easing, but
tightening is far off
Strength and duration
of recovery depend on
reform progress
Inflation remains docile
21. Evelyn Herrmann November 2012
Global Outlook 20 www.GlobalMarkets.bnpparibas.com
Germany: Temporary struggle
The German economy is currently suffering from the impact on activity abroad of the
eurozone crisis and the downturn in the global manufacturing cycle generally.
However, Germany’s fundamentals remain structurally sound and we forecast growth
to recover once the global trade cycle picks up in H2 2013.
After strong growth in H1 2012, we expect economic conditions to remain weak in the
coming months. Industrial production is falling as non-eurozone and domestic orders
fail to offset the plunge in eurozone orders. Fixed investment is also continuing to fall
as uncertainty over the economic outlook causes companies to postpone investment.
However, we expect private consumption to continue to grow throughout the forecast
period. The unemployment rate, although rising, is forecast to remain well below its
historical average and real wages should continue to rise. As Germany’s exports
remain competitive, the economy is set to rebound along with global trade in H2 2013.
Inflation pressure will remain subdued due to the current economic slack in the
economy and delays in passing though increases in labour costs. The cancellation of
some medical fees on 1 January 2013 will also limit inflation next year. We expect
core inflation to accelerate gradually from the end of 2013, but to remain well below
2% over the forecast period.
The spotlight will increasingly fall on the general election to be held in September
2013. Current polls suggest a grand coalition between the conservative CDU and the
Social Democrats (SPD), headed by Chancellor Angela Merkel, is the most likely
outcome. We do not believe that this coalition’s approach to the eurozone crisis will
change significantly. The pressure for structural adjustment in the eurozone might
ease, but mutualisation of debt will remain off the table.
Chart 1: GDP expenditure components (2008=100)
Source: Reuters EcoWin Pro, BNP Paribas
Chart 2: Ifo-clock in downswing
Source: Reuters EcoWin Pro, BNP Paribas
Chart 3: Factory orders by origin (2005=100,3mma)
Source: Reuters EcoWin Pro, BNP Paribas
Chart 4: Intra- & extra-eurozone current account (% GDP)
Source: Reuters EcoWin Pro, BNP Paribas
Economy is structurally
sound
Consumption to
remain strong
No inflation pressures
for now
EU integration
dominates the political
debate
Output will remain weak
near term
23. Dominique Barbet November 2012
Global Outlook 22 www.GlobalMarkets.bnpparibas.com
France: Rough seas
Both business surveys and hard data suggest the economy is now in recession and,
with discretionary fiscal tightening amounting to 2% of GDP next year, we forecast
GDP to be unchanged, on average, in 2013.
After failing to grow for five quarters, GDP surprised to the upside in Q3, rising
0.2% q/q. However, recent data suggest that activity is now contracting. The prospect
of next year’s fiscal tightening is already weighing on personal spending. Weak
domestic demand and the corporate sector’s low profitability will not support a
recovery in investment. Against this background, exports have become the main
contributor to growth, but are unlikely to pick up fast enough to lead to a sustained rise
in GDP until H2 2013.
The unemployment rate is still on a rising trend. The high number of unemployed and
under-employed workers is limiting wage growth, which, in turn, should push core
inflation down to around 1.1% for most of 2013. Volatility of headline inflation will stem
from moves in commodity prices – oil, in particular.
The lack of growth should be the main factor behind the overshoot of the 3%-of-GDP
target for the budget deficit that we are expecting in 2013. However, the European
Commission has already suggested that, given the amount of fiscal tightening already
scheduled, it would not recommend further tightening in 2013 to reach the target.
The government has presented a plan to boost competitiveness. We believe that it is
too back loaded. Structural reforms of the goods and services markets are also
needed. Political pressure from the rest of Europe, France’s lack of competitiveness
and rising unemployment will increase the need for more reforms.
