terra incognita
Transcription
terra incognita
th Quarterly - no. 134 – 4 quarter 2011 Learning how to proceed in a terra incognita Markets are not able to stabilise themselves. They have lost their bearings and are in a terra incognita, mostly because the business cycle is no longer the main reference for shaping expectations. That is why policymakers should make every effort to manage the markets‟ expectations in a positive way. Politicians and policymakers are having difficulty delivering. Of course, forging a consensus about the appropriate response to prevent the risk of facing an aftershock from the 2008-09 balance-sheet recession, no longer centred on the private sector but on the public sector, is no easy task. Are they not entering unchartered waters? Some officials believe (in German government circles or within the US Republican Party) that adding debt to an already excessive level of debt, through fiscal stimulus, cannot be the appropriate medicine. Others consider that asking hic et nunc for more fiscal rectitude will simply exacerbate the underlying bad-debt concern. On the monetary policy front, a similar debate is occurring. Some think that keeping inflation under control is the only and ultimate goal, while others, observing an environment characterised more by a deflation threat than an inflation risk, wonder whether the main issue is not ensuring financial stability. In any case, the US-European „economic community‟ is in no state to withstand a heavy-handed combined therapy of both economic (fiscal and monetary) policy tightening and stricter banking regulation. This means double policy co-ordination: between fiscal and monetary initiatives and between countries/areas. In the US, priority should be given to short-term fiscal stimulus, while in Europe the bulk of the effort should come from monetary policy (lower official rates, longer maturity for the banking sector‟s funding operations and providing support if needed in order to increase the EFSF‟s financing ability). The road to the consolidation of growth prospects is a bumpy one. The levers of economic policy must be used wisely and in a timely fashion by leaders, some of whom at least are, at present, proving somewhat loath to do so. It is up to everyone involved to understand that a new recession would do no-one any good. Contents: Western economy too weak for strong medicine ..................... 2 US Interest Rates: Debating the type of recession .................. 5 Eurozone Interest Rates: Can crisis pricing last? .................... 6 Exchange Rates: USD to recover, but less rapidly .................. 7 Energy: Oil prices to correct downwards on weak demand ...... 8 Metals: Hold gold as insurance; downside for base limited ...... 9 US: Recession watch........................................................... 10 Japan: Finally set for a V-shaped recovery ........................... 14 Eurozone: A limited liability union? ....................................... 15 France: Growth hits the brakes ............................................ 17 Germany: A trailer rather than a locomotive .......................... 18 Italy: The big sleep .............................................................. 19 Greece: No scope for further delays ..................................... 20 Spain: Further consolidation of public finances ..................... 21 Portugal: Apparent respite, but then what? ........................... 22 Ireland: Not out of the woods ............................................... 23 Scandies: Not equal against the storm ................................. 24 UK: Heading towards more QE ............................................ 25 Australia: Two-speed economy ............................................ 26 New Zealand: Sustaining growth momentum ........................ 26 Canada: The BoC softens its tone ....................................... 27 Emerging markets: Gloom-proof? ........................................ 28 Central Europe: In the eye of the storm................................ 29 Russia: Hard or soft landing? .............................................. 29 South Africa: An endangered recovery ................................ 30 Turkey: Soft landing under liquidity constraints..................... 30 China: Slowdown limited by solid buffers ............................. 31 India: Inflationary risk .......................................................... 31 Mexico: Feeling the global cycle .......................................... 32 Brazil: A risky bet ................................................................ 32 Saudi Arabia: Strong growth, big spending .......................... 33 Egypt: Fragile economic stabilisation ................................... 33 Exchange rate forecasts...................................................... 34 Interest rate forecasts – developed countries ....................... 35 Interest rate forecasts – emerging countries......................... 36 Economic forecasts............................................................. 37 Economic forecasts – quarterly breakdown .......................... 38 Economic forecasts............................................................. 40 Commodities forecasts........................................................ 39 Western economy too weak for strong medicine There may be good reasons for calling for the ‘screws to be tightened’, in terms of both economic policy and bank regulation, but the North Atlantic ‘economic community’ is without doubt in no state to withstand this, at least not in the shape of an aggressive combination therapy applied everywhere simultaneously. Only through growth, which brings about the slow task of consolidating the financial accounts, can one emerge from a balance sheet recession. Slow growth in the West (%) 12 Forecasts 8 4 0 -4 -8 Dec-04 Dec-06 Dec-08 Dec-10 Dec-12 USA Real GDP YoY EZ Real GDP YoY EM Real GDP YoY Source: Bloomberg, Crédit Agricole CIB Slowdown but no recession in the US 6 60 3 50 0 40 -3 30 Oct-04 -6 Oct-06 Oct-08 Oct-10 ISM Manufacturing USA Real GDP YoY (rhs) Source: Bloomberg, Crédit Agricole CIB Fiscal imbalances in the US too high (% of GDP) 80 6 70 3 0 60 -3 50 -6 40 30 -9 -12 93 95 97 99 01 03 05 07 09 11 Debt/GDP Deficit/GDP (rhs) Source: Bloomberg, Crédit Agricole CIB We are again in a period of downward revisions to growth forecasts. This is especially true of the industrialised countries. We have revised our own growth forecasts for 2011 and 2012 downwards from 1.9% and 2.5%, respectively, in June, to 1.4% and 1.8%. The US is central to the revision process. Its economy will not now grow by 2.4% this year, but by 1.6% only. Next year, the forecast has been changed from 2.9% to 1.8%. Generally speaking, Europe will adjust to the less dynamic pace of the US economy, given that the fiscal policy stance will continue to bear down on the growth rate. In the emerging countries, the ability to withstand bad news from the West is likely to be borne out. With private domestic demand continuing to rise at a good rate, many emerging countries have the fiscal and monetary policy wherewithal to take most of the negative implications from the expected growth slowdown in the US and Europe in their stride. Emerging country GDP growth, for example, is currently being forecast at 6.0% in 2012, compared with 6.4% three months ago. The revision is no doubt less than the margin of error usually associated with growth forecasts. Let us look at the US, and try to understand what the downward revision to growth means. There are several things to say. In the first place, most of this year’s correction should be put down to the counter-performance in H111. We were expecting something like 2% growth annualised, instead of the actual 0.7%. This can largely be explained by a brace of one-off shocks: an increase in commodity prices, particularly in oil prices, which paused only recently; and the negative effects on the global supply chain of the earthquake in Japan. This should be kept in mind when seeking reasons for the ongoing economic slowdown, if we are to believe recent economic indicators. The ex ante growth rate should not be the 0.7% observed, but something around 2%, no doubt. In this respect, the risk of moving into recession, if such a risk exists, is not imminent, even if it cannot be denied that recent economic indicators point to flagging growth. We need to linger for a moment on the significance of the recession in the current environment. It is well-known that the 2008-09 recession was not of the generally-observed cyclical type, ie, a period following on from an overheating economy fuelling inflationary pressures and prompting central banks to increase key rates. Subsequently, deliberate economic policy initiatives plus excessive inflation have tipped the economy into recession, which is seen as a necessary purgative. The chronicle of the recent bout of negative growth was different: excessive debt levels drove the price of many assets to levels that were too high relative to the fundamentals. A downward correction followed, which had an adverse effect on the balance sheets of the economic agents concerned. Those agents are now busy saving more and hence reining in their consumption to consolidate their balance sheets. If the phenomenon is very large-scale, the economy concerned goes into a balance-sheet recession. This is what happened in the US three years ago. It is important to note that this recession of a different kind is in no way a purge, but a disease to be treated energetically. It is absolutely essential to stave off the start of a deflationary spiral (ie, debt deflation) and recreate the conditions for a return to growth (in volume, and even, to a certain degree, in prices) – the only ‘healthy’ way of easing the stifling effect of a surfeit of debt. The current concern is that a sort of aftershock follows on from the earlier recession, centred not on the private sector (households and financial institutions) but on the public sector. As already mentioned, this risk must not be overestimated, even if it does exist. The best way of stopping a chain of events that would lead to that aftershock is to act now (see below). Hervé Goulletquer [email protected] +33 1 41 89 88 34 Macro Prospects – no. 134 – 4th quarter 2011 2 An ECB rate cut in sight (%) 4.50 Forecasts 3.00 1.50 0.00 Oct-04 Oct-06 Oct-08 Oct-10 Oct-12 ECB refinancing rate Source: Bloomberg, Crédit Agricole CIB Cyclically adjusted public deficit (% of GDP) 0 -10 -20 -30 Forecasts -40 2008 2009 Greece 2010 2011f 2012f Portugal Ireland Secondly, there is undoubtedly a growing awareness among the majority of economists watching the US, be they American or not, from official circles or the private sector. The growth we will see in the years ahead will not, finally, be as strong as long hoped-for.Look at the forecasts published by the Federal Reserve in June: GDP growth was to be around 3.5% in 2012 and even higher in 2013. The most recent consensus forecast is for growth of at least one percentage point less and, as already mentioned, our own forecasts are significantly lower. It is just starting to be admitted that, when an economy emerges from a balance sheet recession, economic recovery is dampened by lower spending among agents who are busy deleveraging. Academic studies are in agreement about the idea of ratios that must not be exceeded if we want to avoid debt being an obstacle to growth1: between 80% and 100% of GDP in the case of the government, 90% for businesses, and 85% for households. In 2010, in the US, the ratio stood at 92% for the government and 96% for households. In this respect, we are no doubt entitled to consider that US growth is likely, for a time, to be slower than before: it was on average 3% in the years prior to the last crisis, so why not consider a figure in the region of 2%? That prospect, which can only cast a pall over Eurozone growth forecasts, raises thorny economic policy issues, valid on both sides of the Atlantic. In a slow-growth environment, and one where, to boot, the confidence of investors and more generally businesses has been shaken by market swings and by sovereign debt crises, the economic policy stance must be calculated to a hair‟s breadth. Of course, a first level of analysis leads to the conclusion that, wherever one turns, it is time to tighten the screws. In the area of fiscal policy, the state of the public accounts – deficit or debt – together with the concerns expressed by the markets lead to the conclusion that restructuring is an unavoidable necessity. In the monetary policy sphere, rock-bottom key rates and the sharp increase in the size of central bank balance sheets point to the conclusion that there is no room for manoeuvre left and that the time for normalisation is almost upon us. With respect to bank regulation, the crisis has so clearly demonstrated insufficient capital, excessive debt leverage, and the fact that access to liquidity is in no way guaranteed at all times that it is necessary to raise the level of required restraints. This three-pronged observation is generally valid for the entire industrialised world. Recent events have sent a number of extremely important signals: Only through growth, which enables the slow task of consolidating the financial accounts, can one emerge from a balance sheet recession. Growth is weak when an economy emerges from a balance sheet recession – weaker than expected, in fact. Moreover, it is sensitive to any wave of negative expectations. While these are perfectly understandable given the need to revise growth prospects downwards, they are also dangerous, because of their negative impact on an already sluggish pace of growth. Source: OECD, Crédit Agricole CIB Ease of doing business, global rank 2011 Ireland Germany France Portugal Spain Greece 0 50 100 150 Source: World Bank, Crédit Agricole CIB All else being equal, there are good reasons to call for a tightening of the screws, in terms of both economic policy and bank regulation. But it would appear that the North Atlantic ‘economic community’ is without doubt in no state to withstand this, at least not in the shape of a heavy-handed combined therapy applied everywhere simultaneously. The economic environment is not as buoyant as hoped in the US and Europe. As a result, the economic policy setting has to be appropriate – an exercise that is anything but easy. On the one hand, it is necessary to act quickly and to find the right setting to halt the ongoing wave of negative expectations. On the other, we have to make sure that in the short term extreme application of the levers of economic policy does not undermine the ability to return to normal further down the road. In fact, we must make a double distinction: by instrument, country by country, and from one country to another. In the US, the market seems to accept the idea that there is now an opportunity to achieve an expansionary fiscal setting in the short term, provided that, in a sense, it is „pledged‟ against a firm, credible commitment to restructure the public accounts in subsequent years. The executive and legislative arms would be 1 See ‘The real effects of debt’, Stephen G Cecchetti, N S Mohanty and Fabrizio Zampolli, August 2011 Macro Prospects – no. 134 – 4th quarter 2011 3 US potential GDP growth (OECD estimate, %) 3.5 Forecasts 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Avg Avg 2009 2010 2011f 2012f 1989- 199998 08 Source: OECD, Crédit Agricole CIB Eurozone potential GDP growth (OECD estimate, %) 2.5 Forecasts 2.0 1.5 1.0 0.5 0.0 Avg Avg 2009 2010 2011f 2012f 1989- 199998 08 Source: OECD, Crédit Agricole CIB wrong not to take advantage of this degree of freedom. In this respect, bipartisan spats must cease, simply because it is in the countries’ best interests that they should do so. When it comes to monetary policy, there is scant room for manoeuvre. However, a dual mission would be timely, namely managing expectations from a positive angle by expecting greater traction on growth from fiscal policy and, if at all possible, managing the central bank’s balance sheet in such a way that the price of risky assets is driven up. In the Eurozone, an easing of restrictions should be sought mainly in the monetary policy sphere. For one thing, the normalisation of the ECB’s key rates has already been put on hold and we cannot rule out new rate cuts; and for another, Eurozone banks will be guaranteed an unlimited supply of liquidity, and purchases of government bonds will be adjusted in light of market conditions and the role of the EFSF. With respect to national fiscal policies, there are three points to make. Firstly, the overall stance will remain restrictive; secondly, it is vital for Ireland and Portugal to observe the letter of the roadmap agreed between them and the EU authorities and the IMF because this should ensure that the no doubt less convincing results achieved by Greece will be seen by the markets as no more than the exception that proves the rule; thirdly, and it is at this level that country differentiation can operate, Germany – perhaps along with some other Eurozone members – should agree on a more expansionary fiscal policy. The initiative is most definitely desirable. Whether it is achievable remains a matter for debate. In the banking regulation arena, beefing up institutions’ financial stability is clearly essential. Today, the market is expressing its doubts, mainly vis-à-vis European banks, making it harder for them to refinance. Those doubts are untimely, especially when all energies are directed towards propping up economic activity. Simply put, the banks have to be able to play their part as a major cog in an accommodative monetary policy stance – either because the yield curve is too flat (although this argument is less telling in Europe than in the US), or because the deployment of a stricter regulatory framework is moving too fast relative to the state of the economy, or because the markets are lacking in confidence. On this last point, the unfavourable comparison between European banks and their US peers can be analysed in terms of capital ratios. The root causes underlying the differences are probably less likely to be sought at the level of the numerator: since 2008, capital levels at European banks have grown by USD414bn, compared with USD314bn for US banks (IFI data). The difference actually seems to reside in the denominator: exposure to sovereign risk ‘costs’ 8% of assets for European institutions, compared with 3% among their US peers. In this respect, credibly restructuring the public accounts is nothing less than an overriding necessity. Clearly, the road to the consolidation of growth prospects is a bumpy one. The levers of economic policy must be used wisely in a timely fashion by leaders, some of whom at least are, at present, proving somewhat loath to do so. These difficulties explain the markets’ gloomy, wait-and-see attitude. It is up to everyone involved to understand that a new recession would do no-one any good. Macro Prospects – no. 134 – 4th quarter 2011 4 US Interest Rates: Debating the type of recession 10Y rates incorporate a range of potential scenarios into their yields. Don’t expect a deep pullback in growth in the unlikely event that recession does bite. Our favoured scenario of continued growth should correct valuations that are consistent only with the Fed Funds rate never again reaching even 3%. Japanese GDP 580000 Yen bn 560000 540000 520000 500000 480000 460000 440000 420000 400000 Sep-88 Sep-93 Sep-98 Sep-03 Sep-08 Japanese GDP (SA) Source: Bloomberg Forward 3M dollar rates What if there is a recession? Increasingly, talk in the debt markets is of what type of recession the economy is facing rather than whether, or not, there will even be a recovery. Currently, the US economy lacks the sense of pre-existing exuberance that is needed to create a deep recession. By this, we mean that corporates are cash-rich, rather than leveraged, there has been no investment binge, the household sector is already deleveraging and even the very cyclical construction industry simply cannot get any worse. If the conditions are insufficient to create a sudden collapse in aggregate demand, then the US economy should have an underlying sideways movement in a worst-case scenario. The Japanese 10Y yield has averaged around 1.5% since it collapsed to its current range at the end of 1998 (some seven years after the Japanese bubble burst) and is a good reference point as to what can happen to the US. The US 10Y yield is currently close to 2%; could it average a Japanese-like 1.5%? As with Japan in the 1990s, the problem for the US economy is less likely to be a big and sudden drop in GDP than a period of below-trend growth that brings forth deflation. Greater population expansion and probably higher productivity growth should translate into better real growth numbers for the US than what we saw occur in Japan’s lost decade. Real GDP growth cannot justify Japanese yield levels. % 4.5 4.0 3.5 3.0 2.5 2.0 1.5 Only once deflation threatens should we be concerned about 1.5%-type 10Y US rates, but as yet core inflation and inflation expectations are seemingly defying gravity. The US economy flirted with deflation in mid-2010 but core inflation suddenly surged from 0.6% YoY to 1.8% YoY, and now neither wage Nov-13 Jun-17 Jan-21 Jul-24 growth nor inflation expectations are showing signs of an impending deflation. Most likely, we will see some moderation in inflation, but what is confusing in this Source: CME recovery is the lack of downward pressure on prices and wages given the supposedly high levels of unemployment. A structural rise in unemployment is the Yield curve shape suggests neutral most likely non-oil-price-related explanation. For the moment though, even a very rate at zero poor growth scenario should not be accompanied by much lower US yields. 