Gli scenari macroeconomici: crisi del debito, spinte recessive e

The FACTSET EMEA Symposium 2015
The European Economy: Will the
Tailwinds be Strong Enough?
Gregorio De Felice
Chief Economist – Intesa Sanpaolo
Monaco, 26 June 2015
The four tailwinds: where do we stand?
Energy prices
• Brent Crude:
-38% in US$ in
2015 vs. 2014,
• -24% in EUR, due
to exchange rate
depreciation
Exchange
rate
ECB
measures
• S/t Interest rates
are record-low
• Bond purchases in
2015-16 exceeding
1000Bn
• Lower contagion
risk
• Effective
exchange rate:
-9.8% y/y in Q2
2015.
1
Fiscal policy
• Flexible
interpretation of
the SGP
• Less fiscal
tightening in
periods of weak
growth or large
output gap
1. The windfall from lower oil prices is for real …
 Oil-importing countries are experiencing a major improvement in their energy balance.
Absolute change o.y.a. of imports from
fuel-exporting countries (US$ millions)
Note: actual change, y/y
Source: IMF, DOTS
2
… and exports to oil producers decrease by far less
 The benefit is offset only to a small extent by the decrease in export to oil producers.
Cutbacks by oil importers have been limited so far
(with the exception of Russia)
Note: actual change, y/y of imports from Euro Area. Source: IMF, DOTS.
3
The impact on real disposable income will be
significant, but not overwhelming
 The decline in price indexes was more significant in early 2015. The boost to real
disposable income in 2015 will average 0.3-0.5% in main Eurozone countries.
Estimated energy-related savings in 2015
as a % of disposable income
0.6%
0.5%
Savings (EUR Bn, r.h.s.)
0.5%
% of 2014 DPI (l.h.s.)
10
9
8
7
0.4%
0.3%
0.3%
0.3%
6
5
4
0.2%
3
2
0.1%
1
0.0%
0
DEU
FRA
Source: Intesa Sanpaolo Research
4
ITA
Lower oil prices are to a large deal persistent
 Structural oversupply will prevent a return of prices to 2013 levels. However, s/t
volatility could result from geopolitical risk, US$ swings on currency markets, supply
uncertainty.
3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 2015 2016 2017
ICE BRENT
65.0
68.0
70.0
69.0
69.0
70.0
62.8
69.5
75.0
NYMEX WTI 60.0
62.0
66.0
65.0
65.0
66.0
57.2
65.5
71.0
5
2. A weaker exchange rate
 We might see some recovery of EER in 2016, but the levels of exchange rates should
stay more competitive than in 2014.
EUR/USD exchange rate and 2-year rate
differential (r.h.s.)
Nominal effective exchange rates 2014-16
4
2
0
-2
-4
-6
2014
2015f
2016f
-8
-10
Eurozone
Italy
Source: ISP projections
Source: Thomson Reuters data
6
Spain
Portugal
Greece
Export response positive …
 European trade data already show a major impact of exchange-rate depreciation
on flows to dollar-based countries. The effects is higher for Italy.
Exports towards the US in EUR and USD terms
From Germany
From Italy
Source: Thomson Reuters–Datastream Charting
Source: Thomson Reuters–Datastream Charting
7
… but partly offset by weaker global demand
 Global trade growth is weak, due especially to emerging markets, and there is no sign
that it will gather speed in the near future.
 The slowdown may be structural and not temporary.
World trade and PMI – export orders
CPB index of import trade, y/y % change
Note: Y/y % changes computed from 3-month moving averages of constant US$ indexes, base 2000=100.
Source: Intesa Sanpaolo Research computations on Markit & CPB data.
8
3. Monetary/credit easing
 The EAPP is in full development, with assets for 283Bn (165Bn government
securities) purchased as of June 19. Rising excess reserves push money market rates
closer and closer to the deposit rate.