Chart 1: GDP and employment growth (% y/y)
Source: Reuters EcoWin Pro, BNP Paribas
Chart 2: Unemployment rate (%)
Source: Reuters EcoWin Pro, BNP Paribas
Chart 3: Foreign trade (real, % of GDP)
Source: Reuters EcoWin Pro, BNP Paribas
(RHS)
Chart 4: HICP, wages and purchasing power (% y/y)
Source: Reuters EcoWin Pro, BNP Paribas
In recession
Inflation set to remain
low
2013 budget overshoot
acceptable
More structural reforms
needed
25. Luigi Speranza November 2012
Global Outlook 24 www.GlobalMarkets.bnpparibas.com
Italy: Headwinds softening
Leading indicators have shown signs of stabilising recently, consistent with our view
that the fall in economic activity is already slowing and will continue to do so for the
next couple of quarters. In 2013, we expect growth to resume, albeit gradually,
reflecting the slower pace of fiscal consolidation (the cyclically adjusted budget deficit
will be reduced by around 1% of GDP, compared with a cut of around 3% of GDP in
2012) and easier monetary and financial conditions. Credit constraints persist,
especially for small and medium-sized enterprises, but the recent fall in interest rates
on loans to businesses (Chart 4) is encouraging.
The government has recently raised its fiscal deficit targets for both this year and
2013, reflecting lower-than-anticipated growth. The new estimate for this year’s budget
deficit (2.6% of GDP) looks cautious in view of the government’s success in fighting
tax evasion and we would not be surprised if the deficit were slightly below target.
Conversely, the 2013 target of 1.8% of GDP is at risk, we believe, in the absence of
additional fiscal measures.
The government’s focus has gradually shifted from fiscal consolidation to growth. The
announcement of income tax cuts in 2013, financed by an increase in VAT rates, is
part of this strategy. While neutral on the budget, this decision is aimed at
demonstrating the eventual rewards of austerity.
The general election in spring 2013 is a key risk factor. Recent opinion polls suggest
that no party will win a clear victory. In such an event, we believe the current prime
minister, Mario Monti, will be asked to lead the new government. However, during the
election campaign, traditional parties may be tempted to distance themselves from the
Monti administration, leading to a sharp increase in uncertainty about the policy
outlook.
Chart 1: OECD leading index and IP
Source: Reuters EcoWin Pro, BNP Paribas
Chart 2: Industrial orders (index, 2005 = 100)
Source: Reuters EcoWin Pro, BNP Paribas
Chart 3: Change in cyclically adjusted primary balance
0.0
1.0
2.0
3.0
4.0
5.0
6.0
Germany France Italy Spain Portugal Greece Ireland Eurozone
2011
2012
2013
(% GDP)
Source: Reuters EcoWin Pro, BNP Paribas
Chart 4: Interest rates on new loans to non-financial
corporations (%)
Source: Reuters EcoWin Pro, BNP Paribas
Growth to resume in
2013
New deficit target for
2012 looks cautious
Election risk remains
high
Policy geared towards
growth
27. Ricardo Santos November 2012
Global Outlook 26 www.GlobalMarkets.bnpparibas.com
Spain: Recession deepening
Fiscal tightening and the deleveraging of Spain’s private sector is leading to a
deepening of the recession. As a result, we expect GDP to fall 1.8% in 2013 after
contracting 1.4% in 2012.
At present, the economy is probably experiencing its steepest quarterly fall of the
recession, due to September’s 2pp VAT increase and as consumers tighten their belts
ahead of cuts to public-sector wages in December. Banks need to deleverage further
to meet the conditions for recapitalisation funding from the EU. Hence, credit is likely to
continue to contract. Moreover, as the Spanish ‘bad bank’ steps up the disposal of
property assets, the housing market is likely to remain under downward pressure. We
forecast house prices to have fallen 13% y/y by the end of this year. Meanwhile,
unemployment is likely to continue to rise, averaging almost 27% in 2013, as both the
private and the public sector continue to cut jobs.
The only support to activity is likely to come from a gain in net trade. However, the
improvement will be limited by weak export growth because of falling demand from other
eurozone countries. The only bright spot will be exports to outside the eurozone.
We forecast inflation to remain above 2% until the impact of September 2012’s rise in
VAT falls out of the year-on-year inflation rate late in 2013.