1.0 0.5 0.0 May-10 7 What if there is no recession? % 6 5 4 3 2 1 0 -1 -2 Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 Jan-09 Neutral real 3m rate from yld curve Neutral nominal 3m rate from yld curve 48 per. Mov. Avg. (Neutral rel 3m rate from yld curve) Source: Crédit Agricole CIB, Basdevant, Bjorksten, Karagedikli, 2004 David Keeble [email protected] +1 212 261 3274 We do not agree that the debt markets are correct in their pessimism regarding the economy and that almost any economic acceleration or change in sentiment could have a vicious impact upon yields. We are predicting nominal US GDP growth of around 3.5-4.0% next year and more the year after. Such numbers would make a 3% 10Y yield look very low and 2% look crazy. From the current yield curve levels and slope we have a model that says the neutral 3M rate is slightly negative, ie, no longer are rates low enough to accelerate growth from the 1-2% level. It is fairly clear that long Treasuries is a crowded trade and the majority of investors are simply preserving capital rather than truly believing that the yield levels are justified. Our forecasts of higher yields for this year and next reflect the assumption that the economic data does not confirm the pessimism and that official responses have not been exhausted. The yield curve has also incorporated ‘Operation Twist’. As with QE2, it will be more important to look at the underlying economic data than become too concerned about any alteration to the Fed’s balance sheet duration. Macro Prospects – no. 134 – 4th quarter 2011 5 Eurozone Interest Rates: Can crisis pricing last? The extreme levels of fear and loathing surrounding the sovereign debt crisis have pushed core yields 150-200bp through the ‘fair’ value given macro fundamentals. If disaster is averted in Greece (and Italy), we should expect higher Bund yields, despite a soft economy and some ECB policy concession. Ever lower 10Y EUR rates? % 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 Sep-01 Sep-04 Bund Low „core‟ yields reflect extreme risk aversion Sep-07 Sep-10 Euribor swap Source: Bloomberg, Crédit Agricole CIB It’s largely about sovereign fears 1.0 0.5 % 0.0 -0.5 -1.0 -1.5 5Y mo del residual -2.0 resid. incl. periph. spread -2.5 Jan-05 Jan-07 Jan-09 Jan-11 Source: Crédit Agricole CIB Volatile intra-periphery 10Y spreads 300 200 150 bp bp 100 100 0 -100 -200 -300 -400 -500 Jul-10 50 0 IE-PT (lhs) SP-IT (rhs) -50 -100 Jan-11 Jul-11 Source: Bloomberg, Crédit Agricole CIB The fall in Eurozone ‘core’ bond yields and Euribor swaps has recently turned into a full retreat, with the Bund yields, in particular, setting new post-EMU lows. Notwithstanding the significant weakening in OECD economic performance, the main driver of the core bond rally has been ever-mounting fears of an EMU sovereign meltdown. This contention is supported by the strongly negative correlation between core and periphery yields as well as econometric evidence suggesting that roughly 80% of the fall in German yields is attributable to risk aversion (as measured by the weighted average 10Y ASW on periphery benchmarks) and only about 20% to deteriorating output growth expectations (as measured by the EC economic confidence survey). Based purely on macroeconomic fundamentals, German 5Y to 10Y yields would be expected to be 1.5-2.0% higher. This suggests that, if the Eurozone sovereign crisis were to be addressed more successfully, core yields should rise quite rapidly, despite deteriorating macroeconomic prospects. Whether solutions such as a ‘leveraged’ EFSF are delivered with enough speed and conviction remains to be seen, as far as the market is concerned. Eurozone situation remains extremely fragile Extreme though it is, the degree of default and illiquidity fears implied by current market pricing is not entirely unfounded, given recent history. Greece, to date, has broadly failed to leverage the IMF/EU bailout into convincing deficit reductions thus requiring a second loan package and ‘soft default’ (the Private Sector Involvement). Even the implementation of the second Greek bailout and associated voluntary debt restructuring has met with difficulties, further unnerving markets. At the same time, as many had feared since 2010, over the summer months periphery crisis contagion spread to the biggest sub-AAA Eurozone debtor, Italy. Despite sizeable ECB purchases (over EUR80bn to date), Italian debt auctions have proved increasingly costly after delivery of an emergency austerity package was marred by farcical politicking and poor growth prospects. The forecasts we have adopted – which feature higher core rates and somewhat lower periphery spreads – are predicated on the assumption that, despite all the obstacles they face, the EU and Greece will complete an orderly debt exchange and pledge the second bailout package in the near future. The other underlying assumption is that ongoing SMP buying is not undermined by German opposition and succeeds in stabilising Italian borrowing costs. In such a relatively benign scenario, bearish price action in core yields would probably be sustained into year-end, despite a growing likelihood of the one-off removal of the 50bp of ECB rate hikes delivered earlier this year. The plain fact is that such cuts are already priced in by the EONIA swap curve, while a fiscal stabilisation should help Euribor-EONIA spreads and Euribor-Schatz spreads tighten back in. Should the handling of and sentiment surrounding the sovereign crisis not improve as significantly as we expect, investors would continue to concentrate on the issuers perceived as strongest (Germany, in primis). As a consequence, our strategy recommendations revolve around the curve anomalies and relative value within the periphery, as opposed to outright duration and core-periphery spread trades. For instance, the 2Y to 3Y segment of the curve looks expensive to the 7Y to 10Y portion, in the Euribor term structure. Similarly, we see relative value in Portuguese paper relative to Irish bonds, and non-BTP Italian issues relative to the more SMP-supported BTPs. Luca Jellinek [email protected] +44 20 7214 6244 Macro Prospects – no. 134 – 4th quarter 2011 6 Exchange Rates: USD to recover, but less rapidly The outlook for most currencies has changed in the wake of deteriorating economic news and downgrades to growth forecasts. However, the USD is still expected to strengthen over coming months, albeit at a less rapid pace than previously expected, while the EUR and JPY are set to lose ground. Commodity currencies remain our top picks. Commodity currencies still set to outperform USD over 12M % 20 15 10 Over recent months FX markets along with other asset classes have been buffeted by an onslaught of bad economic news as well as intensifying tensions in peripheral Europe. Demand for safe-haven currencies has pushed the CHF and JPY to ever-higher levels while the rise in FX volatility is increasingly catching up with the jump in equity volatility and risk aversion in general. Except for the two currencies noted above, most majors have been jostling for the title of „most ugly‟ currency with the USD and EUR front-runners in the contest. 5 0 -5 -10 -15 AUD CAD NZD GBP NOK SEK EUR JPY CHF -20 The outlook for most currencies has changed in the wake of deteriorating economic news and subsequent downgrades to growth forecasts. In particular, significant downward revisions to our US growth expectations and Treasury yield forecasts imply a softer profile for the USD than we had previously forecast. One of the major drivers of currencies is relative bond yield differentials (especially 2Y) and, although the Fed has a high hurdle to overcome before embarking on QE3, there is likely to be a sustained effort to maintain low US bond yields, which in turn will prevent a rapid appreciation of the USD. Source: Crédit Agricole CIB, Bloomberg However, weaker expected growth in the US has to be balanced against lower growth profiles in Europe and elsewhere, and in this respect the US economy is still likely to outperform many other major economies in the months ahead, though much will depend on the extent of US fiscal tightening. Assuming that the Fed does not expand its balance sheet further via more quantitative easing, this growth outperformance should still leave the USD in a better position than many major currencies and, while we have revised lower our profile for USD versus both EUR and JPY, we still expect some appreciation. EUR to soften against most currencies over 12M 20 15 10 5 0 -5 -10 CAD AUD NZD USD GBP NOK SEK JPY CHF -15 Our less aggressive profile for USD appreciation partly reflects the fact that the EUR has proven far more resilient to Eurozone peripheral country woes than had been anticipated, although it has appeared much more vulnerable lately. The fact that EUR/USD is trading closer to 1.35 than 1.20 despite such problems highlights the power of official (mainly Asian) buying of the currency, as central banks have continued to show a degree of confidence in the EUR. Such confidence already appears to be waning, and we still expect the EUR to be restrained by ongoing tensions in the periphery, as likely reflected in continued wide bond spreads between core and peripheral Europe. Source: Crédit Agricole CIB, Bloomberg The rise in risk aversion associated with the tensions described above has and will continue to exert some influence on currencies, but this has been USD to strengthen, but less rapidly predominantly felt in CHF and JPY crosses. Although risk aversion is likely to remain elevated over the near term, if our macro forecasts of no recession and no than previously expected Eurozone disaster prove correct, eventually risk appetite will improve and both CHF and JPY will lose ground against a firmer USD. The attraction of the 125 forecasts CHF has already lessened following the decision by the SNB to put a floor under 115 EUR/CHF at 1.20. Eventually, CHF will likely weaken against the EUR but this 105 may not happen quickly given that the situation in the Eurozone periphery is unlikely to stabilise any time soon. 95 85 75 65 Mar-00 Mar-03 Mar-06 Mar-09 Mar-12 USD index USD index (CA CIB forecast) Source: Crédit Agricole CIB, Bloomberg Mitul Kotecha [email protected] +852 28 26 98 21 The currencies that have been particularly resilient to rising risk aversion are the commodity currencies, including AUD, NZD and CAD. These remain our favoured currencies in our forecast profile and notably have suffered only minor downward revisions to their expected appreciation paths. Given that our forecasts for Asian and in particular Chinese growth have not been revised significantly, this will help give some protection to Australia and New Zealand‟s economies and currencies from weaker growth in the US and Europe. Moreover, diversification flows will continue to provide these currencies with a layer of support. Even accounting for the themes of risk aversion and shifts in growth forecasts, our FX profiles paint a roughly similar picture as before, with the main difference being the magnitude rather than direction of expected moves. Macro Prospects – no. 134 – 4th quarter 2011 7 Energy: Oil prices to correct downwards on weak demand Oil prices remain supported by short-term supply disruptions. In the next few months, prices are expected to correct downwards due to weak demand and the resumption of Libyan supplies. World oil supply/demand (Mbd) 93 92 91 90 89 88 87 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 To tal Demand To tal Supply Source: Crédit Agricole CIB OPEC production (Mbd) 34 33 32 31 30 29 28 27 26 25 08 09 10 P ro ductio n 11 12 Capacity Source: Crédit Agricole CIB Implied stock variations (Mbd) 1.0 0.8 0.6 0.4 In spite of their recent correction, oil prices remain high, with ICE Brent above USD110/bl and WTI at USD87/bl. The WTI/Brent spread remains close to US24/bl. High Brent prices and their structure in backwardation reflects a tight physical market in Europe. Unexpected maintenance at some large fields (Forties) and low crude stocks following the loss of Libyan supplies have contributed to the tightening of European prompt supplies. Forties output, usually making the quote of Dtd. BFOE, has been reduced by unexpected disruptions in Buzzard production in the past few months. Again, in September, Forties loadings have been revised down to 420kbd from 480kbd originally scheduled. While oil markets appear to be tight in the short term, the longer-term outlook appears much weaker. The economic environment remains very weak in Europe and the US, renewing fears of a significant slowdown in the coming months. Fast-growing emerging markets are also slowing on restrictive monetary policies to fight inflation. Record-high prices for food and energy are likely to have contributed to the slowdown in economic activity. Energy accounts for 6-7% of household expenditure worldwide, and food 25%. Both oil and food prices have increased by close to 40% YoY in the second quarter of the year. Together with very high prices experienced since the start of 2011, anaemic growth in developed economies and lower growth in the developing world have significantly reduced oil demand growth. Gasoline is particularly affected, responding strongly to the combination of high prices and low economic activity. Provisional data for July indicates a drop (year-on-year) in gasoline demand of 3.5% in North America, 7.3% in Europe and 2.3% in the Pacific. On the supply side, the main concern remains disruptions to Libyan production. The situation in Libya remains very uncertain as fighting continues in Sirte and Bani Walid. Libyan production appear to be restarting more quickly than expected, however, and is likely to reach 400-500kbd by end-2011, with 1.01.2Mbd possible by the end of 2012. Agoco has already restarted production at Sarir, producing 150kbd from 100 wells, and expects production to reach 200kbd by end-September. The resumption of production from Libya should alleviate tensions on Brent and contribute to a significant drop in European oil prices. With demand growth slowing to 0.8Mbd in 2011 and 1.5Mbd in 2012, we expect prices to decline further in the next few months. Non-OPEC production should increase by 0.2Mbd in 2011 and 1.0Mbd in 2012. The call on OPEC is expected to average 30.7Mbd in 2012, while OPEC production could rise to 31Mbd (+1Mbd YoY thanks to Libya additions). WTI should drop to between USD80/bl and USD85/bl, and Brent prices should correct to between USD90/bl and USD95/bl. The spread between WTI and Brent, reflecting an overhang of crude in the US Mid-Continent and political risks associated with the loss of Libyan supplies, should narrow in the coming months. 0.2 0.0 -0.2 -0.4 -0.6 -0.8 Q111Q211Q311Q411Q112Q212Q312Q412 Source: Crédit Agricole CIB Christophe Barret [email protected] +44 20 7214 6537 Macro Prospects – no. 134 – 4th quarter 2011 8 Metals: Hold gold as insurance; downside for base limited Base metals have corrected from earlier highs on a deteriorating outlook for demand amid slowing global growth, but there are reasons to believe that further price falls will be more limited than in the previous down-cycle. Gold is expected to remain well supported by a myriad of positive factors but its upside is capped in the absence of recession. Base metals index Base metals: reasons to be cautiously optimistic While metals demand will inevitably slow against a background of deteriorating global economic growth, supply-side factors and monetary accommodation argue against a collapse in metals prices. It is worth pointing out that emerging markets last year accounted for more than half of global GDP, measured on a PPP basis (38% of global GDP based on market exchange rates, twice their share in 1990). Copper and aluminium remain our preferred base metal exposures. LMEX 4,150 3,350 2,550 Our view on copper is based on resilient developing world demand, constrained supply (due to strikes and project delays) and signs that Chinese destocking is ending. Resilient aluminium prices reflect robust global demand and rising input costs, coupled with inventory financing and delivery bottlenecks. In the case of the other metals there are also reasons to believe that price falls will be more limited than in the previous down-cycle, notwithstanding the fact that they are below the marginal cost of production. A multitude of supply constraints are impacting the ability of the mining industry to bring new production capacity to market. Near-surface, highgrade deposits located in relatively stable geopolitical areas have gone. Ore bodies are increasingly complex, lower grade and/or in challenging geopolitical and isolated locations. Permitting and approval requirements are increasing, slowing the speed with which projects can reach the production stage. Finally, continued growth in real mining wages over the medium term is expected, as many countries face an undersupply of mining labour. We remain confident about the medium- to long-term fundamentals given still-robust developing world growth, and recommend using any weakness to build new longs. 1,750 950 31-Jan-00 31-May-03 30-Sep-06 31-Jan-10 Source: Reuters, Crédit Agricole CIB Base metals: Relative performance 130 Indexed (100 on 4 Jan 2011) 120 110 100 90 80 04-Jan 22-Feb 12-Apr 07-Jun 26-Jul 14-Sep Cu Al Ni Zn Pb Sn Gold is a form of insurance amid continuing uncertainties Source: Reuters, Crédit Agricole CIB Real interest rates are the key to gold 2000 Gold Price (USD/oz) 1600 Real Interest Rates (%)* 8 4 1200 Gold has emerged as a de facto currency in its own right, the most reliable store of value for many investors worried, however irrationally, about the dangers of debt, recession and inflation. The longer-term financial and economic imbalances in the US and Europe and the negative real interest rate environment should continue to be supportive of the gold price. However, in the absence of recession we expect gold prices to weaken over the forecast period as these bullish factors wane and riskier assets become more attractive as global growth resumes. 