BCE - Expanded Asset Purchase Programme
(Intesa Sanpaolo estimates, mld EUR)
Total target
M ar15-Sep16
Monthly purchase
Mar15-Sep16
EAPP from M ar15 (1)
of which:
- ABS
- Covered Bonds
- Supras
- Sovereigns & Agcy
Previous CBP3 & ABSP (2)
Total EAPP (1)+ (2)
Sov & Agcy
Supras
CB & ABS
Excess liquidity and the EONIA rate
Purchased
amount as of
19/ 06/ 2015
Residual
purchase
60 Monthly Bn
19
N.Months
1140
EUR Bn
227. 94
912
23
235
106
776
55
1195
EUR Bn
EUR Bn
EUR Bn
EUR Bn
4.81
40.90
17.60
164.62
55
283
19
194
88
611
41 Monthly Bn
6 Monthly Bn
14 Monthly Bn
Source: ECB, Bloomberg and Intesa Sanpaolo
9
912
The transmission of monetary policy is improving
Money and credit, y/y % change
New loans to NFCs (EUR Bn)
Source: ECB, Thomson Reuters-Datastream Charting
Source: ECB, Thomson Reuters-Datastream Charting
Credit easing under way,
according to surveys
Loans and overdrafts to NFCs:
periphery-core spread
Source: ECB (BLS) and ISP calculations
Source: ECB and ISP estimates
10
Low interest rates to stay …
 ECB’s official stance on the EAPP is that it will continue until September 2016.
 Draghi (3rd June 2015): “if there were other factors which would, for example, create an
unwanted tightening of monetary policy or […] there were downside risks to growth and
price stability, then we will have to review and reconsider the size, the timing and the
design of the programme. […] So far we frankly see no reason to do that.”
 On exit strategies: “exit strategies are really a high-class problem, and we’re really far
from that, so we’re not discussing anything about that. […] We still have a long way to go.”
Record-low money-market rates in the foreseeable future
2.00
1.50
Euribor 1m
Euribor 3m
Euribor 6m
Euribor 12m
1.00
0.50
0.00
-0.50
2012
2013
2014
2015
Source: Intesa Sanpaolo projections, Thomson Reuters data.
11
2016
… with positive implications for the fiscal stance
 This low-rates environment allows most governments to cut their interest outlays,
despite rising debt ratios.
Interest rate spending by governments (% of GDP)
8
BEL
7
EUR
FRA
DEU
ITA
NLD
ESP
6
5
4
3
2
1
0
1999
2001
2003
2005
2007
Source: European Commission, AMECO
12
2009
2011
2013
2015
4. Less fiscal tightening due to a more flexible SGP
 The EU Commission introduced rules for fiscal adjustment more sensitive to the
cyclical stance. Targets for 2015 and 2016 also take into account the reform effort.
Cyclically-adjusted primary balance (% of GDP)
Primary Balance (% of GDP)
3.0
2.4
2.2
2.0
2.0
4.5
2014
2015
2016
2.3
1.61.7
3.9
3.5
2.9
2.6
2.5
1.0
0.20.3
1.5
-0.2
-0.3
-1.0
-0.8
-1.3
-1.7
-1.8
-2.0
-3.0
BEL
2.1
0.1
0.0
DEU
FRA
ITA
NLD
-0.6
1.1
1.0 0.9 0.9
0.6
0.4
0.9
0.6 0.7
0.5
-1.4
-0.5
-2.5
ESP
-1.5
-0.3
-0.4 -0.3
BEL
Source: European Commission, AMECO
DEU
FRA
Source: European Commission, AMECO
13
2014
2015
2016
3.6
3.3
ITA
NLD
ESP
The four tailwinds will raise GDP growth to 1.5-2.0%
 Cheap energy, a more competitive exchange rate and more supportive economic
policy should more than offset the weaker global environment, raising GDP growth in
the Eurozone.
GDP growth will be driven mostly
by domestic demand in 2015-16
2.5
GDP growth, y/y
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
Inventories
-2.0
Net exports
FCF
HSHD spending
-2.5
2011
2012
2013
2014
2015
2016
Source: Thomson Reuters-Datastream, Eurostat and Intesa Sanpaolo forecasts
14
2017
The outlook is improving also for most of the Periphery
GDP growth 2013-16 in some Southern European countries
2013
2014
2015f
2016f
Italy
-1.7
-0.4
0.6
1.2
Spain
-1.2
1.4
1.5
1.7
Portugal
-1.4
0.9
1.7
2.0
Greece
-3.9
0.8
0.2(°)
1.9(°)
Cyprus
-5.4
-2.3
-0.5(*)
1.4(*)
3.0
2.7
2.0
0.9
1.0
0.0
0.1
0.2
1.5
1.7
1.6
1.8
0.6
0.4
-1.0
-2.0
Core
-1.4
-3.0
2011
-2.3
2012
Peripherals
2013
2014
2015
Note: ‘Core’: Austria, Belgium, Finland, France, Germany; ‘Periphery’: Greece, Ireland, Italy, Portugal, Spain.