We expect Spain to ask for official support from the EFSF/ESM and ECB in Q1 2013
due to its continued fiscal problems, especially if market tensions rise. We forecast the
2012 budget deficit at 8.2% of GDP, above the 6.3% target, as the new financial
control mechanisms for the country’s autonomous regions are not yet in place and the
deficit will include the cost of banks’ recapitalisation. Although it is likely to be more
closely monitored by the European Commission, we expect Spain to miss its deficit
target in 2013. Recent comments by the EU suggest some leeway is possible.
Chart 1: Public balance (% GDP)
Source: Reuters EcoWin Pro, Ministry of Finance, BNP Paribas
Chart 3: Composite PMI and GDP growth
Source: Reuters EcoWin Pro, BNP Paribas
Chart 2: GDP and domestic demand (% y/y)
-8.5
-6.5
-4.5
-2.5
-0.5
1.5
3.5
5.5
7.5
Dec-00 Dec-02 Dec-04 Dec-06 Dec-08 Dec-10 Dec-12
GDP
Domestic
Demand
Source: Reuters EcoWin Pro, BNP Paribas
Chart 4: Labour market
Source: Reuters EcoWin Pro, BNP Paribas
Chart 1: Fiscal tightening (% GDP)
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
2012 2013 2014
Change in cyclically adjusted budget balance
April 2012
September
2012
Source: Reuters EcoWin Pro, BNP Paribas
Chart 3: Fiscal measures (% of GDP)
Mar 12 Jun 12 Sep 12
Regional spending cuts (0.6%)Spending cuts (0.6%)
Income-tax increase (0.6%)
Social benefit cuts (0.3%)
Regional tax increases (0.3%)
VAT increase (0.5%)
Wage cuts (0.3%)
Dec 12
Source: Ministry of Finance, BNP Paribas
Chart 2: Public and private employment growth (% y/y)
Source Reuters EcoWin Pro, BNP Paribas
Chart 4: Central government cash deficit (% GDP)
Source: Ministry of Finance, BNP Paribas
GDP to shrink further
Inflation set to fall
Net trade will be the
only support
Budget deficit to exceed
targets in 2012 and 2013
Unemployment to
continue to increase
29. Raymond van der Putten November 2012
Global Outlook 28 www.GlobalMarkets.bnpparibas.com
Netherlands: Pruning for health
Domestic spending will remain subdued in the coming years. Households, facing high
indebtedness and rising unemployment, continue to rein in spending. Moreover,
business confidence is at a record low. Production is not only being hampered by a
lack of demand, but also increasingly by financing constraints (Chart 2). Hence, the
external sector should remain the main engine of growth. Thanks to the impact on
competitiveness of limited wage growth, Dutch exporters will retain market share and
exports should rise. In contrast, imports are expected to be subdued, resulting in a
substantial and growing surplus on the current account.
Inflation should remain well above 2% in 2013, mainly due to a 2pp hike in the
standard VAT rate to 21% from October 2012, although retailers will find it difficult to
pass on all of the VAT increase to their customers. However, higher consumer prices
are unlikely to translate into pay rises, as rising unemployment is undermining trade
unions’ bargaining position, particularly in light of the pay freeze in the public sector.
Wage growth has been below inflation since 2010.
Following September’s election, the liberal VVD party and the Labour Party (PvdA)
succeeded in bridging their ideological differences to form a grand coalition. The main
objective is to achieve a balanced budget in the medium term. To this effect, the
parties have agreed a savings plan, worth EUR 16bn, or 2.5% of GDP. The main
measures are: limiting mortgage tax deductibility in exchange for lower income taxes,
limiting unemployment benefits to two years, easing employment protection rules and
gradually raising the retirement age to 66 by 2018 and 67 by 2021.
The main risk is the housing market. Around 20% of mortgage borrowers are in
negative equity, while house prices are still trending down. The number of mortgages
in arrears could increase rapidly in tandem with the deterioration in the labour market.