0 800 400 -4 0 -8 Jan-70 Jan-78 Jan-86 Jan-94 Jan-02 Jan-10 Gold Price US Real Interest Rate (rhs) * Real interest rates are calculated using the US 3M T-bill yield minus US CPI YoY Source: US Federal Reserve, US Bureau of Labor Statistics, Reuters, Crédit Agricole CIB Robin Bhar Concerns about sovereign debt burdens, the long-term value of certain reserve currencies and fear of persistent inflation are persuasive arguments driving investment demand for gold and supporting even higher prices, we believe. This trend is reinforced by a growing desire for central banks to hold more gold and to diversify their foreign reserves away from fiat currencies, while there remains an insatiable appetite for gold in China and India – the world’s two largest consumers. Furthermore, there is a growing perception that physical gold is the ultimate collateral because it has no credit risk and is not a liability of any government or corporation. Nor does it run any risk of becoming worthless through the default of the issuer and cannot be easily depreciated by governments like paper currencies. [email protected] +44 20 7214 7404 Macro Prospects – no. 134 – 4th quarter 2011 9 US: Recession watch Growth nearly stalled in the first half of the year. Given the much reduced forward momentum, we now look for annual growth of 1.6% this year, followed by growth of only 1.8% in 2012. Our projected recovery pace could be characterised as a growth recession as it will not be strong enough to result in material declines in the unemployment rate. History rewritten We see the US economic recovery on a knife‟s edge. With appropriate policies, current sluggish growth will accelerate in time, while remaining vulnerable to shocks in the interim. Below, we offer our views on the fiscal and monetary policies that would support the recovery as well as guideposts for assessing the timing and scope of an effective policy response. Real GDP (SAAR, USDbn Chn 2005) 14,500 Pre-revision peak to trough -4.1% 14,000 Post-revision peak to trough -5.1% 13,500 13,000 History rewritten 12,500 12,000 forecasts 11,500 Q105 Q306 Q108 Q309 Q111 Q312 Pre-revision GDP & forecast Mainline - "Growth Recession" Source: BEA, Crédit Agricole CIB Auto production rebounding Near-term outlook Oct-11 Jul-11 Apr-11 Jan-11 Jul-10 Apr-10 Oct-10 1.2 1.0 0.8 0.6 0.4 0.2 0.0 -0.2 -0.4 -0.6 Jan-10 10 8 6 4 2 0 -2 -4 -6 -8 IP: Manufacturing [SIC] (SA, %chg) IP: Motor vehicles & parts (SA, %chg) (rhs) Source: Federal Reserve Board Oil price declines boost consumers’ purchasing power Sep-11 Aug-11 Jul-11 Jun-11 May-11 Apr-11 Mar-11 115 110 105 100 95 90 85 80 75 Domestic spot market price: light sweet crude oil, WTI, Cushing (EOP, USD/bl) Source: Wall Street Journal The annual revisions to GDP provided a rewrite of US economic history. The great recession was deeper than initially thought with a peak-to-trough decline of 5.1% vs 4.1% in the initial estimates. Furthermore, near-term growth was lowered significantly with the economy nearly stalling in the first half of 2011, with real GDP growth averaging only 0.7%. The reduced forward momentum led us to reduce our expectations for second-half growth from 2.9% to under 2.0%, resulting in an annual growth rate of 1.6% in 2011. In the chart (left), we show the pre- and post-revision GDP figures along with our previous forecast and our revised mainline outlook. As the recent negative shocks to growth fade, underlying growth will fare better over time. The modest pace of real GDP growth in the first half reflected some negative shocks to the economy and financial markets, including (1) a sharp rise in energy prices; (2) supply-chain disruptions in the automotive sector; (3) the debt-ceiling debacle and disappointing deficit-reduction deal in DC; (4) the credit downgrade of long-term Treasury debt by one rating agency; (5) a significant equity market correction; (6) continued unease over the sovereign debt problems in Europe; and (7) weakened job markets and higher unemployment. Motor vehicle production is rebounding. Looking ahead to the second half of the year, there are positive developments to consider. For example, we see a bounce in automotive production in Q311, following supply-chain disruptions that lowered output in Q2. The planned production schedules announced by Detroit could add 1 percentage point to Q3 real GDP growth. Moreover, vehicle assembly plans for Q4 show a further increase in production, which, if realised, could extend the boost to growth from Q3 into Q4. The production impact was visible in a rebound in industrial production and factory job gains. The third quarter started on a solid footing with a 5.8% gain in July motor vehicle sales to a 12.2 million unit annual rate, and August sales edged down just slightly to a 12.1 million pace. The roughly 20% drop in energy prices has acted like a tax cut, increasing consumers‟ real purchasing power. The decline in energy prices has long been a crucial element of our recovery story. The most recent concerns over soft demand and resultant financial market volatility pushed the West Texas Intermediate (WTI) benchmark price below USD80/bl versus over USD110/bl in early May. The price decline also tends to have a positive psychological impact on consumers’ outlook. However, the positive effect may take several quarters to play out. Business investment spending remains on an upward trajectory. Shipments of nondefense capital goods, excluding aircraft, and orders for this equipment continue apace. What is more, if the recent proposal by President Obama is enacted, firms will continue to enjoy 100% expensing for such expenditures, effectively lowering their after-tax cost. Mike Carey [email protected] +1 212 261 7134 Macro Prospects – no. 134 – 4th quarter 2011 10 Consumer spending started Q3 with a robust 0.8% rise in July. Gains were posted in spending on nondurable goods and services. We expect to see a rebound in Q3 consumption after a virtual stall in Q2. Robust investment spending 73,000 For households to be confident about spending, they need to feel secure about their jobs and future income stream. Nonfarm payrolls have weakened of late, rising by an average of only 40,000 over the four months ending in August compared with an average 178,000 monthly gain in the previous four months. The unemployment rate held steady at 9.1% in August – below the cycle peak of 10.1% but above the recent low of 8.8%. 68,000 63,000 58,000 53,000 Jul-11 Sep-10 Jan-09 Nov-09 Mar-08 Jul-06 May-07 Sep-05 Jan-04 Nov-04 48,000 Mfrs' New Orders: nondefense capital goods ex aircraft (SA, USDm) Mfrs' Shipments: nondefense capital goods ex aircraft (SA, USDm) Source: Census Bureau The recent proposals in the American Jobs Act could, if enacted, stimulate job creation. If the entire USD447bn package were to be implemented, it has been estimated that the level of payrolls could be boosted by one million or more during 2012. This reflects both the direct impacts related to hiring and the stimulus to aggregate demand from related spending and tax incentives. A likely improvement in job market conditions and continued consumer spending, even if it is modest, will keep the recovery moving forward in 2012. Monetary policy conditions remain supportive Slow improvement in employment 300 10.0 9.8 9.6 9.4 9.2 9.0 8.8 8.6 8.4 8.2 250 200 150 100 50 Jul-11 May-11 Jan-11 Mar-11 Nov-10 Jul-10 Sep-10 May-10 Jan-10 -100 Mar-10 0 -50 Change in total private employment (SA, Thous) Civilian unemploy rate: 16yr+ (SA, %) (rhs) Source: Bureau of Labor Statistics Banks ease lending standards 80 70 60 50 40 30 20 10 0 -10 -20 The Federal Reserve announced in August that it expects to maintain “exceptionally low levels for the federal funds rate at least through mid2013”. The intention is to anchor short rate expectations in order to keep longterm rates low as investors seek a higher return by moving out the curve and into other more risky assets. At the September FOMC meeting, the Fed decided to implement additional accommodative policies, including „Operation Twist‟. The Fed will buy longterm debt, to try to push down home-mortgage and other interest rates and ease broader financial conditions by extending the maturity of its portfolio. A majority of FOMC members, including Chairman Bernanke, believes policies that remove duration risk from the market put downward pressure on longer-term yields and lead to easier financial market conditions generally. This occurs through a portfolio rebalancing effect as investors adjust their risk exposures. The Fed intends to purchase USD400bn of Treasuries with remaining maturities of 6Y to 30Y and sell an equal amount of Treasuries with remaining maturities of 3Y or less by the end of June 2012. In addition, principal payments from agency debt and agency MBS will be re-invested in Agency MBS rather than in Treasuries to help support mortgage markets. The Fed’s commitment to holding short rates low and other tools at its disposal (including another round of quantitative easing if the economy were to turn down) will keep long rates lower than otherwise would be the case, helping to support growth. The Fed is keenly aware that this is no ordinary business cycle; the historical precedent remains the experience of the 1930s. The healing process, following the bursting of a debt bubble, will take years, suggesting limited improvement in 2013 growth prospects. Q111 Q310 Q110 Q309 Q109 Q308 Q108 Q307 Q107 Q306 Q106 Senior bank lending officers continue to report easing lending standards. Nonetheless, credit conditions for housing loans remain tighter than the excessively lax standards that fuelled the housing market bubble. Creditworthy borrowers can access bank credit, assuming down-payment and other conditions are met. FRB Sr Loan Survey: res mortgages: net share, banks tightening (Haver Est, %) FRB Sr Officers Survey: banks tightening C&I loans to small firms (%) Source: Federal Reserve Board However, the transmission mechanism whereby low rates lead to refinanced debt, reducing debt service charges and freeing up monies for other spending, is inhibited by the fact that many home mortgages that could benefit from refinancing are currently near 100% of current market value. This means coming up with additional funds to get an 80% loan-to-value mortgage in today’s market. Banks report that they continue to ease credit conditions on commercial and industrial loans for large, medium-sized and small firms, and very small firms do not report access to credit as a major issue. The USD has been on a downward trend since mid-2010 against major currencies on a real trade-weighted basis. This has increased the pricecompetitiveness of US exports in the global marketplace. It also allows for some Macro Prospects – no. 134 – 4th quarter 2011 11 substitution away from imported goods towards domestic production. With the help of continued demand growth in the emerging markets, real net exports could make modest positive contributions to real GDP growth in the second half of 2011, after having trimmed 0.5 percentage points from annual growth in 2010. However, the strengthening USD in our medium-term forecast may limit the gains in external trade. Fiscal follies Deficit impact of Budget Control Act of 2011 (fiscal years, USDbn) Discretionary spending Mandatory spending & debt service 2012 2013 2014 -25 -46 -58 2012-2021 -743 3 4 -1 -174 Total effect on the deficit excluding provisions related to JSC -22 -42 -59 -917 Pre-set cuts if JCS proposals < USD1.2T or Congress rejects1 0 -115 -120 -1200 Total effect on deficit -22 Including debt service savings -157 -179 -2117 1 Source: CBO, Macroeconomic Advisers, Crédit Agricole CIB A key factor in whether the current weakened recovery regains its health or morphs into a recession is government fiscal policy. The agreed-upon spending cuts in the debt-ceiling/deficit-reduction deal are quite small for fiscal year 2012. The Congressional Budget Office (CBO) estimates that the Budget Control Act of 2011 (USD917bn deficit reduction over ten years) would reduce 2012 spending by only USD22bn. That might trim real GDP growth by a few tenths of a percent and is not excessive, in our view. The American Jobs Act proposals contain significant near-term stimulus to growth and employment. If the proposals were to be fully enacted, the plan could add over 1 percentage point to GDP growth in 2012, and over one million to the baseline level of employment by the end of next year. However, the effects are expected to be temporary and will likely ‘pull forward’ growth that would have occurred in 2013. The justifications for the proposals are the considerable slack in the economy, especially in labour markets, and the elevated risk of recession given the stalled growth in the first half. Moreover, we may be reaching the limits of monetary policy, which underscores the role for counter-cyclical fiscal policy. The president proposes to fund the programmes by (1) limiting itemised deductions for individuals earning over USD200,000 pa; (2) ending tax breaks for oil & gas companies; (3) taxing carried interest as ordinary income rather than at the capital gains rate, targeting hedge-fund managers; and (4) changing depreciation on corporate jets. The changes would raise revenues by about USD467bn over ten years. It is unlikely that all of the president‟s proposals will make it through the Republican-controlled House. We believe that the weakened state of the economy will prompt the Congress to approve requests from President Obama to (1) extend the payroll tax cuts that are set to expire at the end of President Obama's American Jobs 2011 and to (2) extend the emergency unemployment benefits for another year in line with the deal that was struck in December 2010. That will provide Act some additional stimulus as the payroll tax will be lowered from the already Cost (USD) reduced rate in 2011 and payroll tax cuts will be extended to employers, with the Payroll tax cut from 6.2% to 3.1% for workers 175m in 2012 legislation targeting smaller firms. The other proposals and the proposed revenue increases to pay for them may face stiff resistance in Congress. Payroll tax cut from 6.2% to 3.1% for employers and none for qualifying new hires in 2012-100% expensing for new investments Infrastructure investments, including modernising schools and rehabbing vacant homes, funding for states to rehire teachers and first responders Extending unemployment insurance and new programmes for jobless TOTAL Source: Macroeconomic Advisers, Crédit Agricole CIB 70bn 140bn 62bn 447bn If the Republican-led House accepts the need for near-term fiscal stimulus paired with future deficit reduction, the recovery is unlikely to be overburdened by fiscal headwinds and the economic expansion will strengthen. Such a response would also be an excellent omen for the Joint Select Committee tasked with finding at least USD1.2trn of additional deficit reduction. If the committee’s proposals follow along the lines recommended by Fed Chairman Bernanke and the head of the IMF, the near-term fiscal restraint should not be onerous. Of course, any near-term stimulus would need to be coupled with reducing the growth in entitlement spending over the next ten years with credible tax and spending reforms that will put the deficit on a sustainable trajectory. However, given the partisan rancour exhibited in the debt-ceiling negotiations, one can imagine an alternative scenario of no agreement. That would set in play the USD1.2trn budget sequestration plan agreed to in the debtceiling deal. The forced budget cuts would not be implemented until 2013. They would be apportioned equally over the next ten years (not back-loaded), increasing fiscal drag in 2013 at a time when we expect emergency unemployment payments and temporary payroll tax cuts would expire. Not to mention the potential expiry of the Bush era tax cuts. The fiscal drag and the increased uncertainty over the outlook could be quite burdensome for a fragile recovery. The first of several guideposts for the fiscal outlook and its impact on growth will Macro Prospects – no. 134 – 4th quarter 2011 12 be the Congressional response to the American Jobs Bill. The second will be the Christmas deadline to come up with additional deficit reduction over the next decade. If the political process remains hyper-partisan and fiscal restraint is not back-loaded, the recovery could be at risk. We believe that the public support for plans to increase current employment and growth prospects while setting the long-term deficit on a sustainable path will resonate with Congress. However, below we contemplate a ‘what if’ scenario that would be quite troubling. Risk scenario A growing sense of unease about the economic recovery, the polarised politics in Washington and the potential lack of Fed policy tools to counter an economic downturn have been hyped in the media and consumer sentiment measures have returned to recession territory. Below we offer a plausible sketch of a scenario that would lead to a double-dip recession. In this scenario, one could argue that the recovery was never able to reach a self-sustaining dynamic but reflected instead the stimulus measures from the Fed’s monetary policy and short-term fiscal policy boosts. Our recession scenario incorporates ill-timed fiscal restraint, with elevated uncertainty over the tax outlook and the sustainability of the recovery. Businesses hold off on capital expansion plans, and hiring is replaced by redundancies as firms hunker down. Consumer confidence is damaged by rising unemployment and discretionary spending is cut. The impact is exacerbated by negative wealth effects due to equity market losses and the lack of a credible response from Congress and the Administration. Banks tighten credit to limit loan losses due to the downturn and to maintain more demanding capital standards mandated by regulators. In this rather ugly scenario, we are likely to see collateral shocks in Europe and Asia that create an adverse feedback loop that exacerbates the global downturn. Sharp drops in commodity prices could lead to consumer price deflation and a strong disinflationary impulse to core inflation measures. The rising slack in labour and product markets could temporarily push the core inflation measure close to zero by the summer of 2012. A strengthening USD in our recession forecast would also contribute to declining import prices. However, as the recession abates we do look for inflation to rise towards the Fed’s target and a prolonged deflation seems highly unlikely. The recession scenario described is costly in terms of damagingly high unemployment, lost output and wealth destruction. The social and political adjustments needed to put the deficit back on a sustainable trajectory are always problematic. However, in a recession scenario, the social fabric of the country could become so strained as to make progress on that front extremely difficult. The chart below offers some empirical evidence suggesting that output growth may have fallen below a ‘stall speed’ of 2.0% YoY, which is typically followed by a recession. Real GDP (%ch YoY) 16% SAAR, USDbn Chg 2005 12% 8% 4% 2% cut-off 0% -4% We are here 1.6% -8% 50 53 56 59 62 65 68 71 74 77 80 83 86 89 92 95 98 01 04 07 10 Real GDP Growth (YoY) of 2% or lower Source: Bureau of Economic Analysis, Haver Analytics Macro Prospects – no. 134 – 4th quarter 2011 13 Japan: Finally set for a V-shaped recovery Although real GDP growth for Apr-Jun was down 0.5% QoQ and the Japanese economy has contracted for three straight quarters, the demand components breakdown showed a much earlier stabilisation than we had initially envisaged. That said, with the political administration in the hands of the new PM, the economy is finally set for a V-shaped recovery. Real GDP projection 2.5 % QoQ Forecasts 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 Q110 Q210 Q310 Q410 Q111 Q211 Q311 Q411 Q112 Q212 Q312 Q412 -1.5 Real GDP growth Source: Cabinet Office, Crédit Agricole CIB CPI revised down by 0.6ppt 1.0 % YoY 0.5 0.0 -0.5 -1.0 -1.5 -2.0 Jan-10 May-10 Sep-10 Jan-11 May-11 CPI (ex. fresh food) old benchmark CPI (ex. fresh food) new benchmark Source: Ministry of Internal Affairs and Communications, Crédit Agricole CIB BOJ’s balance sheet size 180 JPY trn 160 140 120 100 80 60 40 979899000102030405060708091011 BoJ's balance sheet size Source: Bank of Japan, Crédit Agricole CIB Takahiro Sekido [email protected] +81 3 45 80 53 36 Real GDP growth for Apr-Jun fell 0.5% QoQ and the Japanese economy has contracted for three straight quarters, with the negative impact from the slowdown in major trading partners towards the end of last year being coupled with the collapse in economic activities due to the disaster in March. However, the breakdown by demand component actually reveals how resiliently the economy is emerging from the difficulty and supports our view that we have highlighted in previous publications. In short, we are comfortable in maintaining our view of a V-shaped recovery towards H211. Looking at the demand components of the private sector, household consumption growth stabilised at 0.0% QoQ in Apr-Jun after two straight quarters of contraction. Considering that the disaster was in mid-March and thus its full impact can reasonably be assumed to have been realised in the following quarter, we expected at least a similar degree of contraction in consumption. However, the unexpected stabilisation