(*) European Commission, Spring Forecasts 2015; (°) Consensus Forecasts, May 2015.
Source: Intesa Sanpaolo Research forecasts, Eurostat data and European Commission.
15
2016
The fiscal picture has improved since 2010
 Structural fiscal flows have improved since 2010 to levels that can stem the increase
in debt ratios.
2010
2014
200
180
160
200
High-debt &
Fiscal surplus
High-debt &
Fiscal imbalance
180
160
GRC
ITA
120
USA
100
BEL
IRL
PRT
80
FRA
UK
60
ESP
40
DEU
USA
100
UK
80
ITA
IRL
BEL
FRA
ESP
DEU
NLD
40
Low-debt &
Fiscal surplus
0
-5
120
60
NLD
Low-debt &
Fiscal imbalance
-10
Gross Debt
Gross Debt
PRT
140
140
20
High-debt & GRC
Fiscal surplus
High-debt &
Fiscal imbalance
0
20
0
5
Low-debt &
Fiscal imbalance
-10
Low-debt &
Fiscal surplus
-5
0
Cyclically-adj. primary balance
Cyclically-adj. primary balance
Source: IMF Fiscal Monitor database
16
5
Even Italy seems to be recovering
 Italy appears to have shifted from recession to a slow recovery from Q4 2014, but
the trend is still fragile. Exports and fixed investment provided support.
Out of the woods?
GDP supported by exports and fixed investment
Source: Thomson Reuters-Datastream Charting, ISTAT and Intesa Sanpaolo calculations
17
However, q/q growth does not pick up in the Eurozone
 Eurozone GDP grew 0.4% q/q in Q1 2015 (Q4 2014: 0.3%).
 Business surveys are not consistent with stronger growth in Q2.
PMIs and the EC confidence index not yet
consistent with faster GDP growth.
Source: Markit, European Commission and Intesa Sanpaolo calculations
18
Baseline view to be challenged from all sides
Slowdown
Turnaround
of FX rates
of global
economy
Weak
capital
spending
Potential
for
political
instability
in Spain,
High debt
ratios
Collapse
of
Greece
(Italy?)
19
The Greek nightmare
 No breakthrough in the negotiations since February, no funding available to cover the
June repayment to IMF and the July 20 bond redemption.
 Government has supported its liquidity position by suspending most payments to
suppliers and contractors. The economy is falling back into recession.
 Fast deposit outflow, but no evidence of bank-run up to mid June. Rapid deterioration
from June 13. Reliance on ECB liquidity stands at ca. 120Bn euros, but is rising fast.
A fast-shrinking deposit base,
high reliance on central bank support
Uncertainty and payment
delays take their toll
Source: Thomson Reuters-Datastream Charting, Bank of Greece
Source: Thomson Reuters-Datastream Charting
20
Many paths lead to Grexit
Stock of ELA
eligible assets
is depleted
30/6:
Greece
misses
IMF
payment
Bank run
ECB suspends
ELA (to raise
pressure)
20/7: Greece
misses GGB
repayment
Syriza loses
support,
party divided
ECB
suspends
BoG from
TARGET2
ECB
suspends
ELA
21
Capital
controls are
introduced
Sharp
economic
contraction
Nationalisation
of banks
Issuance of
a local
currency
Monetary
financing of
deficit
Debt-service
suspended
Greek
government
backs down
New
programme
The costs of Grexit/1
Exports to Greece
Collapse of
trade flows
Direct
financial
links
Financial
‘contagion’
Confidence
 In the very worst case, the negative
impact could be of 0.1-0.2% for the
most exposed countries.
 The exposure of European banks is
now negligible and there is little
negotiable debt around.
 The long gestation of the crisis means
that investors should be well prepared
to the risk.




Source: Thomson Reuters-Datastream, Eurostat
and Intesa Sanpaolo calculations
Tensions on sovereign spreads are likely, in the short term.
Fundamentals are far more robust than in 2011
However, the ECB may front-load the PSPP to restore confidence
Future crises may see more volatile spread (but not as much as in
2011: the institutional framework has been improved)
 Hard to assess whether it will be transitory or persistent.
 Relevance will also depend on context and policy response.
22
The costs of Grexit/2
Write-off of
official loans
TARGET2
balances
Savings
 EUR 52.9Bn of Greek Loan Facility.