Chart 1: Burst housing bubble weighing on spending
-10
-8
-6
-4
-2
0
2
4
6
8
08 09 10 11 12
-5
-4
-3
-2
-1
0
1
2
3
4
House prices (% y/y)
Domestic consumption (3mma, % y/y, RHS)
Source: Statistics Netherlands
Chart 2: Increasing financing problems for industry*
0
10
20
30
40
50
60
70
October 2010 October 2011 October 2012
No bottlenecks
Insufficient
demand
Financing
problems
% of responses
Source: Statistics Netherlands *Factors limiting production
Netherlands: Economic forecasts
2010 2011 2012
(1)
2013
(1)
2014
(1)
Components of growth
Total GDP 1.6 1.0 -0.9 -0.3 0.9
Dom. demand ex. stocks -1.1 0.6 -1.5 -1.1 0.6
Private consumption 0.3 -1.0 -1.2 -1.8 0.2
Public consumption 0.7 0.1 0.3 0.0 0.0
Fixed investment -7.2 5.7 -5.0 -1.0 2.5
Stocks (cont. to growth) 1.2 -0.1 0.0 0.1 0.1
Exports 11.2 3.9 1.9 1.2 4.5
Imports 10.2 3.6 1.5 0.6 4.8
Industrial production 7.0 3.4 -1.5 0.0 2.3
Savings ratio (%) 3.4 5.0 5.2 5.3 5.4
Inflation & labour
CPI 1.3 2.3 2.5 2.3 1.7
HICP 0.9 2.5 2.8 2.5 1.8
Core HICP 1.1 1.7 2.2 2.5 1.9
Contract wages 1.2 1.3 1.5 1.3 1.3
Employment -1.1 0.0 -1.1 -1.3 -0.1
Unemployment rate (%) 4.5 4.4 5.4 6.8 7.0
External trade
Trade balance (EUR bn) 39.6 44.4 45.8 49.0 50.4
Current account (EUR bn) 45.1 58.6 60.1 64.2 68.7
Current account (% GDP) 7.7 9.7 9.9 10.5 11.0
Financial variables
General gov. budget (EUR bn) -30.0 -27.1 -23.3 -19.6 -17.6
General gov. budget (% GDP) -5.1 -4.5 -3.9 -3.2 -2.8
Primary budget (EUR bn) -21.9 -18.3 -15.4 -11.7 -10.2
Primary budget (% GDP) -3.7 -3.0 -2.5 -1.9 -1.6
Gross gov. debt (% GDP) (2)
62.8 65.5 71.9 73.5 74.0
Interest rates
(2)
3-month rate (%) 0.67 1.36 0.20 0.20 0.50
10-year bond yield (%) 3.11 1.75 1.55 2.05 2.55
Spread over Bund (bp) 131 39 30 30 20
Footnotes: (1) Forecast (2) End period
Figures are year-on-year percentage changes unless otherwise indicated
Source: BNP Paribas
Number of mortgages
in arrears could rise
rapidly
Exports remain the
main growth engine as
domestic sectors
continue to deleverage
EUR 16bn savings
programme to achieve
balanced budget in
medium term
Second-round effects of
VAT hike likely to be
limited
30. IMPORTANT DISCLOSURE:
This analysis has been produced by Fortis Bank sa/nv and has been reviewed, but not amended, by BNP Paribas. BNP Paribas is an indirect shareholder of Fortis Bank with a
74.93% stake. This analysis does not contain investment research recommendations.
Steven Vanneste November 2012
Global Outlook 29 www.GlobalMarkets.bnpparibas.com
Belgium: Resilience waning
While the Belgian economy escaped recession in Q3, it may not have escaped it
entirely. Economic activity was particularly weak at the start of Q4, with all leading
indicators pointing downwards and, in some cases, plunging (such as companies’
appraisal of the evolution of industrial production, Chart 1). Recent announcements of
mass layoffs pose a real threat to the resilience of the labour market, a key foundation
of domestic demand. Furthermore, the need for fiscal consolidation and to control unit
labour costs (Chart 2) will weigh on consumers’ purchasing power. Some support is
expected from exports in 2013 as activity slowly picks up in the US, China and
Germany. Nevertheless, as capacity utilisation remains well below its long-term
average, it will take time before this translates into investment growth.
A fall in energy inflation has lowered Belgian inflation back in line with the eurozone
average. However, core inflation is still rising faster in Belgium as a consequence of its
wage growth. While the automatic wage-indexation system will be left largely
untouched, the government is set to tighten wage policy to limit real wage growth and
bring labour costs more in line with Belgium’s neighbouring countries.