in consumption in Apr-Jun should suggest that households did not consume as much as they necessarily would normally, not because of the worsening outlook for income conditions but in consideration for those who had been affected by the disaster. Recent economic indicators are increasingly supporting such a view, with consumer confidence showing signs of improving and labour market indicators showing unexpectedly resilient income conditions as represented by overtime hours worked already stabilising. Furthermore, what was equally surprising to us was the only modest decline in capex, as shown by the fact that it fell only 0.9% QoQ in Apr-Jun. This should reflect the expectation among firms that underlying demand for products is still steady and thus that they had better be prepared for a production recovery by renewing production equipment. Based on our main global scenario that major economies should go through only a soft patch rather than a fullyfledged recession, this should mean that demand for exports should continue to support demand for capex. Turning to the public demand side, the much anticipated change in leadership has finally taken place and the succession by the former finance minister Yoshihiko Noda should, we hope at least, open the way for the government to propose a JPY10trn disaster rescue package. Given the even larger size relative to the two rescue packages that have been already carried out, the package will be used more for recovering social capital that was damaged by the disaster in addition to normalising the daily lives of those who were affected. Thus, we maintain our view that the private capex recovery will be encouraged by the recovery of social capital and that gross fixed capital formation will lead the way in the economic recovery. On the price front, while the downward revision to the CPI (excluding fresh food) inflation rate by -0.6ppt brought in by the benchmark year revision was less than expected, the only meaningful interpretation of the change should be that the Bank of Japan will keep the present accommodative monetary conditions longer than otherwise would be the case. In addition, the Fed’s commitment to keep the policy interest rate until at least mid-2013 also means that the BoJ now has to compete with its US peer as to how long and how committed it is to keeping accommodative monetary policy settings. Although the JPY foreign exchange rates are not an explicit policy target, the BoJ would not dare to take the risk of being blamed as the source of currency appreciation. Although the BoJ left monetary policy unchanged at its policy meeting in September, the policy direction should be towards further easing measures in order to „win the race‟. Macro Prospects – no. 134 – 4th quarter 2011 14 Eurozone: A limited liability union? The markets will continue to test the resistance of the Eurozone and to challenge the conviction of the irreversibility of European Monetary Union (EMU). The steady swelling of stimulus packages reveals the true state of the economy, which has also been shackled by further austerity measures in the peripheral countries. By acting as circuit-breakers, the ECB and other European institutions should help buffer the contagion effect on the big economies. The impact will also be limited by the decoupling of the slowdown in the industrialised countries from the resilience of the emerging economies. Limited immunity GDP growth 5 % YoY The pressures building in the European sovereign debt market this year have targeted countries that do not necessarily share common features. Though some countries are strapped by unwieldy deficits (Greece) or ailing banking sectors (Ireland, Spain), others do not fit so easily into these categories (Italy). Yet, contagion is clearly the market's way of saying that it has integrated the economic policy dilemma and, although in most cases public finances can be turned around in the medium term, the real challenge is growth. Moreover, this challenge will be all the harder to meet in the current environment, marked by a global slowdown in demand and restrictive fiscal policies in virtually all of the EMU member states. forecasts 4 3 2 1 0 -1 -2 2010 2011 EMU France Spain 2012 Germany Italy Source: Eurostat, Crédit Agricole SA Investment rate 23 22 % of GDP 22 21 21 20 20 19 99 00 01 02 03 04 05 06 07 08 09 10 11 Source: Eurostat, Crédit Agricole SA Fiscal impulse % of GDP 2011 2012 0 -1 -2 -3 -4 -5 -6 -7 EMU Ireland France Portugal Italy Greece Spain Source: Eurostat, Crédit Agricole SA Frederik Ducrozet [email protected] + 33 1 41 89 98 95 Paola Monperrus-Veroni [email protected] +33 1 43 23 67 55 The net slowdown in Q2 GDP growth, which fell far short of expectations (+0.2% QoQ) after a very buoyant Q1 (+0.8%), only fanned the market's growing scepticism. The slowdown was mainly due to disappointing performances by France (+0.0%), Germany (+0.1%) and the Netherlands (+0.1%). Italy showed a slight rebound in activity (+0.3%), Spain continued to grow (+0.2%) and Portugal managed to halt the contraction in GDP (+0.0%). The contribution from domestic demand was the main factor curbing GDP growth in most countries, eroded by the decline in household consumption in France, Germany and the Netherlands as well as in the small countries of Southern Europe. The impact of higher energy prices on household revenue is the main suspect, even though revenue picked up. Investment failed to repeat the rebound of the previous quarter, which was mainly driven by a technical upturn in the construction sector. The investment rate is still stuck at 2.5 points below precrisis levels. Growth would have been negative without the positive contribution from foreign trade, which was due to a sharper slowdown in imports than exports. The sluggishness of internal sources of growth is becoming increasingly clear, making it harder to respond to the slowdown in world trade. And yet, job creation accelerated in the Eurozone in Q211 (+0.3% QoQ), after stagnating for most of the previous year. This uniform performance was accompanied by accelerating hourly wage costs in the core countries (+3.6% YoY) and a tendency towards wage deflation in Greece, Ireland and Portugal. In July, quantitative indicators showed a slight improvement in Eurozone activity, with a 1% rebound in industrial production (vs 0.8% MoM), driven mainly by Germany and France. Activity continued to slump in Spain, Italy and Portugal. Yet the downturn in leading economic indicators a bit later fuelled increasing worries about the resilience of growth on either side of the Atlantic. In September, the European Commission's business sentiment index dropped below its long-term average, and the composite PMI for activity in the Eurozone as a whole slid below 50 points, signalling an economic slowdown. Although the reversal in inflationary trends suggests a slight rebound in H2 consumption, it is likely to be limited to the core. Indeed, the growth slowdown accentuates the differences among countries, which were already very wide. On top of differing competitive positions, the sovereign debt crisis produced various extremely negative fiscal impulses and more restrictive financing conditions, including for private agents, in the least virtuous countries. These factors are creating too much of a strain to guarantee the growth cycle will be reactivated via intra-European demand, driven by the gearing effect of a healthier core (especially since it is not immune to the decoupling of Italy). But we have based our scenario on the assumption that the US economic slowdown will have only a mild impact on emerging economies and that the Eurozone will be able to rely on persistently strong world demand. Macro Prospects – no. 134 – 4th quarter 2011 15 ECB’s short-term interest rates % 2.0 1.0 0.0 Jan-10 Jul-10 Refi Euribor 3M Jan-11 Jul-11 Eonia deposit facility Source: Bloomberg, ECB, Crédit Agricole CIB This scenario would benefit the core economies most. Thanks to more competitive positions, they should be able to maintain a certain growth momentum that prevents growth from collapsing in the region. With capacity utilisation rates at high levels in the core countries, investment would increase, albeit at a milder pace. The slowdown in production growth could hamper the process of rebuilding margins, curtailing both job and wage growth. The small increase in the total wage bill, except in France and Germany, would run up against generally restrictive fiscal policies. The negative fiscal impulse, which is expected to average 1.1 points of GDP in 2011 and 2012 in the Eurozone, should lead to healthier public finances in most countries, despite the deterioration in the cyclical component, notably in 2012. The pro-cyclical bias of fiscal policy will widen the negative output gap, which could not be narrowed by the prematurely interrupted recovery. Our scenario calls for growth of 1.6% in 2011 and 1.1% in 2012, with a downside risk in the event of a severe confidence crisis, the impact of which would spread rapidly in both North America and Europe and from the financial sphere to the real economy. ECB: unlimited liability? The sudden contagion of the debt crisis to Spain, Italy and even the Eurozone core and its banking system over the summer forced the ECB to make several spectacular about-faces in terms of its conventional and non-conventional monetary policy. In the spring, the ECB had set out gradually to normalise monetary policy, raising its key refinancing rate on two occasions, from 1.0% in March to 1.50% in July. The ECB then adopted a more neutral tone in September on the back of the deterioration in the economic and financial environment. ECB’ open market operations 1,000 EURbn 800 600 400 200 0 99 00 01 02 03 04 05 06 07 08 09 10 11 OMO (1-week) LTRO (1M, 3M, 6M and 12M) Source: ECB, Crédit Agricole CIB ECB’s Securities Markets Programme 200 EURbn EURbn 25 20 150 15 100 10 50 5 0 0 0 1 2 3 4 5 6 7 8 91011121314151617 Nb of months from the start of the programme amount of weekly purchases (rhs) cumulated govt bond purchases Source: ECB According to the ECB's own analysis, the risk of inflation was no longer "on the upside" but was now deemed to be "broadly balanced", while the risks to growth had switched from "balanced" to "on the downside". The ECB’s staff lowered their growth forecasts to 1.6% for 2011 (from 1.9%) and to 1.3% for 2012 (from 1.7%). In the short term, the ECB is likely to be particularly sensitive to economic data, and it seems to be keeping all options open. While we do not forecast a recession in our central case, economic and financial conditions have deteriorated since the summer, strengthening the case for a rate cut by year-end. Now that mediumterm inflation risks have eased, the ECB is therefore more likely to use its (modest) room for manoeuvre by cutting the Refi rate by 50bp, possibly as soon as on 6 October. If, on the contrary, the overall situation improves rapidly, the ECB could remain on hold for a prolonged period of time before it resumes its gradual normalisation process in 2013. In keeping with its separation principle, the ECB has strengthened its arsenal of non-conventional measures to ensure bank liquidity and the smooth transmission of monetary policy. After the outbreak of tensions in the interbank market and the refinancing troubles encountered by some European banks in USD, the ECB decided to reintroduce a series of tools with which it has experimented in the past. While extending its offer of unlimited liquidity at fixed rate through early 2012, the ECB conducted a 6M tender in early August followed by 3M USD refinancing operations in coordination with the Federal Reserve. Once again, the ECB demonstrated its complete flexibility, and we would expect it to take more action in the months ahead, introducing new ultra-long refi operations or even intervening directly in the private debt market to support banks, as it did through the covered bond purchase programme in 2009. Most importantly, the ECB reactivated its Securities Markets Programme (SMP) in early August, extending purchases of sovereign debt on the secondary market to include Italy and Spain. At the end of September, the Eurosystem had over EUR150bn in securities on its balance sheet. The ECB justifies SMP as part of its mandate, while openly demanding counterparties from the countries it assists. The central bank's arguments have been weakened, however, by a small minority of governors who contest the legitimacy of its interventions. Jürgen Stark, the ECB's Chief Economist and member of the Executive Board, even resigned in early September to express his disapproval. Yet, one thing is clear: the ECB is the only credible institution capable of stabilising the markets today, until European governments manage to come up with a suitable response in keeping with the size of the current crisis. Macro Prospects – no. 134 – 4th quarter 2011 16 France: Growth hits the brakes After a period of very slow increase in the second half of 2011, growth could pick up in 2012. The recovery will be slow and gradual, however, due to the downward revisions to global growth forecasts and austerity measures, which could contribute to stoking agent fears and wait-and-see behaviour. Annual average economic activity should grow by 1.6% in 2011 and by just 1.3% in 2012. Steady GDP in Q211 In Q211, the slowdown in French growth was more pronounced than anticipated, as GDP stabilised in volume terms. This stagnation can mainly be explained by a sharp downturn in private consumption, at -0.7% QoQ, as the effects of the car scrappage scheme receded. Furthermore, the contribution of changes in inventory was zero (after +0.8 points in Q1). Despite stable exports, foreign trade made a positive contribution to growth due to a sharp reduction in imports. Investment also drove activity and partly offset the negative contribution from domestic demand. GDP growth contributions QoQ, % 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 07 08 09 10 11 External balance Inventory changes Domestic demand (excl. inventories) GDP Source: Insee, Crédit Agricole SA Inflation and unemployment forecasts YoY, % YoY % 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 12 10 8 6 4 Forecasts 2 0 06 07 08 Inflation 09 10 11 12 Unemployment (rhs.) Source: Insee, Crédit Agricole SA Distribution of value added 32.5 YoY, % YoY, % 32.0 31.5 31.0 30.5 30.0 29.5 29.0 06 07 08 09 10 67.5 67.0 66.5 66.0 65.5 65.0 64.5 64.0 63.5 63.0 62.5 11 Margin rate (EBITDA/VA) Labour share in VA (Salaries/VA) Source: Insee, Crédit Agricole SA Olivier Eluère [email protected] + 33 1 43 23 65 57 Werner Perdrizet [email protected] + 33 1 57 72 08 54 In H211, growth is set to continue rising modestly by just 0.2% per quarter. Surveys confirm this slowdown in economic activity, along with a significant deterioration in the business climate in manufacturing. Private consumption should improve slightly. Car sales increased by 2% in July-August relative to Q2, versus a drop of almost 16% in Q2 (QoQ). Despite an increase of around 3% in the wage bill in 2011, inflation (forecast to average 2.1% in 2011) will curb households’ purchasing power. The recent fiscal consolidation measures, combined with only a small reduction in the unemployment rate (forecast to average 9.1% in 2011 versus 9.4% in 2010), could also encourage precautionary behaviour, leading to a high personal savings ratio among households. Some of these consolidation measures, notably the restrictions on profitmaking firms‟ ability to defer losses, will affect investment. The mixed outlook for sales in the domestic market, fears for global growth, and recent financial tensions should foster wait-and-see behaviour on the part of entrepreneurs, who are likely to slow down their spending significantly. The downward revisions to global demand forecasts, combined with a strong EUR, will also squeeze export volumes. Nevertheless, the contraction in imports due to slower domestic demand should limit the negative contribution from foreign trade. This marked slowdown in activity should continue into the early part of 2012 followed by a very gradual pick-up in growth. Households‟ purchasing power should improve on the strength of a sharp predictable fall in inflation. This should sustain private consumption despite measures to improve public finances (notably the reduction in the number of tax loopholes and the announced deceleration in health spending) and continued high unemployment. Conversely, housing investment looks set to slow due to very high house prices, rising mortgage rates and higher taxes. In their investment decisions, firms should benefit from a slight improvement in their financial situation, notably driven by a drop in intermediate costs as a result of falling commodity prices, an accommodative monetary policy from the ECB and the pursuit of the rebound in productivity. Corporates intend to restore their margin ratios, which are still below the 2008 level at present. On the other hand, the growing uncertainties surrounding the economic and financial environment and deteriorating demand prospects should lead to greater caution from entrepreneurs. In the end, firms will invest little despite the need to replace and modernise their equipment. Foreign trade should benefit slightly from the forecast depreciation of the EUR, but this will be hindered by the weaker global demand. Overall, net exports will provide a small positive contribution to growth (forecast at 0.2 point in 2012). Uncertainties about the global economic outlook and the consolidation of public finances should result in modest quarterly growth rates of an average 0.3-0.4% per quarter in 2012. French growth should slow in annual terms, with a GDP increase of just 1.3% in 2012. As for the rest of the Eurozone, this scenario is surrounded by a serious downside risk. Macro Prospects – no. 134 – 4th quarter 2011 17 Germany: A trailer rather than a locomotive With 2011 growth of 2.7%, Germany has managed to take advantage of the recovery, which is now slowing . The gradual lifting of stimulus plans reveals the true state of the economy, which nonetheless has accumulated enough advantages to face a slowdown in foreign demand. So, Germany will continue to support Eurozone growth, but not revitalise it. Contributions to GDP growth % 4 3 2 1 0 -1 -2 -3 -4 -5 2009 2010 2011 2012 Domestic demand Change in inventories External trade GDP growth Source: Destatis, Crédit Agricole SA Activity indicators 80 80 75 70 65 60 55 50 45 40 35 30 PMI manufacturing (RHS) 60 40 20 0 The jagged growth in H111 confirms the slowdown in domestic demand. The -0.3pt contribution from domestic demand in Q2 curbed GDP growth (+0.1%) for the first time since late 2009. As in France, the net decline in household consumption (-0.7%) can be attributed to the loss of purchasing power due to higher energy prices as well as an erosion of confidence. While aggregate investment was sluggish, investment in machinery and equipment remained buoyant (+1.7%), driven by exports, which were still robust (+2.3%). Yet imports rose even more strongly (+3.2%) resulting in a net negative contribution by foreign trade (-0.3%). GDP managed to grow feebly thanks solely to major stock rebuilding. The upturn in imports reveals the Achilles‟ heel of the German economy: its energy dependency. Halting several nuclear power plants increases the country's basic electricity deficit and thus its imports. The activation of alternative energy sources mainly addresses peak electricity demand, for which Germany is also an exporter, but cannot cover the basic deficit. Faster import growth in the long term is a factor that must be taken into account when calculating Germany's growth prospects, and it is not all that clear that the contribution from foreign trade will return to normal in the months ahead. Our forecast of a Q3 rebound in GDP (+0.3% QoQ) is based on a more positive contribution from domestic demand. Investment will continue to grow, pulled along by the tailwind of a persistently robust growth cycle in the emerging countries. With the decline in orders from its European partners, however, demand for German goods is bound to be hit by the backlash of the slowdown in Eurozone growth. The industrial production index rebounded in July (+4% MoM, after -1.2% MoM), but this only masks the shift in the summer holiday season to August, which will probably have repercussions into September. The German economy