 EUR 141.9Bn of EFSF loans
 EUR 25.2Bn of IMF loans
 As of Apr 30, the TARGET2 liabilities of Bank of Greece stood at EUR
98.8 billion.
 If Greece detaches from the Eurozone and from TARGET2, no
repayment plan can be envisaged.
 No need to extend further financial assistance (possibly EUR 50Bn
in 5 years)
 Suspension of EU transfers, normally 2-3Bn per year (15.2Bn
allocated over 2014-20).
 In case of agreement, substantial debt relief will be required, which
reduces the present value of theoretical cash flow.
23
How a reasonable deal on Greece should look like…
Trial period
(2015 H2)
ECB, IMF
repaid with
EU funds
(cash for
reforms)
Moderate
Fiscal
correction
~1%
Some structural
reforms, measures to
improve tax-compliance
3rd
programme
ESM, IMF
cover the
financing
gap,
Primary
surplus
raised to
2.5%
Growth-enhancing
reforms + measures to
support the unemployed
and the poors
Post-2020
settlement
Debt relief
(maturity
extension)
Primary
surplus 2.5%
Growth-friendly policies
No repayment of debt to IMF and ECB without support
4000
3000
2000
1000
0
-1000
-2000
-3000
-4000
-5000
payments to IMF
ECB-owned bonds
cash deficit/surplus
Total (excl. GRBL)
Projected debt service 2015-45 (without debt relief)
-7%
capital, % of GDP
interest, % of GDP
-6%
-5%
-4%
643
-726
-3%
-492
-2%
-1873
-3682
5
6
-3275
7
-3068
-1%
-4517
8
9
10
11
0%
12
2015
24
2020
2025
2030
2035
2040
2045
… and what we may get
Reforms for
cash




 Deal on the release of 7.2Bn of funds left from the 2nd programme, to
be extended by 3-6 months
 Greece will commit to a fiscal adjustment yielding a 1% primary
surplus in 2015, mostly based on tax increases and to a reform of
early retirement.
The June 30 payment to the IMF is too close: increase in the ceiling to GRBL issuance?
Implementation risk
Strains within Syriza (parliamentary approval probably guaranteed by opposition parties)
Funding need for 2015H5 not fully covered by programme extension (also considering
that squeeze on suppliers is not sustainable): gap of ca. 8Bn according to our estimates.
Need to start negotiation on 3rd programme as soon as possible!
Default risk not averted despite the deal!
25
Spain: deep transformation of the political landscape
 In Spain, declining support for Partido Popular (PP) and the rise of new political
movements may put an end to the PP – PSOE turnover.
 A PP-PSOE coalition may turn out to be the only feasible outcome.
Regional elections in Spain opens up an highly uncertain
scenario for the year-end national elections
Spain – New Congress projections
based on regional elections outcome
ERC
Ciudadanos
2011
IU
2015
CiU
Podemos
PSOE
PP
0
50
100
150
200
Note: projections on the number of seats in the next Parliament based on the result of the recent regional vote.
The general election will be held in November.
Source: El País and Intesa Sanpaolo research.
26
Anti-EU parties on the rise, but with little to share
 The EU and the euro have turned into one of the preferred targets of populist
movements of all colours in Europe.
Support for some anti-EU movements
35
29 - 31%
30
Previous
25
Latest poll
20
15
17.5
16
26
10
19
15.5
5.5
5
4.7
0
Fra: Front National
(Ifop polls) Jan 29
Ita: 5 Stelle (Piepoli
polls) 9 feb
Ita: Lega Nord (Piepoli Germ: AfD (15 Feb 2015
polls) 9 feb
Hamburg Municipal
elections)*
Note: Ifop, Piepoli, Wall Street Journal (for Germany) and Intesa Sanpaolo research
27
Summing up …
 The Eurozone economic scenario is currently more favorable than last
year: the outlook is improving for core countries, but also for most of the
Periphery.
 Four tailwinds are sustaining the recovery: low energy prices, the
depreciation of the euro, a more flexible interpretation of the SGP and
the over-expansionary stance of the ECB.
 Also the Italian economy appears to have shifted from recession to a
slow recovery: that is good news, but the trend is still fragile.
 Our baseline, however, is challenged by all sides: political instability, the
risk of a slowdown in global growth or of a turnaround in exchange
rates, weak capital spending, high debt ratios.
 The Greek situation is the issue that most urgently needs a solution.
Negotiations on a 3rd programme have to be started as soon as
possible: default risk has not been fully averted.
28