A total consolidation effort of almost 4% of GDP has been needed to lower the budget
deficit below 3% of GDP in 2012. Although the pace of austerity is more moderate in
2013 (1.3% of GDP), the softer policy options are largely running out, putting stress on
the six-party coalition. However, financial conditions have remained favourable, with
the 10y Olo government and 3m treasury certificate rates at record lows.
Threats to political cohesion, a correction of house prices and a lack of improvement
in Belgium’s competitiveness are the main risks to the economic outlook.
Chart 1: Industrial production
Industrial production (% y/y)
-20
-15
-10
-5
0
5
10
15
20
05 06 07 08 09 10 11 12 13
-25
-20
-15
-10
-5
0
5
10
15
20
Appraisal of production rate
(RHS)
Source: Reuters EcoWin Pro, BNP Paribas
Chart 2: Unit labour cost index (whole economy)
95
100
105
110
115
120
125
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
France
Belgium
Netherlands
Germany
Q1 2002 = 100
Source: Reuters EcoWin Pro, BNP Paribas
Belgium: Economic forecasts
2010 2011 2012 (1)
2013 (1)
2014 (1)
Components of growth
Total GDP 2.4 1.8 -0.2 0.0 1.2
Dom. demand ex stocks 1.4 1.2 -0.4 -0.1 1.2
Private consumption 2.7 0.2 -0.7 0.0 1.4
Public consumption 0.7 0.8 0.0 -0.4 -0.1
Fixed investment -1.4 4.1 -0.1 -0.1 2.5
Stocks (cont. to growth) 0.3 0.7 -0.3 -0.2 0.0
Exports 9.6 5.6 0.5 2.3 4.7
Imports 8.9 5.8 0.1 1.9 4.8
Industrial production 8.4 4.3 -4.4 -0.3 3.4
Savings ratio (%) 15.4 14.4 15.8 15.5 16.1
Inflation & labour
HICP 2.3 3.5 2.6 1.9 1.5
Core HICP 1.1 1.7 1.9 1.7 1.5
Wages 1.5 3.2 3.2 2.2 0.7
Employment 0.8 1.4 0.1 -0.2 1.0
Unemployment rate (%) 8.3 7.2 7.4 7.9 7.6
External trade
Trade balance (EUR bn) 13 7 12 13 13
Current account (EUR bn) 7 -5 1 2 2
Current account (% GDP) 1.9 -1.4 0.2 0.6 0.5
Financial variables
General gov. budget (EUR bn) -13 -14 -11 -9 -5
General gov. budget (% GDP) -3.8 -3.7 -2.9 -2.3 -1.2
Primary budget (EUR bn) -1.6 -1.5 1.8 4.2 9.3
Primary budget (% GDP) -0.4 -0.4 0.5 1.2 2.3
Gross gov. debt (% GDP) (2) 96.4 98.7 100.7 101.7 100.3
Interest rates (2)
3-month rate (%) 0.67 1.36 0.20 0.20 0.50
10-year bond yield (%) 4.16 3.27 2.30 2.65 3.15
Spread over Bund (bp) 237 192 105 90 80
Footnotes: (1) Forecast (2) End period
Figures are year-on-year percentage changes unless otherwise indicated
Source: BNP Paribas Fortis
Q4 2012 started badly
Wage restraint
Moderate fiscal
austerity, but difficult
political choices
31. Catherine Stephan November 2012
Global Outlook 30 www.GlobalMarkets.bnpparibas.com
Austria: A wait-and-see attitude
After GDP fell by 0.1% q/q in Q3 2012, surveys suggest that activity has weakened
further towards the end of the year. The weakness of activity in the eurozone,
particularly in Germany and Italy, Austria’s two most important trading partners, is
expected to continue to weigh on exports in the coming months. Moreover, the further
decrease in the capacity utilisation rate to 83.6% in Q3 2012, below its long-term
average, together with modest growth prospects and persistent uncertainties are likely
to prompt companies to postpone some of their investment plans.