does not seem to be sheltered from ever-greater uncertainties over growth prospects in Europe and North America. The big drop in the IFO index in August is accelerating and spreading from the -60 manufacturing sectors to construction and retailing. In manufacturing, export -80 expectations are eroding, too, and companies are being more cautious about ZEW their hiring plans. Yet, the index is still higher than its long-term average, unlike Source: Datainsight, Markit, Crédit Agricole SA the ZEW index for September, which declined for the seventh consecutive month to -43.3. Of course, German companies are well positioned to withstand external shocks, but margins have not recovered fully yet, and the prospects for Private productive investment rate expanding production capacity – under pressure from high capacity utilisation rates – can quickly darken in the event of a cyclical downturn. -20 -40 % of GDP 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 14 14 13 13 12 12 11 11 10 10 9 Source: Destatis, Crédit Agricole SA Paola Monperrus-Veroni [email protected] +33 1 43 23 67 55 Growing scepticism toward the German economy's capacity to resist can also be seen in the GfK index. The pace of job creation is slowing (+1.3% YoY in Q2) and the unemployment rate has not declined since April (7% in July according to the Federal Employment Agency). Despite an upturn in wages (+1.7% YoY), real disposable income has shrunk in the face of an upsurge in inflation (+2.5% YoY), and the decline in consumption has been accompanied by a lower savings rate. The easing of inflationary pressures and the continuation of dynamic wage momentum justifies an upturn in household consumption, assuming that the erosion of confidence does not drive up precautionary savings. The big question is whether Germany has really succeeded in balancing its growth engine, which so far has been highly dependent on foreign trade. In a recovery phase that has prematurely run out of steam, we do not think Germany has succeeded in generating enough of a surplus to develop autonomous domestic growth momentum capable of serving as a growth engine. Yet having purged some of the imbalances inherited from reunification, Germany should grow at a faster pace than its long-term potential over the forecast horizon (+2.9% QoQ in 2011, +1.4% in 2012). Macro Prospects – no. 134 – 4th quarter 2011 18 Italy: The big sleep The markets will surely continue to keep an eye on Italy. With foreign trade and domestic demand making almost no contribution to growth, Italian GDP is unlikely to exceed 1% over the next two years, with negative retroactive effects on its budget equilibrium and debt trajectory. Contributions to GDP growth Q411f Q311f Q211 Q111 Q410 1.0 0.8 0.6 0.4 0.2 0.0 -0.2 -0.4 forecasts -0.6 -0.8 Q310 Q210 % QoQ Q110 1.0 0.8 0.6 0.4 0.2 0.0 -0.2 -0.4 -0.6 -0.8 -1.0 Domestic demand excluding inventories Foreign trade Change in inventories GDP Source: Istat, Crédit Agricole SA Exports – market share 120 Index 2003=100 110 100 90 80 70 60 00 01 02 03 04 05 06 07 08 09 10 11 Germany France Italy Spain Source: Eurostat, Crédit Agricole SA Public finances 130 120 % of GDP forecasts 110 6 5 4 100 3 90 After two quarters of stagnation last winter and a slight rebound in Q211, Italy's economic growth prospects have slumped again along with the current slowdown in the global economy. This environment has brought Italy under growing pressure in the sovereign debt market. The Italian government has responded with two budget amendments in July and August to accelerate the pace of deficit reduction, anticipating the problem by bringing forward its greatest efforts into 2012 instead of 2013. Apparently, Italy will keep its promises in terms of fiscal adjustments, as it has for the past two decades, but in the medium term growth is the real key to cleaning up its public finances. The rebound in Q2 GDP (+0.3% QoQ vs 0.1% in Q1) remains an isolated event and the contributing factors leave little room for optimism. Domestic demand made a positive contribution of 0.2%, mainly because of a 2.5% rebound in investment in machinery and equipment. Yet, its cyclical momentum has slowed sharply since the beginning of the year. Household consumption did not contract like in France and Germany but was virtually stagnant at 0.2%. Foreign trade continued to make a positive contribution to growth (+0.9%), but this was mainly due to the drop in imports (-2.3%) after the stock-rebuilding trend of the past year came to an abrupt halt. Exports picked up albeit at a very slow pace (+0.9). As a result, the negative contribution from changes in stock (-0.8%) offset the entire contribution from foreign trade. Looking ahead, domestic demand should remain sluggish against a backdrop of a slow easing in the unemployment rate (8% in July). Although the outflow from the workforce seems to have halted, job creation – mainly temporary and part-time work – is spreading to the manufacturing sector. Yet, partial unemployment is still high and workers no longer entitled still contribute to unemployment. The need to rebuild margins at a time of low productivity combined with the freeze on public sector wages will hinder any increase in the total wage bill. Fiscal policy will also squeeze growth (2 points of GDP in 2012) through widespread tax increases and higher rates for administrative services. Moreover, the decision to raise the ordinary VAT rate to 21% from 20% from September 2011 will partially erase the purchasing power gains that could have been expected from lower energy prices. Lowering the savings rate is the only factor that could support consumption (+0.9% in 2011 and +0.5% in 2012). Despite ongoing capital accumulation (+3.7% and +3.1%), the investment rate will remain well below the average for the past ten years. All in all, we estimate GDP growth at 0.8% in 2011 and 0.6% in 2012. For some time, Italy has no longer managed to take advantage of growth in other regions, notably in the emerging countries. Over the past decade, the transmission of global to domestic demand has seized up. The buoyant momentum of world imports (+7%) resulted in only feeble export growth (+2.5%) and even weaker GDP growth (1.2%). The current account deficit is symptomatic of the erosion of Italy's industrial capacity and the decline in its long-term growth potential. 2 80 70 1 60 0 2008 2009 2010 2011f 2012f Debt General government net lending (rhs) Source: Eurostat, Crédit Agricole SA Paola Monperrus-Veroni [email protected] +33 1 43 23 67 55 Macro Prospects – no. 134 – 4th quarter 2011 19 Greece: No scope for further delays While the economy is plunging deeper into recession, deviations from fiscal targets dictate that the austerity measures of the Medium Term Fiscal Strategy Framework – and new ones – be timely implemented to keep the fiscal effort on track and secure external financial aid. Central government balance (% of GDP) The Greek economy has been caught in a vicious circle of recession and fiscal tightening. The macroeconomic outlook has further worsened, while the fiscal deficit remains above the target due to delays in structural reform and deepening recession. The overshooting deficit entails more austerity measures and a longer time mired in recession. -1 Real GDP shrank more than expected in Q211 (-7.3% YoY2) with private consumption being by far the major negative contributor to this development. Private consumption is set to suffer more in the coming quarters as households will bear the brunt of new taxes imposed on property to make up for the shortfall in public revenue. -4 -7 -10 J F M A M J J A S O N D 2010 2011 Source: Hellenic Ministry of Finance PMI index in manufacturing 55 53 51 49 47 45 43 41 39 37 35 Jan-08 The worse performance in Q211 and the additional austerity measures point to 2011 GDP contracting more than previously expected. Recession will probably be deeper than last year and in all likelihood the economy will be in recession in 2012 as well. This development translates into even higher unemployment. The unemployment rate averaged 15.9% in the first half of the year. Redundancies in the public sector and increased dismissals in the private sector should drive the unemployment rate above 17% next year. Jan-09 Jan-10 Jan-11 Source: Markit Economics, Hellenic Purchasing Institute Greece Q111 Q310 Q110 Q309 Q109 Q308 Q108 Q307 Q107 Q306 14 12 10 8 6 4 2 0 -2 -4 -6 -8 Eurozone The dampening effect of declining economic activity on prices has started to show (August 2011 HCPI: 1.4% YoY) as the impact of excise tax hikes in 2010 has waned. Some upward pressure on prices may be in evidence in the autumn – certain goods and services will shift to a higher VAT rate – but overall in 2011 inflation is now expected to average below 3.0%. The larger downturn in economic activity contributes to lagging public revenue. In January-August 2011 the public deficit was well above that in the corresponding period of 2010. But, aside from underperforming revenue, persistently overshooting public spending was also the culprit. All the same, some overrun in the fiscal deficit should be expected as recession will be deeper this year. Given the difficulty in achieving the target of 7.6% of GDP for the general government deficit in 2011, the government has announced new two-year tax measures with a view to realising the target. Hence, the timely implementation of the new tax measures is crucial. Total Labour Cost Index (annual %ch) Q106 Investment also remains very much in the doldrums. Net exports made a positive contribution to growth as in the previous quarters, mostly thanks to a fall in imports. Exports have not proved as strong as expected. The upward trend in goods exports and tourism is counterbalanced by an underperforming shipping sector due to the drop in freight rates. However, permanent measures on both the revenue and expenditure side of the state budget rather than one-off tax hikes are needed to consistently achieve the targets. As market doubts about Greece's ability to implement the reform programme have mounted – and the country is struggling to secure one tranche of the Troika's financial aid with the other suffering the consequences of structural delays and a still-large public sector – the Medium Term Fiscal Strategy Framework (MTSF), which passed parliament in June 2011, needs to be implemented swiftly and fully. Source: Eurostat Aikaterini Anagnostopoulou [email protected] + 30 2 10 32 10 952 2 According to available non-seasonally adjusted data. Macro Prospects – no. 134 – 4th quarter 2011 20 Spain: Further consolidation of public finances Weighed down by austerity measures, Spanish growth will contract again in H211. The public authorities' activism should help contain the swelling of public finances, which is likely to reassure the markets. Budget deficit 10 % GDP 8 6 4 2 2010 Dec Oct Nov Sept Jul 2011 Aug Jun Apr May Mar Jan -2 Feb 0 2009 Source: IGAE, Crédit Agricole GDP growth 8 %YoY %YoY 16 12 6 8 4 4 2 0 -4 0 -8 -2 -4 -12 -16 9697 989900 0102 030405 060708 09 GDP Construction Invt. (rhs) Source: Datastream, Crédit Agricole SA Evolution of the CDL of companies by sectors 100% 80% 60% 40% 20% Mar-11 Mar-10 Mar-09 Mar-08 Mar-07 Mar-06 Mar-05 Mar-04 0% Services (excl. Real Estate) Construction and real estate activity Industry (excl. construction) Agriculture Source: Banque d'Espagne Sandrine Boyadjian [email protected] + 33 1 43 23 65 42 Antonio Teixeira [email protected] + 33 1 43 23 03 57 Amid a worsening sovereign debt crisis, Spanish GDP slowed to 0.2% QoQ in Q2 from 0.4% in Q1. The contractions in exports (-1.9% QoQ vs 5.8%) and public consumption (-2.4% vs 2.9%) were partially offset by a rebound in household consumption (0.6% QoQ vs -0.1%). In H211, the Spanish economy is expected to slump again. The first Q3 indicators, notably PMI, the EC survey and industrial production, suggest a slight decline in GDP of about 0.3% QoQ. This temporary contraction is likely to arise from the negative contribution by foreign trade and a decline in household demand, as greater budget austerity further squeezes private sector spending behaviour. Towards the end of the year, growth will remain sluggish and a key theme will be the ongoing clean-up of the construction sector. Sluggish growth will not fuel job creation in the short term. Although Spanish rates have eased somewhat in recent weeks, the country is still a concern for the markets and rating agencies. After the 21 July decision to launch a second rescue package for Greece, Moody's switched its Aa2 rating for Spanish sovereign debt to a negative outlook, warning of a possible downgrade. One of the agency's biggest concerns is the risk of swelling public deficits in the 17 autonomous regions. The regional public deficit target of 1.3% of GDP at year-end had nearly been met by mid-year, with an average deficit of 1.2%. For the same reason, Fitch also downgraded its ratings for five Spanish regions in early September. In reaction, the government set up a new measure3 to impose stricter budget discipline on the regions. Regions exceeding the debt target must obtain central government authorisation to issue new debt. Approval will depend on compliance with the previous year's target and the presentation of a budget consolidation plan. The government also took budget austerity measures to reduce education and healthcare spending, including the generalised use of generic drugs (generating savings of EUR400m in 2011 and EUR2.4bn in 2012). During the summer, the government also reduced tax credits and deductions, and rescheduled corporate tax payments (which affect only 0.5% of taxable companies). The latter measures should enable the public authorities to generate EUR2.5bn in savings in 2011 and EUR400m in 2012. Altogether, these measures are designed to consolidate the target of 6% of GDP in 2011. At the same time, the government is seeking to boost the fragile real estate sector. Between September and December 2011, the VAT rate on purchases of new housing was lowered to 4% from 8%. After taking into account these measures and the sluggish economic environment, we expect Spain to exceed its public deficit target slightly in 2011 (by about 0.5ppt). Restructuring is underway in the banking sector. Although this is bound to be a slow and painful process, it should nonetheless remain on track. The Bank of Spain has taken measures to calm down the ‘deposit wars’. The Spanish central bank will require greater contributions to the guaranteed deposit fund once proposed returns exceed certain levels. In terms of liquidity, the Spanish banks have strongly increased their use of ECB refinancing, up 34% to EUR69.9bn in August (from EUR52bn in July). The non-performing loan ratio hit 6.94% at the end of July and is expected to rise to 8% by end-2011, mainly due to the property development segment (where the ratio is nearly 18%). The ratio could even peak as high as 11% as structured loans migrate towards doubtful debt status. Lastly, after the poor figures reported by Caja Mediterráneo, Spain's ailing savings banks continue to struggle with restructuring (the government may still have to pay out another EUR7.5bn) and a second wave of consolidation is foreseeable this year. This is the economic environment that will prevail during the early legislative elections to be held on 20 November 2011. The conservative People's Party is favourite to win although it is uncertain whether it will be capable of winning a majority in parliament. 3 Approved on 27 July 2011 Macro Prospects – no. 134 – 4th quarter 2011 21 Portugal: Apparent respite, but then what? Over the summer, the Portuguese economy managed to escape the markets' attention somewhat. Yet the risks to growth and public finances are still high. The new government seems to be ready to tackle these problems head on. GDP and contribution of its components 4 3 2 1 0 -1 -2 -3 -4 -5 Q211 Q111 Q410 Q310 Q210 Q110 Q409 Q309 YoY, % Q209 pp Q109 4 3 2 1 0 -1 -2 -3 -4 -5 External demd Inventories Domestic demd excl. inv GDP (rhs) Source: INE, Crédit Agricole SA Public deficit 2011 Dec Oct 2010 Nov Sept Aug Jul Jun May Apr Mar Jan % GDP Feb 9 8 7 6 5 4 3 2 1 0 -1 2009 Source: National sources, Crédit Agricole SA Redemptions schedule 18 EURbn 16 14 12 10 8 6 4 2 2038 2035 2032 2029 2026 2023 2020 2017 2014 2011 0 Source: Bloomberg Before the summer break, Moody's issued another warning on the Portuguese economy. On 5 July, the rating agency downgraded Portugal's sovereign debt rating by four notches to Ba2, the same category as junk bonds. Moody's justified its downgrade on doubts about the country's capacity to implement its austerity programme and worries about the banking sector's eventual need for support, notably in a deteriorated economic environment. This announcement triggered sharp tensions in Portuguese bonds, sending 10Y rates surging to nearly 13%. Since then, market pressures on Portugal have eased slightly. In the banking sector, the three Portuguese banks successfully passed July's stress tests. Even so, the Bank of Portugal insisted that the banks must reinforce their equity capital, notably the most fragile banks, to better withstand shocks and reduce their dependence on ECB refinancing. As to fiscal policy, the government was given some breathing room by the successive payment of various tranches of financial assistance from the EU/IMF rescue plan. Of the EUR78bn planned over three years, EUR31.3bn has already been paid out since June 2011. So far, the Troika has been satisfied with Portugal's progress in implementing the required reforms in exchange for European financial support. It is worth adding that the newly elected, right-wing government seems particularly determined to meet its public deficit targets of 5.9% of GDP in 2011 and 4.5% in 2012. In addition to the austerity measures announced at the beginning of his mandate (see the last Economics Quarterly), the Portuguese prime minister also promised at the end of June "a little over EUR2bn in additional savings in 2011", thanks to a one-time tax equivalent to 50% of any 14-month bonuses exceeding the minimum wage (estimated to generate EUR800m in savings), a VAT increase on natural gas and electricity, higher transportation fees and the acceleration of the privatisation programme. Even so, there is a risk that the government will fail to meet its budget targets. In the light of monthly data, the budget deficit was already near 4% of GDP at mid-year. Moreover, the international environment has deteriorated significantly since last summer with greater risk of a more severe recession that would surely disrupt Portugal's budget equilibrium. For these reasons, and under pressure from the IMF and the EC, the government decided to tighten its austerity plan at the end of August. During the presentation of its medium-term fiscal strategy (2011-15), the government announced the introduction of a new 2.5% tax on the highest incomes (over EUR153,000 a year) and an additional 3% tax on earnings exceeding EUR1.5m. The capital gains tax was also raised by 1 percentage point to 21%. In terms of spending, the number of public sector workers will be reduced by 2% a year (versus 1% initially) and public sector wages will be frozen in 2012 and 2013. Other public spending will also be cut by 7 percentage points by 2015. Altogether, these measures should reduce the public deficit to only 0.5% of GDP in 2015. Although the austerity measures have yet to trigger any mass protests comparable to those in Greece and Spain, social unrest is bound to rise as the impact of belt-tightening kicks in. Moreover, a rigorous budget policy risks hindering Portugal's return to growth, a vital component for bringing its debt back onto a viable trajectory. We remain very cautious about Portugal's economic growth prospects over the next two years (-1.5% in 2011 and -1.8% in 2012). Sandrine Boyadjian [email protected] + 33 1 43 23 65 42 Macro Prospects – no. 134 – 4th quarter 2011 22 Ireland: Not out of the woods Ireland is sticking to the plan and implementing its economic adjustment programme. Nevertheless, the fiscal challenge remains big, and the global environment will be less supportive of Irish GDP growth than at the beginning of the year. The new government’s high approval ratings will be tested as further austerity measures will need to be specified this autumn. 10Y bond yields 15 Almost a year after the EUR85bn bailout and Ireland has made good progress. As the Eurozone sovereign debt crisis deepens, market confidence has actually improved in Ireland. Irish 10Y bond yields remain high (at 8%), but have dropped by a notable 545bp since their peak in July. Several factors have helped calm market fears: a return to positive GDP growth, timely implementation of fiscal targets, strengthened political support and limited financing needs thanks to the low level of post-crisis public debt. % 13 11 9 7 5 3 Mar-11 May-11 Ireland Portugal Jul-11 Sep-11 Italy Spain Source: Bloomberg, Crédit Agricole SA Activity is holding up today, but uncertainty for tomorrow 60 Points >50 pts Expansion in activity 55 50 45 40 35 <50 pts Contraction in activity 30 06 07 08 09 10 11 PMI composite index (services + manufacturing) PMI sub-index : expected new orders Source: Markit, Crédit Agricole SA YoY, % 6 4 2 0 -2 -4 -6 -8 06 07 08 inflation - total 09 10 On the economic front, GDP growth excelled in H111 (by a revised 1.9% QoQ in Q1 and 1.6% QoQ in Q2), fostered by the strong contribution from external demand (4.5 point contribution to GDP over the half-year) and a new turnaround in investment. However, survey and hard data point to a slowdown in activity in H211 as the global economic environment becomes less supportive and domestic demand continues to drag on growth. The ESRI consumer sentiment index remains well below its long-term average (at 55 points in August compared with a long-term average of 82). Households continue to face a number of obstacles (including deleveraging and future tax increases) that are prompting them to save rather than consume. The labour market has begun to stabilise, but the unemployment rate remains at a high level (14.2% in Q2), despite the decrease in the workforce linked to an increase in emigration (-1.2% in Q2). In an effort to keep attracting international investors, the government has refused to negotiate on its comparatively low rate of corporation tax. Nevertheless, the large overhang in housing and commercial space is expected to keep total investment in negative territory throughout 2011 (at -4.3% YoY). The recovery in cost-competitiveness, as both wages and prices adjust, has aided the strong drive in export growth. However, it will not be enough to compensate for the fall in demand from Ireland’s main trading partners. The PMI composite index remains above the 50 mark (at 51.5 in August), indicating an ongoing recovery in production activity, but the new orders sub index continues to contract. Ongoing adjustment in prices 8 Exchequer returns for the year to August remain broadly in line with the 2011 budget target. The government aims to bring down the public deficit from 11.8%4 of GDP in 2010 to 10.4% in 2011 and below 3% in 2015. This will require a total of EUR12.5bn (8% of GDP) worth of consolidation measures, details of which will be specified at the end of October. Therefore, it would be wrong to assume that Ireland is out the woods just yet, as the fiscal challenge ahead remains daunting. However, the decision at the EU summit in July to alleviate financial terms on bailout loans has improved financial sustainability. 11 We have significantly revised up our annual 2011 growth figures (from 0.9% to 2.1%), due to the much more robust growth than expected in the first half. Nevertheless, Irish growth figures remain very volatile and the sluggish external demand has led us to revise our GDP figure downwards for 2012 from 2.1% YoY to 1.7%. Overall, the reform programme is well underway, but Irish public finances remain vulnerable to spillovers from the financial sector as well as broader Eurozone developments. inflation - core (excl. energy & food prices) Source: Datastream, Credit Agricole SA Bénédicte Kukla [email protected] + 33 1 43 23 18 89 4 This figure excludes the cost of bank recapitalisation worth 20.2% of GDP, which for accounting purposes was added to the 2010 deficit but will be dispensed progressively over the next decade. Macro Prospects – no. 134 – 4th quarter 2011 23 Scandies: Not equal against the storm The worsening prospects for global growth and the financial turmoil are the major threats to growth in Scandinavian countries. Sweden’s economy looks more vulnerable to those headwinds than Norway’s. The former is relying heavily on exports while the latter has stronger domestic conditions and the prospect of a boost to oil activity. Sweden: PMIs point to contraction of exports in the near term index 75 70 65 60 55 50 45 40 35 30 25 20 % YoY 20 15 10 5 0 -5 -10 -15 -20 95 97 99 01 03 05 07 09 11 13 PMI new exports orders (lagged 6 m) Exports (rhs) Source: Markit, Statistics Sweden, Crédit Agricole CIB Sweden: Core inflation pressures remain on a downward trend Sweden: a pronounced slowdown looks imminent The deterioration of prospects for global growth and the financial market turbulence will clearly affect the Swedish economy. Exports, a key driver of Swedish growth, will likely decline and lead to lower growth as early as in H211. Forward-looking confidence indicators have fallen rapidly. The lower prospects for demand and the impaired funding conditions will affect investment negatively, as well as the need for additional hiring. Employment – which has already reached unprecedented levels – will likely continue to rise but at a slower pace, which in turn will likely lead to higher unemployment and modest wage growth. Private consumption has remained strong so far despite higher energy prices and rising mortgage costs (household consumption actually accelerated in Q2 versus Q1). The healthy financial situation with a relatively high savings rate (10% of disposable income) helps explain the resilience in household consumption. However, the fall in the stock market (almost -20% since the beginning of the year) will lead to an erosion of households’ financial wealth. Combined with the prospect of a weakening labour market, household consumption growth is therefore expected to moderate in the coming quarters. 6 3.5 5 3.0 4 2.5 3 2.0 2 1.5 Inflationary pressures have remained low (CPIF inflation slightly below the 2% and forecasts for future inflation have been revised down as a result of worse prospects for demand. We now expect the Riksbank to keep its repo rate at 2% until mid-2012. Further ahead, the path of the repo rate looks highly uncertain and contingent on developments abroad. The Riksbank will be reluctant to deviate too much from other major central banks in terms of rate expectations as any additional appreciation of the SEK increases imported disinflation. 1 1.0 Norway: the task for the Norges Bank is becoming complicated 0 0.5 Yo Y % 7 4.0 -1 0.0 00 01 02 03 04 05 06 07 08 09 10 11 labo ur co sts index, nadj Underlying inflatio n CP IF (rhs) Source: IMF, SCB, Crédit Agricole Norway: house prices and credit growth 25 % YoY % YoY 20 15 10 5 0 -5 -10 -15 15 14 13 12 11 10 9 8 7 6 5 03 04 05 06 07 08 09 10 11 Housing prices Norway Credit to households (rhs) Source: Norges Bank, Crédit Agricole CIB. Slavena Nazarova [email protected] + 33 1 41 89 99 18 target) Yo Y % Growth in traditional Norwegian exports like the manufacturing sector is expected to fall as a result of the global slowdown in demand. The decline will probably be more pronounced than in other developed countries due to the less favourable competitiveness of Norwegian products. Wage growth has been higher than in other European countries because of the tight labour market, which has resulted in extremely high unit labour costs. However, the oil market is expected to provide a buffer to prospects for growth. Oil companies are planning to increase oil production and investment. We also expect a relatively mild impact on household consumption from equity market losses thanks to the solidity of the labour market. The continually rising housing prices also represent an offsetting force to the losses in asset prices. The prospect of delayed interest rate increases should underpin consumer confidence. The Norges Bank therefore needs to find a balance between relatively strong domestic conditions and external headwinds to growth. Relatively high credit growth and a sustained increase in house prices argue for the need for monetary policy normalisation. However, with interest rates abroad set to remain low until late 2012 at least, and forecasts for growth and core inflation revised downwards, rate hikes will likely be further delayed. We therefore expect the Norges Bank to remain on hold in the coming months. Further ahead, assuming that global macroeconomic developments improve and given the Norges Bank’s concerns regarding the risk of financial imbalances, gradual monetary policy normalisation will likely resume before the central banks of Norway’s key partners. Macro Prospects – no. 134 – 4th quarter 2011 24 UK: Heading towards more QE The slowing in global demand growth and the heightened tensions in financial markets suggest that the balance of risks to the medium-term outlook for inflation has shifted to the downside. Further asset purchases in the coming months look increasingly likely, in line with recent communication from the BoE. Private sector employment loses strength ('000) 300 Employment (quarterly changes) 200 100 0 -100 -200 -300 03 04 05 06 07 08 09 10 11 Public sector Private sector Total employment Source: ONS, Crédit Agricole CIB PMI composite consistent with sharp moderation in activity 60 58 56 54 52 50 48 46 44 42 40 38 index % YoY 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 -2.5 00 01 02 03 04 05 06 07 08 09 10 11 12 in-house composite PMI GDP (rhs) Source: ONS, Markit, Crédit Agricole CIB Survey-based output gap indicator improves but still negative 3 % 2 1 0 GDP growth was in line with expectations in Q2, slowing to 0.2% QoQ, after 0.5% QoQ in Q1. Underlying growth seems to have been stronger though, as a series of ‘special’ events – among which the dramatic Japanese events and the additional bank holiday in April – led to distortions in activity in most sectors. ‘Broad-brush’ ONS estimates of the net overall impact of those factors suggest growth might have been as high as 0.7% QoQ without them. Surprisingly, the second estimate of GDP growth did not provide us with the expenditure breakdown. This left us in the dark as to the current state of the various demand aggregates in an environment of heightened uncertainty about the global and domestic economic outlook. Both high-frequency backward- and forward-looking indicators have deteriorated recently on the back of concerns about US growth and the Eurozone debt crisis. PMI manufacturing declined below 50 in July and August suggesting that the contraction in activity is being sustained into Q3. The PMI services, while relatively resilient at the beginning of this quarter, registered the second-steepest drop in its history in August. Poor surveys are raising concerns that a sizeable unwind of some special factors is underway this quarter. Consumer confidence has remained low by historical standards. The volume of retail sales was flat in Q2 after a contraction of -0.2% QoQ in the previous quarter. The squeeze in real household incomes, which has resulted from subdued earnings growth and elevated price inflation, likely explains the weakness in consumer spending. Prospects are for a further deterioration in H211, owing to higher utility prices, recent losses in equity markets and a slowing pace of job creation. Households’ willingness to smooth their spending by reducing savings in particular looks limited by the ongoing process of deleveraging (the saving ratio fell to 4.6% in Q1, down from 6.2% a year earlier). We will have to wait for 2012 at the earliest before we see any improvement in the prospects for household consumption, partially thanks to the expected moderation in inflation. The weakness in household demand will likely translate into lower import growth and hence a small positive contribution from net trade. We assume exports continue to grow though at a slower pace. However, the worsening outlook for growth in the Eurozone, which is the destination of around 40% of exports, implies negative risks surrounding that scenario. A possible lack of rebound in external demand will further weigh on business confidence and therefore on investment intentions, jeopardising the desired process of rebalancing from domestic demand towards exports and investment. Internal demand will have to be sustained in order for the MPC to meet its target on inflation. Government reluctance to step back from its consolidation plan means that the asset purchase programme will have to be resumed unless the economic deterioration shows signs of reversing. The BoE has made it clear that it will continue to ‘look through’ the expected rise in inflation to around 5% in the autumn due to pre-announced utility bill rises. The downside risks to the outlook for demand have increased, threatening that -3 inflation could fall back materially below target in the medium term. We now -4 expect the base rate to remain unchanged over the whole forecast period 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 (until 2013). We also assign a strong probability to another round of asset purchases in the near term. The most likely timeframe for QE2 in our view Source: ONS, Crédit Agricole's estimate based appears to be in November, when the next Quarterly Inflation Report is published, on the OBR methodology but an announcement as early as October should not be ruled out. -1 -2 Slavena Nazarova [email protected] + 33 1 41 89 99 18 Macro Prospects – no. 134 – 4th quarter 2011 25 Australia: Two-speed economy The Australian economy grew strongly by 1.2% QoQ in Q2 following a sharp contraction in Q1, and we look for growth of 2.5% and 3.1% in 2011 and 2012, respectively. Meanwhile, given the conflicts of high inflationary pressures and a slowdown in the economy, the RBA will likely stay on hold until 2013. Outlook dampened under the threat of weaker global growth 5 Australia GDP % 4 3 2 1 0 -1 -2 -3 00 02 04 06 08 QoQ YoY (rhs) 8 forecasts 7 6 5 4 3 2 1 0 -1 10 12 The Australian economy, the resource sector in particular, has enjoyed the benefit of high terms of trade over the past few years. However, having experienced several years of resource boom, the two-speed economy is suspected of showing a risk of „Dutch disease‟. So far, economic growth is back on track following a sharp contraction due to flooding in Q1. In Q2, the economy expanded by 1.2% although the recovery in coal production has been slower than expected. However, the outlook for the economy is not as solid as we expected previously. Employment growth has slowed sharply recently, with barely any growth over the past three months while the jobless rate climbed to 5.3% in August. Together with deteriorating world economic conditions, we have revised our real GDP forecasts downwards to 2.5% YoY and 3.1% YoY in 2011 and 2012, from 3.1% YoY and 3.4% YoY, respectively. Currently, RBA board members are holding divergent views on policy rates. On the one hand, moderating employment growth, a slump in consumer confidence and downbeat housing data highlight the downside risks to the economy. A rate cut is one of the options for boosting growth. On the other hand, given its inflation benchmark, the trimmed mean of consumer prices was up 2.7% YoY in Q2 (target band: 2-3%,) so some members are arguing for a rate hike to curb CPI inflation. We expect the RBA to stay on hold for the time being, while our forecast shows inflation above the target band but slowing down gradually next year. We remain positive on the AUD but it is likely to appreciate at a slower pace given the lacklustre global economic outlook. QoQ F YoY F (rhs) Source: Crédit Agricole CIB, Bloomberg Kin Tai Cheung [email protected] +852 2826 1033 New Zealand: Sustaining growth momentum Fundamentals of the economy remain strong given support from the Rugby World Cup in Q3 and the materialisation of rebuilding activity early next year. Inflationary pressures are expected to form, but core CPI inflation will likely stay within the target band. Despite fears about global growth, the RBNZ is expected to resume its rate hikes early next year. Growth momentum sustained as tourism and rebuilding boost activity 2.0 New Zealand GDP, % 1.5 8 forecasts 6 1.0 4 0.5 2 0.0 0 -0.5 -1.0 -2 -1.5 -4 00 01 02 03 04 05 06 07 08 09 10 11 12 QoQ QoQ F YoY (rhs) YoY F (rhs) Source: Crédit Agricole CIB, Bloomberg Kin Tai Cheung [email protected] +852 2826 1033 The recovery of New Zealand‟s economy from the earthquake is underway at a healthy pace. Business confidence has recovered from the low following the Christchurch earthquake while labour market conditions are improving steadily. Exports continue to be buoyant on elevated food prices. Meanwhile, although the global economic outlook has turned subdued, the economy is likely to sustain its growth momentum in the forecast period. In Q3, the Rugby World Cup is expected to boost local tourism and consumer spending (benefit estimated at NZD700m). Moreover, rebuilding activity is expected to materialise early next year, supporting growth in the economy. Our forecast shows that the economy will expand by 2.0% YoY this year and accelerate to 3.5% YoY in 2012. The RBNZ has stayed on hold since its rate cut to 2.5% from 3.0% in February. Recently, headline inflation has been well above its target level of 3% but this is mainly due to the GST hike. Core inflation is still below the target level but is picking up. Looking forward, inflationary pressures are expected to form given increasing capacity pressure, a tightening labour market and high commodity prices. We expect CPI inflation to rise by 3.9% YoY and 3.3% YoY in 2011 and 2012, respectively. Meanwhile, the RBNZ will likely resume its rate-hiking cycle next year. On the currency front, NZD/USD has come under pressure recently but has been relatively resilient over past months. With a strong growth outlook due to rebuilding activity and some room for rate hikes by the RBNZ, the NZD is expected to climb gradually by the end of 2012. Macro Prospects – no. 134 – 4th quarter 2011 26 Canada: The BoC softens its tone Faced with this summer's financial turmoil, at its 7 September policy meeting the BoC basically closed the door to new rate hikes in the near term. We now expect the BoC to wait until uncertainties surrounding the US recovery have cleared up sufficiently before resuming the normalisation of its monetary policy, meaning prolonging the status quo until mid-2012. Economic growth stalls 6 QoQ, saar, % 4 2 0 -2 -4 -6 -8 -10 07 08 09 Canada 10 11 United States Source: Statistics Canada, BEA, Crédit Agricole SA Impaired business confidence Following its May meeting, the BoC left open the possibility of resuming rate increases. The expected and hard-felt slowdown in Q2 growth justified holding off a while longer, and indeed at the 19 July meeting the BoC decided to maintain the status quo. Nothing out of the ordinary so far. The surprise came when the word "eventually" was eliminated from the phrase used in the previous statement: "some of the considerable monetary policy stimulus currently in place will eventually be withdrawn". This change in wording was interpreted as signalling an upcoming increase in the overnight cash rate, supporting our scenario that the BoC would make such a move at its next meeting on 7 September. Yet, this was before the outbreak of the summer's financial turmoil, which changed everything. In early September, the BoC was no longer in a position to raise rates, and its clear switch to a dovish message ruled out the possibility of rate increases any time soon. The BoC went straight to the point and acknowledged the materialisation of several downside risks to its July growth forecast (which had called for average annual growth of 2.8% in 2011 and 2.6% in 2012). These risks include the escalation of the European sovereign debt crisis, slower global growth, and even weaker US growth than previously anticipated. The BoC fears "more severe dislocations in the global financial markets" without "additional significant initiatives by the European authorities". Canada's poor Q2 performance (down 0.4% at an annualised quarterly rate) was expected and remains attributed "largely to temporary factors". This is confirmed by looking at the breakdown of growth, with on the one hand the persistent strength of household consumption (up 1.6%) and investment (up nearly 10%), and on the other the very negative contribution from net exports. The poor foreign trade performance was due to an exceptional configuration in which exports plunged 8% while imports surged 10%. The BoC is still confident that growth will resume in H2, led by positive momentum in business investment and household expenditure. The most recent monthly indicators point in this 01 02 03 04 05 06 07 08 09 10 11 direction, with strong figures for industrial production and retail sales in June, Canada Ivey PMI while GDP growth for the month brought Q2 to a close on a bright note. The only US manufacturing ISM major slip was the poor jobs report for August, with 6,000 net job destructions and a slight upturn in the unemployment rate to 7.3%. The Ivey business climate Source: IHS Global Insight, Crédit Agricole SA survey also rebounded in August to well above 50 (56.4, from 46.8 in July), but the high month-on-month volatility limits its importance. Although the strength of domestic demand is not an issue, foreign trade is. According to the BoC, CAD's persistent strength net exports are a "major source of weakness" reflecting more moderate global demand and the persistent strength of the CAD. Under these 1.10 conditions, the BoC has nothing to worry about in terms of inflation – core 1.05 inflation is expected to "remain well-contained". In July, inflation was only 1.00 1.6% YoY according to the benchmark index, a figure that is unlikely to 0.95 accelerate much in 2012 given the slow pace of growth. We now expect GDP 0.90 growth to be 1ppt lower than in our June forecast, with average annual growth of 0.85 only 2.0% in 2011 and 2.1% in 2012. 