Despite wage rises at the beginning of the year and a slowdown in inflation, private
consumption remained flat in the autumn and is unlikely to pick up in the coming
months. The uncertain economic climate and a further rise in the unemployment rate
(from 4.5% in Q3 2012) will weigh on earnings and household confidence. Hence, we
forecast Austrian GDP to remain weak in the coming quarters and to grow by only
0.5% and 0.7%, respectively, in 2012 and in 2013.
After accelerating in September due to an increase in energy and clothing prices,
inflation should resume its downward trend. The high level of spare capacity in the
economy will restrain price pressures, particularly in terms of core inflation. After an
expected 2.5% this year, we expect the inflation rate to average 2.0% in 2013.
Support to the financial sector and measures implemented within the framework of
crisis management in the eurozone are weighing on public finances. Although a
second package of fiscal-consolidation measures was agreed at the start of the year,
we expect the budget deficit to rise from 2.5% of GDP in 2011 to 3.2% in 2012.
Due to the economy’s high reliance on economic conditions in its main trading
partners, particularly Germany, Austria’s medium-term outlook is dependent on the
course of the eurozone debt crisis.
Chart 1: GDP and economic sentiment indicator
0
20
40
60
80
100
120
140
Mar
92
Mar
94
Mar
96
Mar
98
Mar
00
Mar
02
Mar
04
Mar
06
Mar
08
Mar
10
Mar
12
GDP
(% y/y, RHS)
-8
-6
-4
-2
0
2
4
6
8
Economic sentiment
indicator: Composite measure
Source: European Commission, BNP Paribas
Chart 2: Investment and capacity utilisation
-15
-10
-5
0
5
10
Jan
01
Jan
02
Jan
03
Jan
04
Jan
05
Jan
06
Jan
07
Jan
08
Jan
09
Jan
10
Jan
11
Jan
12
GFCF (% y/y)
72
74
76
78
80
82
84
86
88
90
Capacity
utilisation
(%, RHS)
Source: European Commission, Eurostat, BNP Paribas
Austria: Economic forecasts
2010 2011 2012 (1)
2013 (1)
2014 (1)
Components of growth
Total GDP 2.1 2.7 0.5 0.7 1.8
Dom. demand ex stocks 1.2 2.0 0.6 0.5 1.3
Private consumption 1.7 0.7 0.3 0.4 0.8
Public consumption 0.2 0.1 1.1 0.8 0.6
Fixed investment 0.8 7.3 1.0 0.4 3.1
Stocks (cont. to growth) 0.7 0.4 -0.2 -0.1 0.0
Exports 8.7 7.2 1.8 2.5 4.2
Imports 8.8 7.2 1.7 2.1 3.6
Industrial production 4.5 5.7 2.2 2.0 4.3
Savings ratio (%) 8.4 7.5 7.8 7.7 7.8
Inflation & labour
HICP 1.7 3.6 2.5 2.0 2.1
Core HICP 1.3 2.5 2.0 1.7 1.9
Employment 0.6 1.8 1.2 1.0 1.2
Unemployment rate (%) 4.4 4.2 4.4 4.7 4.5
External trade
Trade balance (EUR bn) -3.2 -7.5 -6.6 -5.7 -4.6
Current account (EUR bn) 9.7 1.7 3.4 3.6 4.3
Current account (% GDP) 3.4 0.6 1.1 1.1 1.3
Financial variables
General gov. budget (EUR bn) -12.9 -7.6 -9.7 -8.7 -6.1
General gov. budget (% GDP) -4.5 -2.5 -3.2 -2.8 -1.9
Primary budget (EUR bn) -5.3 0.2 -0.4 -0.6 2.9
Primary budget (% GDP) -1.8 0.1 -0.1 -0.2 0.9
Gross gov. debt (% GDP) (2)
72.0 72.4 74.7 75.8 75.0
Interest rates (2)
3-month rate (%) 1.01 1.36 0.20 0.20 0.50
10-year bond yield (%) 3.49 1.85 1.70 2.15 2.70
Spread over Bund (bp) 126 49 45 40 35
Figures are year-on-year percentage changes unless otherwise indicated
Footnotes: (1) Forecast (2) End period
Source: BNP Paribas
Downward trend in
inflation interrupted
A climate of uncertainty
Public deficit under
control
Private consumption
remains flat
Hit by the eurozone
crisis