75 70 65 60 55 50 45 40 35 30 0.80 CAD/USD Jul-11 Apr-11 Jan-11 Jul-10 Oct-10 Apr-10 Jan-10 Jul-09 Oct-09 Apr-09 Jan-09 0.75 LT average Source: Federal Reserve, Crédit Agricole SA Hélène Baudchon [email protected] +33 1 43 23 27 61 The BoC's new dovish message is partly due to its negative assessment of the economic environment, but above all it results from the central bank's concluding remarks on the monetary policy outlook: "in light of slowing global economic momentum and heightened financial uncertainty, the need to withdraw monetary policy stimulus has diminished." We can even imagine that the BoC is prepared to lower its key rate if necessary. We have revised our forecasts accordingly and now expect the BoC to wait until uncertainties surrounding the US recovery have cleared up sufficiently before resuming the normalisation of its monetary policy. This would mean prolonging the status quo until mid-2012. This long pause would then be followed by a very gradual increase in the overnight cash rate, up 25bp per quarter, bringing the BoC's policy rate to 1.50% at the end of 2012. Macro Prospects – no. 134 – 4th quarter 2011 27 Emerging markets: Gloom-proof? We have revised down our EM growth outlook, but only to a limited extent. EMs would be strongly challenged in a doubledip scenario (not our base case), but they could cope with a low (but positive) growth environment in the US and Europe. BRICs: revising our forecasts downwards 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% EM outlook downgraded … very slightly We downgraded our EM outlook after the summer … but only to a limited extent. Our EM GDP growth forecasts for 2011 and 2012 have been revised from 6.3% and 6.4%, respectively, to 6.2% and 6.0% – quite a marginal change. This reflects two features. Firstly, we downgraded EMs in reaction to lower expected growth in the US and Europe. However, in our central case US-EU growth should still be reasonably strong. In particular, these revisions are very far from the black Lehman-type scenario. China India previous forecasts Brazil Russia updated forecasts Source: Crédit Agricole CIB BRICs: 53% of EM growth, and 34% of global growth* Where did global growth come from in 2005-10? DM, 36% BRIC, 34% This represents 53% of the EM growth Other EM, 30% * we exclude 2009 from the calculation as negative growth rates in some EMs would otherwise induce some weird distortions Source: IMF, Crédit Agricole CIB Rates: what has been done can be undone Monetary flexibility being partly rebuilt Also, despite the spread of rumours and some tension surrounding global liquidity, the financial stress has come nowhere near the level reached in 2008. EMs actually benefit from a handful of buffers. BRICs‟ resilience a key trump card Firstly: China. One key difference between now and 2008 is that the world currently knows that, should there be a global shock to growth, China would react by spending money through banks and would succeed in supporting growth at a level with which policymakers remain comfortable. It is true, however, that China did overshoot with a very large stimulus plan in 2008. It would likely be more moderate in supporting the economy if needed in 2011-12. In the meantime, however, the exposure of other EMs to China has increased. This would make the Chinese support more efficient. Beyond China, some other pillars of EM growth, such as India and Brazil in particular, have developed their domestic demand further over the past few years, and would also be resilient. It is worth remembering that 53% of EM growth in 2005-10 came from BRICs. Hence the resilience of these large economies is key in our constructive EM growth outlook. Fiscal and monetary flexibility provides comfort Policy-wise, there is flexibility in both monetary policy and fiscal policy in many emerging markets. True, fiscal profligacy is very unlikely, particularly as many governments will continue to take care of their rating trajectories, which will likely be a way to differentiate themselves from developed markets in the coming years, and at the end of the day to attract more global money (including stable flows like foreign direct investments). However, tolerance vis-à-vis wider deficits would likely emerge, should there be a shock to global growth. 30 20 10 0 -10 -20 -30 -40 -50 -60 -70 We also expect many central banks to postpone monetary tightening to accommodate increased global uncertainty. Brazil chose to follow Turkey and lowered policy rates last month despite persisting inflation pressures. Although we do not expect other central banks to follow suit at this stage, there should be more dovish comments and this may cap rates. 04 05 06 07 08 09 10 11 Monthly change in EM GDP-weighted average policy rate (bp) rhs EM GDP-weighted average policy rate (%) In a nutshell, in our non-double-dip DM scenario, we would expect Q3 to be significantly better than Q2 in terms in GDP growth. Better Q3 numbers in industry-oriented economies along with the Japanese reconstruction should also contribute to lift EM sentiment. We would also expect the EM PMI indices, which have consistently decreased over the past four to five months, to stabilise and pick up in the rest of the year, if economic data confirms the no-double-dip outlook. 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% Source: Bloomberg, Crédit Agricole CIB Sébastien Barbé In addition, slower growth in DMs suggests that oil prices could decrease from current levels. This means some relief, with a lag, for EM growth in 2012, particularly for oil-intensive economies (including many Asian economies). [email protected] + 33 1 57 87 17 23 Macro Prospects – no. 134 – 4th quarter 2011 28 Central Europe: In the eye of the storm The end of the year will likely be bumpy. The outlook has deteriorated further alongside the Eurozone slowdown and banking stress. A slowdown in exports and timid domestic demand should not help the economic recovery. Nevertheless, rate cuts should come later and lower risk aversion will likely help FX to recover. Exposure to EU 40 Pressure is mounting as Eurozone debt worries and the economic slowdown have intensified. The remainder of the year should be pretty bumpy for CE4 countries, which will likely see less growth than expected due to lower exports, bank funding stress and tighter credit conditions. % GDP 35 exports to EU 30 25 20 15 10 5 0 Czech Hungary Poland Romania Source: Crédit Agricole CIB, Bloomberg Guillaume Tresca [email protected] +33 1 41 89 18 47 Exposure to the Eurozone slowdown through exports is significant, especially for the Czech Republic and Hungary. Since 2008, internal demand has partially recovered but it is not yet solid enough to absorb the decline in exports. In addition, further commitments from governments to reduce budget deficits will not help to re-ignite domestic demand. Bank funding stress is all the more worrying since Central European countries are highly FX indebted. Credit tightening will not help to bolster any recovery in demand. Thus, Hungary is the country to watch, and the HUF should remain under intense pressure as long as the FX mismatches and risk aversion persist. Given this backdrop, we expect a softer stance from the central banks but no rate cuts. To this extent, we consider markets are pricing in too many rate cuts, betting in a certain manner on a Eurozone break-up. In Hungary and Romania, the risk premium is too high to see cuts soon. In Poland, inflationary pressures are significant while in Czech Republic room to cut is limited. Coupled with a decline in risk aversion, the stable rates should help FX to recover. PLN has the best appreciation potential due to the resilient macro outlook but risks of a political impasse after the elections could weigh. HUF and RON are expected to stabilise but downside risks remain. Russia: Hard or soft landing? The turmoil in financial markets came at a time when fast-growing imports were ready to bring the current account into the negative area. The combination of these factors has led to weaker RUB and tighter liquidity locally. Our base scenario: a soft landing for the Russian economy, but if the current shock deepens and remains for longer the Russian economy will likely experience a hard landing. Duration and size of rate spike will determine hardness of economy’s landing 7 6 5 4 3 Jun-11 Jul-11 Aug-11 Sep-11 RUONIA Deposit rate, % Auction rate REPO, % Fixed-rate REPO, % Source: CBR Maxim Oreshkin [email protected] +7 495 937 0581 Q211 showed a further strengthening in internal demand growth: the low interest rate environment supported strong lending activity, while better conditions in the labour market pushed wage growth higher. The H2 outlook was even brighter: the food price decline was expected to result in stronger real household income, while high capacity utilisation levels should have spurred investment activity. The strong oil price was expected to protect the current account from the first deficit since Q297. However, the European crisis has triggered a weakness in oil markets, expectations of a further deterioration in world economic conditions and negative risk sentiment. As a result, the weakening current account has been combined with intensified capital outflows and triggered an adjustment in the domestic financial market: RUB has weakened from 33.0 to 36.0 vs the bicurrency basket, while tighter liquidity conditions have resulted in a significant increase in short-term money market rates (from 3.8% in August towards 5.0% in mid-September). Weaker RUB (and any subsequent increase in inflation) and tighter monetary conditions (tight liquidity will definitely lead at least to a slowdown in lending activity) will mean the economy puts on the brakes. Depending on the deepness and length of the FX and rate adjustment, the Russian economy will experience a soft or hard landing during the next couple of quarters. Macro Prospects – no. 134 – 4th quarter 2011 29 South Africa: An endangered recovery South Africa's mild economic recovery is showing signs of faltering. Yet the ZAR's high volatility in recent weeks combined with persistently high inflation should discourage the central bank from lowering its key rates at this stage. Terms of trade and the real effective exchange rate South Africa's economy is picking up slowly, but the recovery is now in trouble. Q2 growth was 3.2% YoY (but only 0.3% QoQ). Household consumption is still the main growth engine, and at 4.9% its pace has barely slowed. The most positive factor is probably the slow recovery of investment, up 2.4% YoY, after contracting up until Q310. Yet, industrial production dropped off sharply in July, down 6% YoY, even after a mediocre Q2 performance. Indeed, strong consumption and the modest rebound in investment are mainly benefiting imports, which rose 9.1% YoY in volume. 140 130 120 110 2005=100 100 90 80 70 2004 2005 2006 2007 2008 2009 2010 2011 Terms of trade Real effective exchange rate Source: SARB, Crédit Agricole SA Jean-Louis Martin [email protected] +33 1 43 23 65 58 The ZAR is surely to blame. The ZAR's real effective exchange rate has returned to pre-crisis levels. Foreign trade balances have not been hit much thanks to an upward trend in the terms of trade. But the South African economy continues to de-industrialise slowly, which is vexing with unemployment at a record high of 25.7%. The central bank now faces a dilemma. Cutting key rates would seem tempting, but the ZAR has eroded sharply in recent weeks from USD/ZAR7.00 at 31 August to USD/ZAR7.39 on 15 September. Inflation is also threatening again at 5.3% YoY in July, up from 3.7% at the beginning of the year. Moreover, the SARB has a long history of preferring a strong ZAR and a tight grip on inflation over stimulating growth. Turkey: Soft landing under liquidity constraints The debate over the pace of Turkey's slowdown should not be allowed to mask the liquidity risk, because there is a great need for financing in volume terms. For the moment, Turkey is having no trouble refinancing its short-term debt, even in a very tight global environment. Clearly, its confidence capital is still intact. Balance of payments 180 12 months, cumulative, USDbn -180 140 -140 100 -100 60 -60 20 -20 -20 20 2000 2002 2004 2006 2008 2010 Portfolio investment Foreign direct investment Currency reserves Financing need* (rhs) Current account balance (rhs) * (Current account balance + short-term debt + principal on medium-term debt) - direct investment Source: Crédit Agricole SA Tania Sollogoub In three months, the landscape has changed dramatically: the currency has depreciated, the slowdown has been confirmed and external adjustments are underway, stimulated by lower energy prices, an upturn in tourism and a smaller trade deficit (excluding energy, the deficit dropped from USD5.3bn in March to USD1.8bn in July). All of this is good news. But what will the pace of the economic slowdown be? Second-quarter GDP slowed to 8.8% YoY from 11.6% in Q1, which is alarming because it was bigger than the consensus forecast. Yet, even though final consumption clearly slowed, construction hesitated to follow suit, exports were buoyant and inventory increased. None of this justifies the repeated prophecies of recession, especially since the central bank has lowered its key policy rate and is prepared to take further action if needed. On the other hand, a more severe slowdown in Europe would lend credibility to the scenario of a Turkish hard landing: although exports are limited as a share of GDP, they nonetheless have a strong gearing effect. That brings us to Turkey's liquidity risk, which is more threatening than the country's growth profile. The external deficit will swell to nearly USD70bn in 2011. Over the first six months, FDI accounted for only 11% of financing versus 37% for portfolio investment, 30% for private sector debt and 22% for hard currency deposits remitted from abroad. The country's liquidity continues to depend on the global appetite for Turkish risk. [email protected] +33 1 43 23 49 27 Macro Prospects – no. 134 – 4th quarter 2011 30 China: Slowdown limited by solid buffers China is bound to be impacted by weaker global growth, but we do not see a major deceleration. Our growth forecast for 2011 is unchanged (9.3%) and we have cut our 2012 call by only a mild 0.2ppt, to 8.8%, given reduced dependence on exports. China’s fiscal position: a buffer against global slowdown 20 % % 9 15 6 10 3 5 0 0 -3 2005 2006 2007 2008 2009 2010 Budget deficit, % of GDP (rhs) Government debt, % of GDP Source: CEIC, Crédit Agricole CIB Dariusz Kowalczyk China is bound to feel the impact of weaker global growth, but it will be limited. We maintain our 9.3% growth forecast for 2011 and expect only a marginal slowdown in 2012, to 8.8%, given the reduced dependence on exports. Their share of GDP has fallen sharply since 2007, and share of other BRICs in exports has risen at the expense of G3. China has other buffers: double-digit gains in real wages, which will support consumption, and recent fiscal/monetary tightening, which provides room for easing if need be, especially as CPI inflation has likely peaked. However, policymakers will be less aggressive in stimulating the economy than in 2008, only defending growth at 7.0-7.5%, due to the negative consequences of the last stimulus: a rise in inflation, house prices and local government debt, and low quality of infrastructure spending. Unless global tensions rise, policy will remain focused on price stability. While we do not see further rate/RRR hikes this year, CNY gains will continue if the USD stabilises versus majors. Risks to our call for USD/CNY to fall to 6.30 by year-end are skewed to the downside. [email protected] +852 28 26 15 19 India: Inflationary risk Growth was still buoyant in Q211, but short-term prospects have been jeopardised by the recent downturn in the global environment and persistently high inflation. Price momentum will be particularly decisive. Activity and inflation 25 20 15 10 5 0 -5 -10 Sep-06 Oct-07 Nov-08 Dec-09 Jan-11 Industrial production (volume, YoY, %) Wholesale price index (YoY, %) Source: CSO, OEA, Crédit Agricole SA Sylvain Laclias [email protected] +33 1 43 23 65 55 Q2 GDP rose 7.7% YoY, nearly as fast as in the previous quarter. This is a rather encouraging performance given the national situation (higher production costs, tighter monetary policy and political pressure) and the international environment, which had already begun to deteriorate. It also supports the scenario of an upcoming but mild slowdown in growth in the second half, before the economy gradually recovers again in early 2012. Yet, this scenario is not without risks. Of course, there is the strong weakening in world demand, but in particular there is inflation. Inflation picked up again in August, to 9.8% YoY. This is the highest level since July 2010, and all components of the benchmark wholesale index contributed to the increase. The upsurge in inflation was expected. The RBI – which raised its key policy rate by 25bp in September – for that matter expects inflation to remain high until December. Yet, this scenario could prove to be too optimistic: inflation could rise again above 10% and/or hold at current levels for longer than expected. The probability of such an outcome has been increased by the recent depreciation of the INR, which has shed 11% against the dollar between the beginning of August and the end of September, and by the absence of measures to ease supply-side restrictions (due to political infighting) – another key source of strong inflation. The economy could therefore be set for a sharper-than-expected slowdown, and the recovery could be delayed. Macro Prospects – no. 134 – 4th quarter 2011 31 Mexico: Feeling the global cycle Mexico’s correlation with the US continues to show strong links and, as such, growth in Mexico should feel the impact. While this has been the case, some sectors such as automobile production have been supportive factors mitigating the growth slowdown, at least for now. Mexican automobile production: still adding to growth 10 250 5 200 0 150 -5 100 -10 50 -15 -20 0 Oct-02 Oct-04 Oct-06 Oct-08 Oct-10 Mexico Ind Prod % US Ind Prod % Mexico auto production ('000) rhs Source: Bloomberg Mario Robles [email protected] +1 212 261 7736 Most economic indicators continue to point to a global growth deceleration trend stemming from developed markets. Given Mexico’s correlation to the US, with over 80% of external trade being shipped to the US, it would be natural that growth should see a clear deceleration. This has been the case; however, we must note that automobile production has been one of the bright spots in both countries and continues to ameliorate a significant growth slowdown in Mexico (see chart). One of the major factors that has provided support for Mexico has been the fact that Mexico is the country in Latin America with the fewest barriers to either capital or trade flows and has a truly free-floating currency, which helps stem volatility that otherwise would flow to growth or interest rates. We expect Mexico to continue with this characteristic. In the political arena, with the 2012 presidential elections approaching, all persons who want to become a party candidate have begun resigning their current government positions and starting their pre-campaigns. So far, there has been limited coverage of polls, but existing ones still place the PRI as the frontrunner. In the PAN and PRD arena, the big question continues to be who will be the candidate. Our take continues to be that all those persons that have a reasonable chance of becoming the official candidate are likely to be market-friendly or at least inclined towards maintaining Mexico‟s current prudent fiscal stance and orthodox economic policy. Brazil: A risky bet The BCB surprised markets by cutting its policy rate by 50bp in August, a decision that was justified by the deterioration in international conditions. Having embarked on this riskier approach, the BCB is likely to cut again during the remaining meetings of 2011. Brazil: Inflation % vs economic activity (3M maar) 14% 12% 10% 8% 6% 4% 2% 0% Jan-10 Jun-10 Nov-10 Apr-11 Eco. Act. Index IPCA (CPI) Source: Bloomberg The Brazilian economy is clearly slowing down, but inflation and inflation expectations remain above the target and there is still very little slack in resources utilisation (see chart). Given this background, it is hard to square the decision to cut the Selic rate by 50bp in August with the inflation-targeting regime. Unless, of course, one believes that the European crisis is on the verge of turning into a ‘mini-Lehman’ crisis. While this possibility cannot be ruled out, up until now there have been few signs that this may be the case and strong reasons to believe otherwise. Thus, the decision seems very risky right now. However, having decided to defy expectations in this way, the BCB is likely to cut again during the remaining meetings of 2011, bringing the Selic rate down to 11% by the end of the year. Since our base-case scenario for developed markets does not contemplate a financial meltdown, this precipitated easing cycle is likely to cause inflation to remain high for a longer period of time and, eventually, force the BCB to make a U-turn at some point in H212 (although the latter expectation is, of course, highly speculative given all the uncertainties surrounding both the domestic and international scenarios). Vladimir Vale [email protected] +55 11 38966418 Macro Prospects – no. 134 – 4th quarter 2011 32 Saudi Arabia: Strong growth, big spending Growth is not a problem for Saudi Arabia. A spectacular increase in public spending in 2011 combined with a buoyant oil sector should be enough to ensure GDP growth of over 6%. Yet, the reason the kingdom is spending so much is to try to get a handle on growing social unrest. Oil and foreign reserves 120 500 450 400 350 300 250 200 150 100 50 0 100 80 60 40 20 Q111 Q410 Q310 Q210 Q110 Q409 Q309 Q209 0 Foreign reserves (USDbn, rhs) Crude oil price (OPEC avg, USD/bl) Oil revenue (USDbn) Source: Central Bank Riadh El-Hafdhi [email protected] +33 1 57 72 33 35 Over the course of the year, the IMF has strongly revised up its GDP growth forecast for Saudi Arabia from 3.5% to 6.5%. This buoyant performance can be attributed to two factors: the increase in oil and natural gas production, to a record 9.6m barrels of crude oil per day, and a phenomenal increase in public spending, largely adopted following the tumult of the Arab spring. The 2011 budget was increased by an additional USD130bn, up 30% from the 2010 figure. Sixty percent of these funds are earmarked for the real estate sector, which will ensure solid growth in the construction sector. With foreign reserves exceeding USD500bn and accounting for nearly 100% of GDP, the kingdom has the resources to fund such generous spending. The public debt has been reduced to 10% of GDP, down from 80% in 2004. Saudi's massive response to the turmoil of the Arab spring illustrates two of the big challenges the country must face if it is to maintain its political and social unity. Public spending mainly targets the real estate sector because of the housing shortage, which is due to strong demographic growth (+3% a year) and new demands of a population with a median age of 25. As a result, real estate prices have risen continuously and sharply in some urban areas. Building affordable residences has become a necessity, both social and political. Yet, this measure alone is not enough, since Saudis account for only 6% of workers in the private sector. As the country prepares for the local population to double within the next generation, diversifying the economy and creating private sector jobs for Saudis has also become a vital issue for political stability. Egypt: Fragile economic stabilisation Despite numerous signs of economic stabilisation since January's revolution, growth is still heavily dependent on the current political process. Much depends on how the next government will address the country's fiscal weaknesses and its social situation. Decline in foreign reserves 38000 There are more and more signs that the Egyptian economy is stabilising: the drop-off in foreign reserves has slowed sharply since May; the depreciation of the EGP was limited to 5%; exports have picked up strongly (+25% QoQ in Q111) and the tourism sector has rallied, limiting the decline in revenues to 30% or 40%. The latest indicators also suggest positive growth of 1.8% YoY in June, even after contracting 8.8% in Q1. Yet, it is still too early to talk about an economic recovery. The EGP stabilised only because of massive central bank intervention, which mobilised 30% of foreign reserves. Exports picked up mainly due to higher oil prices (40% of exports). And tourism is unlikely to rebound fully before the political transition process has run its course. So far, industrial production continues to contract by 5% YoY. USDm 36000 34000 32000 30000 28000 26000 Source: Central Bank Riadh El-Hafdhi [email protected] +33 1 57 72 33 35 Q211 Q111 Q410 Q310 Q210 Q110 Q409 Q309 Q209 Q109 24000 The complexity of the political process underway is preventing investors from regaining confidence. In the light of persistently high social tensions, investors also fear an ongoing swelling of the budget deficit and public debt, even once a new government has taken power. Q411 will be a transitional period dominated by a wait-and-see approach, especially since Egypt has already covered this year's debt servicing. By 2012, however, the government will have to face the issue of fiscal consolidation (as well as questions about IMF support), if it plans to restore growth and investor confidence rapidly. Macro Prospects – no. 134 – 4th quarter 2011 33 Exchange rate forecasts 29-Sep Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 1.26 USD Exchange rate Industrialised countries Euro EUR/USD 1.36 1.33 1.31 1.28 1.27 Japan USD/JPY 77 80 81 82 83 85 United Kingdom GBP/USD 1.56 1.53 1.52 1.50 1.50 1.49 Switzerland USD/CHF 0.90 0.90 0.98 1.02 1.06 1.10 Canada USD/CAD 1.03 0.95 0.94 0.93 0.92 0.90 Australia AUD/USD 0.98 1.06 1.07 1.08 1.09 1.10 New Zealand NZD/USD 0.78 0.82 0.82 0.83 0.84 0.84 USD/CNY 6.40 6.30 6.24 6.18 6.11 6.05 Asia China Hong Kong USD/HKD 7.79 7.77 7.77 7.77 7.77 7.77 India USD/INR 48.90 45.40 44.80 44.20 43.60 42.90 Indonesia USD/IDR 8978 8460 8420 8355 8290 8220 Malaysia USD/MYR 3.19 2.96 2.95 2.94 2.92 2.90 Philippines USD/PHP 43.7 41.7 41.4 41.1 40.8 40.4 Singapore USD/SGD 1.30 1.19 1.18 1.17 1.16 1.15 South Korea USD/KRW 1174 1045 1035 1025 1010 990 Taiwan USD/TWD 30.4 28.7 28.5 28.3 28.1 27.8 Thailand USD/THB 31.2 29.4 29.2 29.0 28.7 28.4 Vietnam USD/VND 20832 21300 21800 21800 22300 22300 USD/ARS 4.21 4.40 4.45 4.60 4.60 4.50 Latin America Argentina Brazil USD/BRL 1.84 1.70 1.70 1.75 1.75 1.80 Mexico USD/MXN 13.43 12.30 12.70 12.80 12.30 12.20 USD/ZAR 7.87 7.00 7.05 7.10 7.20 7.30 TRY/ZAR 4.24 4.12 4.27 4.33 4.44 4.51 Africa South Africa Emerging Europe Poland Russia Turkey USD/PLN 3.26 2.97 3.02 3.05 3.07 3.10 USD/RUB 31.92 31.43 29.89 31.41 31.66 32.78 Basket/RUB 37.11 36.10 35.00 36.50 36.50 37.50 USD/TRY 1.86 1.70 1.72 1.75 1.75 1.70 Euro Cross rates Industrialised countries Japan EUR/JPY 104 106 106 105 105 107 United Kingdom EUR/GBP 0.871 0.870 0.860 0.855 0.845 0.845 Switzerland EUR/CHF 1.22 1.20 1.28 1.30 1.34 1.38 Sweden EUR/SEK 9.23 9.20 9.25 9.30 9.35 9.40 Norway EUR/NOK 7.85 7.70 7.65 7.60 7.55 7.40 23.80 Central Europe Czech Rep. EUR/CZK 24.47 24.00 24.00 23.80 23.80 Hungary EUR/HUF 290 268 268 268 268 268 Poland EUR/PLN 4.44 3.95 3.95 3.90 3.90 3.90 Romania EUR/RON 4.32 4.20 4.20 4.20 4.20 4.20 Source: Crédit Agricole CIB Macro Prospects – no. 134 – 4th quarter 2011 34 Interest rate forecasts – developed countries 29-Sep Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 USA Fed funds 3M 2Y 10Y 0.25 0.37 0.25 1.99 0-0.25 0.30 0.30 2.80 0-0.25 0.29 0.50 3.10 0-0.25 0.28 0.80 3.30 0-0.25 0.28 1.30 3.70 0-0.25 0.28 1.80 4.00 Japan Call 3M 2Y 10Y 0.08 0.19 0.15 1.00 0-0.10 0.20 0.25 1.35 0-0.10 0.20 0.30 1.50 0-0.10 0.20 0.25 1.40 0-0.10 0.20 0.25 1.35 0-0.10 0.20 0.25 1.30 Eurozone Repo 3M 2Y (Ger) 10Y (Ger) 1.50 1.49 0.56 1.98 1.00 1.25 0.65 2.00 1.00 1.25 0.80 2.10 1.00 1.25 1.00 2.25 1.00 1.25 1.25 2.50 1.00 1.25 1.50 2.75 United Kingdom Base rate 3M 2Y 10Y 0.50 0.94 0.57 2.52 0.50 0.75 0.95 2.95 0.50 0.75 0.95 2.95 0.50 0.75 1.10 3.10 0.50 0.75 1.30 3.30 0.50 1.75 1.50 3.40 Sweden Repo 3M 10Y 2.00 2.51 1.88 2.00 2.85 4.35 2.00 3.10 4.45 2.00 3.35 4.60 2.25 3.60 4.75 2.50 3.85 4.85 Norway Deposit 2.25 2.25 2.25 2.50 2.50 2.75 Switzerland 3M 10Y 0.02 0.94 0.50 2.60 0.75 2.85 1.00 3.00 1.00 3.10 1.25 3.25 Canada Overnight Target 1.00 1.00 1.00 1.00 1.25 1.50 Australia Cash Target 4.75 4.75 4.75 4.75 4.75 4.75 3.50 3.75 New Zealand Official Cash Rate 2.50 2.50 2.75 3.00 Note: 3M rates are interbank, 2Y and 10Y rates are government bond yields Source: Crédit Agricole CIB Macro Prospects – no. 134 – 4th quarter 2011 35 Interest rate forecasts – emerging countries 29-Sep Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Fed funds 0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0.00 0.00 0.00 3M 0.37 0.30 0.29 0.28 0.28 0.28 0.00 0.00 0.00 2Y 0.25 0.30 0.50 0.80 1.30 1.80 0.00 0.00 0.00 10Y 1.99 2.80 3.10 3.30 3.70 4.00 0.00 0.00 0.00 Call 0.08 0-0.10 0-0.10 0-0.10 0-0.10 0-0.10 0.00 0.00 0.00 3M 0.19 0.20 0.20 0.20 0.20 0.20 0.00 0.00 0.00 2Y 0.15 0.25 0.30 0.25 0.25 0.25 0.00 0.00 0.00 10Y 1.00 1.35 1.50 1.40 1.35 1.30 0.00 0.00 0.00 Repo 1.50 1.00 1.00 1.00 1.00 1.00 0.00 0.00 0.00 3M 1.49 1.25 1.25 1.25 1.25 1.25 2.00 2.25 2.50 2Y (Ger) 0.56 0.65 0.80 1.00 1.25 1.50 2.00 2.25 2.50 10Y (Ger) 1.98 2.00 2.10 2.25 2.50 2.75 3.00 3.25 3.50 China 1Y lending rate 6.56 6.56 6.56 6.56 6.81 6.81 7.06 7.06 7.31 Hong Kong Base rate 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 1.00 India Repo rate 8.25 8.25 8.25 8.25 8.50 8.50 8.75 8.75 8.75 Indonesia BI rate 6.75 6.75 6.75 6.75 6.75 6.75 6.75 6.75 6.75 Korea Call rate 3.25 3.50 3.50 3.50 3.75 4.00 4.00 4.00 4.00 Malaysia OPR 3.00 3.00 3.00 3.25 3.25 3.50 3.50 3.50 3.50 Philippines Repo rate 4.50 4.75 5.00 5.00 5.00 5.00 5.25 5.25 5.25 Singapore 6M SOR 0.09 -0.08 0.30 0.48 0.72 1.05 1.65 2.15 2.51 Taiwan Redisc 1.88 2.00 2.00 2.00 2.13 2.25 2.38 2.50 2.50 Thailand Repo 3.50 3.50 3.50 3.50 3.75 4.00 4.00 4.00 4.00 Vietnam Base rate 9.00 9.00 9.00 9.00 9.50 9.50 9.50 10.00 10.00 Argentina 3M deposit 12.20 12.00 12.50 12.50 12.50 12.00 12.00 11.50 11.50 Brazil Overnight/Selic 12.00 11.00 11.00 11.00 11.50 12.50 12.50 12.50 12.50 Mexico Overnight rate 4.50 4.50 4.50 4.50 4.50 4.50 4.75 5.25 5.50 Czech Rep. 14D repo 0.75 0.75 1.00 1.25 1.50 1.50 1.75 1.75 1.75 Hungary 2W repo 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 Poland 7D repo 4.50 4.50 4.50 4.50 4.50 4.50 4.50 4.50 4.50 Romania 2W repo 6.25 5.75 5.50 5.50 5.50 5.50 5.50 5.50 5.50 Russia O/N Deposit rate 3.75 3.50 3.50 3.50 4.00 5.00 6.50 8.00 8.75 Turkey 1W repo rate 5.75 5.75 6.00 6.50 7.00 7.00 7.00 7.00 7.00 USA Japan Eurozone Asia Latin America Emerging Europe Africa & Middle East South Africa Repo 5.50 5.50 5.50 5.50 5.50 5.75 6.00 6.25 6.50 UAE Repo 1.00 1.00 1.00 1.00 1.25 1.75 1.75 1.75 1.75 Saudi Arabia Repo 2.00 2.00 2.00 2.00 2.25 2.75 2.75 2.75 2.75 Source: Crédit Agricole CIB Macro Prospects – no. 134 – 4th quarter 2011 36 Economic forecasts USA JAPAN EUROZONE Germany France Italy Spain Greece Norw ay Sw eden Sw itzerland Canada Australia New Zealand United Kingdom Asia China Hong Kong India Indonesia Korea Malaysia Philippines Singapore Taiw an Thailand Vietnam Latin Am erica Argentina Brazil Mexico Em erging Europe Czech Republic Hungary Poland Russia Romania Turkey Africa & Middle East Algeria Egypt Kuw ait Lebanon Morocco Qatar Saudi Arabia South Africa United Arab Emirates Tunisia Total Industrialised countries Real GDP (YoY. %) 10 11 12 3,0 1,6 1,8 4,0 -0,5 2,7 1,7 1,7 1,1 3,6 2,9 1,4 1,4 1,6 1,3 1,2 0,8 0,6 -0,1 0,6 0,4 -4,4 -5,1 -1,0 0,3 0,7 1,8 5,4 4,5 1,9 1,6 1,9 2,2 3,2 2,0 2,1 2,7 2,5 3,1 1,5 2,0 3,5 1,4 1,1 1,2 9,2 7,7 7,6 10,3 9,3 8,8 6,8 6,0 5,5 8,5 7,2 7,5 6,1 6,0 5,7 6,1 4,8 5,0 7,2 3,5 4,5 7,6 4,9 5,1 14,5 6,5 6,0 10,8 5,6 5,5 7,8 4,5 5,5 6,8 5,8 6,0 6,6 3,8 3,5 7,0 5,8 3,7 7,5 3,6 3,5 5,3 3,4 3,3 4,2 3,5 2,6 2,3 2,1 2,0 1,2 2,1 2,0 3,8 3,5 3,2 4,0 3,7 2,0 -1,3 1,5 2,6 7,5 4,5 4,0 4,0 4,4 4,4 4,1 4,6 4,0 5,1 1,2 3,5 3,1 4,4 5,4 7,2 1,3 3,5 3,7 4,3 4,0 14,0 15,8 5,9 3,3 6,7 5,3 2,5 3,2 4,0 1,4 3,3 4,3 3,4 0,0 3,3 4,9 3,7 3,7 2,7 1,4 1,8 10 1,3 -1,0 1,6 1,2 1,7 1,6 2,0 4,7 2,4 1,2 0,7 1,8 2,9 2,3 3,3 4,6 3,3 2,4 9,5 5,1 3,0 1,7 3,8 2,8 1,0 3,3 9,2 6,0 10,9 5,9 4,4 7,0 1,5 4,9 2,6 8,8 6,1 8,3 5,1 3,9 11,1 6,0 4,6 1,0 -2,4 5,4 4,3 0,9 4,4 3,1 1,2 CPI (YoY. %) 11 3,1 -0,2 2,6 2,6 2,3 2,4 2,8 2,6 1,5 2,9 1,0 2,7 3,5 3,9 4,5 5,9 5,6 4,9 8,3 5,4 4,4 2,8 4,7 5,3 1,4 3,8 17,5 5,9 11,0 6,3 3,4 6,4 2,3 4,3 4,3 7,7 6,0 6,5 6,0 4,0 13,3 5,2 2,1 2,2 3,9 5,6 4,5 2,5 4,0 4,2 2,5 12 1,9 0,7 1,8 2,3 1,7 1,5 1,6 1,2 1,6 1,9 1,2 1,9 3,3 3,3 2,7 4,3 3,8 3,2 6,0 5,2 3,5 2,5 4,5 3,6 1,7 4,0 11,0 5,8 12,0 5,8 3,3 7,2 1,8 3,1 3,1 10,0 5,0 6,5 5,3 3,9 11,0 4,7 4,3 1,8 3,8 4,3 4,5 2,1 4,5 3,3 1,7 Current Account (% GDP) 10 11 12 -3,2 -3,3 -3,3 3,6 2,8 3,4 -0,4 -0,3 0,2 5,7 5,3 5,4 -1,7 -2,6 -1,2 -3,3 -2,7 -2,4 -4,6 -4,1 -3,6 -10,4 -7,4 -4,7 14,0 15,0 13,1 7,0 7,0 7,3 9,5 8,0 9,0 -3,1 -3,0 -2,8 -2,6 -3,5 -2,8 -2,3 -2,9 -2,7 -2,2 -1,6 -1,2 3,5 3,2 3,1 5,1 4,6 4,2 8,7 9,5 10,0 -2,8 -2,7 -2,6 0,9 1,5 1,4 2,8 2,8 3,0 12,8 11,5 11,6 4,4 4,2 3,5 22,2 23,5 23,0 9,4 8,1 8,0 4,6 3,5 3,6 -5,5 -5,7 -5,5 -1,2 -1,6 -1,9 1,0 -0,2 -0,6 -2,3 -2,7 -3,0 -0,6 -0,6 -0,8 0,5 -0,8 -2,4 -3,0 -2,8 -3,5 2,3 1,0 0,0 -2,6 -4,5 -4,0 4,8 4,0 0,0 -5,8 -6,9 -6,4 -5,0 -7,5 -6,0 5,5 9,0 6,9 8,4 10,0 7,0 -2,0 -3,0 -2,0 29,2 38,4 31,7 -22,4 -28,5 -21,9 -3,4 -7,6 -2,9 17,4 33,6 34,5 16,1 26,1 17,5 -3,5 -4,0 -3,0 3,8 10,3 5,6 -1,6 -7,7 -3,5 0,6 0,5 0,4 -1,0 -1,2 -0,9 * For UK: HICP; for India: wholesale prices; for China, retail price index; for Brazil: IPCA, for South Africa: CPI-X ** For India: Fiscal year ending in March Source: Crédit Agricole CIB Macro Prospects – no. 134 – 4th quarter 2011 37 DO N CHA ANY FOR INSE OR DELE ANY COL OR R Economic forecasts – quarterly breakdown 2010 2011 2012 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 USA (annualised) 3.9 3.8 2.5 2.3 0.4 1.0 1.8 1.7 1.7 1.9 2.0 2.2 JAPAN 2.3 -0.1 1.0 -0.6 -0.9 -0.3 0.9 1.0 0.9 0.4 0.4 0.2 EUROZONE 0.4 0.9 0.4 0.3 0.8 0.2 0.1 0.2 0.3 0.3 0.4 0.4 Germany 0.5 1.9 0.8 0.5 1.3 0.1 0.4 0.3 0.4 0.3 0.4 0.5 France 0.2 0.5 0.4 0.3 0.9 0.0 0.2 0.2 0.3 0.4 0.4 0.4 Italy 0.6 0.5 0.3 0.1 0.1 0.3 0.2 0.1 0.0 0.1 0.4 0.3 Spain 0.1 0.3 0.0 0.2 0.4 0.2 -0.3 0.0 0.1 0.3 0.3 0.3 0.4 1.1 0.6 -0.5 0.5 0.2 0.5 0.2 0.3 0.2 0.5 0.4 Real GDP growth, % United Kingdom Consumer prices, YoY % USA 2.4 1.8 1.2 1.2 2.2 3.3 3.6 3.3 2.5 1.9 1.6 1.7 JAPAN -1.2 -1.2 -1.1 -0.5 -0.8 -0.2 0.1 0.1 0.5 0.7 0.9 0.8 EUROZONE 1.1 1.6 1.7 2.0 2.5 2.8 2.6 2.6 2.0 1.4 1.9 1.9 Germany 0.8 1.0 1.2 1.6 2.2 2.5 2.7 2.9 2.6 2.2 2.3 2.1 France 1.5 1.8 1.8 1.9 2.0 2.2 2.4 2.5 1.9 1.6 1.7 1.7 Italy 1.3 1.6 1.7 2.0 2.3 2.9 2.3 2.1 1.8 0.8 1.9 1.7 Spain 1.3 2.3 2.0 2.5 3.2 3.3 2.6 2.1 1.3 0.7 2.0 2.4 3.3 3.4 3.1 3.4 4.1 4.4 4.8 4.6 3.4 2.7 2.5 2.1 United Kingdom Unemployment rate, % USA 9.7 9.6 9.6 9.6 8.9 9.1 9.1 9.3 9.2 9.1 9.0 8.8 JAPAN 5.1 5.1 5.0 5.0 4.7 4.6 4.6 4.6 4.6 4.5 4.5 4.5 EUROZONE 10.1 10.2 10.1 10.1 10.0 10.0 9.8 9.8 9.7 9.6 9.6 9.5 Germany 7.5 7.2 6.9 6.6 6.4 6.2 6.1 6.1 6.1 6.0 6.0 6.0 France 9.9 9.8 9.8 9.7 9.7 9.6 9.6 9.6 9.6 9.6 9.5 9.5 Italy 8.5 8.5 8.3 8.3 8.1 8.0 8.1 8.2 8.2 8.1 8.0 7.9 Spain 19.3 20.0 20.5 20.5 20.6 20.8 20.9 20.9 20.7 20.5 20.5 20.2 7.9 7.8 7.9 7.9 7.7 7.9 7.9 8.0 8.2 8.2 8.0 7.9 United Kingdom Source: Crédit Agricole CIB Macro Prospects – no. 134 – 4th quarter 2011 38 Commodities forecasts Oil price forecasts Average prices WTI Brent 2010 USD/bl USD/bl Q1 79 76 Q2 78 78 Q1 84 80 Q2 76 75 End quarter prices WTI Brent 2011 Q3 76 77 Q4 85 86 Q1 94 105 Q2 102 117 Q3 82 83 Q4 91 93 Q1 107 117 Q2 95 112 2010 USD/bl USD/bl 2012 Q3 90 112 Q4 81 93 Q1 80 91 Q2 73 85 Q3 86 103 Q4 81 92 Q1 77 88 Q2 75 87 2011 Q3 77 89 Q4 83 95 Q3 80 92 Q4 84 95 2012 Source: Crédit Agricole CIB Metals forecasts 29-Sep 2010 Year Q1 Q2 2011 Q3 Q4 Year Q1 Q2 2012 Q3 Q4 Year Long-term Prices Base metals Aluminium USD/t 2,201 2,173 2,506 2,600 2,450 2,365 2,480 2,400 2,500 2,600 2,700 2,550 Copper USD/t 7,231 7,537 9,633 9,147 9,200 8,020 9,000 8,500 9,500 10,000 9,500 9,375 4,960 (225c/lb) Nickel USD/t 20,500 21,000 22,000 23,000 21,625 15,432 (700c/lb) Zinc USD/t 1,919 2,159 2,394 2,251 2,255 2,000 2,225 2,100 2,200 2,300 2,500 2,275 Lead USD/t 2,029 2,146 2,603 2,548 2,500 2,070 2,430 2,200 2,300 2,300 2,500 2,325 1,323 (60c/lb) Tin USD/t 24,000 26,000 30,000 30,000 27,500 15,000 (680c/lb) 18,475 21,807 20,554 20,364 26,905 24,176 22,000 20,520 23,400 29,917 28,463 25,500 21,500 26,345 2,650 (120c/lb) 1,764 (80c/lb) Precious metals Gold USD/oz 1,625 1,226 1,386 1,507 1,700 1,805 1,600 1,750 1,550 1,350 1,150 1,450 Silver USD/oz 30.9 20.2 32.0 38.0 40.0 42.0 38.0 40.0 34.0 32.0 30.0 34.0 700 7.0 Platinum USD/oz 1,539 1,609 1,790 1,785 1,800 1,625 1,750 1,700 1,800 1,900 2,000 1,850 1,200 Palladium USD/oz 626 525 788 756 800 695 760 750 800 850 900 825 300 Source: Crédit Agricole CIB Macro Prospects – no. 134 – 4th quarter 2011 39 Economic forecasts Government balance 10 11 12 -8.9 -8.6 -7.8 -9.5 -8.9 -9.2 -5.9 -4.1 -3.2 -3.3 -1.9 -1.4 -7.0 -5.7 -4.5 -4.6 -4.0 -3.2 -9.2 -6.5 -5.1 -5.4 -3.7 -2.2 -4.1 -3.8 -4.0 -10.5 -8.0 -6.6 -32.4 -10.2 -8.6 -9.1 -6.0 -4.9 -8.5 -7.8 -6.1 USA JAPAN EUROZONE Germany France Italy Spain Netherlands Belgium Greece Ireland Portugal United Kingdom 10 62.1 191.8 85.5 83.2 81.7 119.0 60.1 62.7 90.1 142.8 96.2 93.0 79.8 Public debt 11 67.3 203.6 87.9 81.8 85.5 120.5 67.4 64.5 97.0 165.4 112.2 102.4 84.8 12 72.0 209.3 89.0 81.4 87.5 120.9 70.1 64.9 97.5 172.1 117.9 109.6 86.9 Source: Crédit Agricole CIB Publication Manager: Jean-Paul BETBEZE Chief Edition: Hervé GOULLETQUER, Isabelle JOB Production and Sub-Editor: Fabienne Pesty Contact : [email protected] Crédit Agricole S.A. — Economic Research Department— 75710 PARIS Cedex 15 — Fax : +33 143 23 58 60 This publication reflects the opinion of Crédit Agricole S.A. on the date of publication, unless otherwise specified (in the case of outside contributors). Such opinion is subject to change without notice. This publication is provided for informational purposes only. The information and analyses contained herein are not to be construed as an offer to sell or as a solicitation whatsoever. Crédit Agricole S.A. and its affiliates shall not be responsible in any manner for direct, indirect, special or consequential damages, however caused, arising therefrom. Crédit Agricole does not warrant the accuracy or completeness of such opinions, nor of the sources of information upon which they are based, although such sources of information are considered reliable. Crédit Agricole S.A. or its affiliates therefore shall not be responsible in any manner for direct, indirect, special or consequential damages, however caused, arising from the disclosure or use of the information contained in this publication. www.credit-agricole.com - Economic Research Subscribe to our free online publications Macro Prospects – no. 134 – 4th quarter 2011 40