Interest rate forecasts - economic research of Credit Agricole
Interest rate forecasts - economic research of Credit Agricole
Interest rate forecasts - economic research of Credit Agricole
Create successful ePaper yourself
Turn your PDF publications into a flip-book with our unique Google optimized e-Paper software.
Quarterly - no. 137 – 3 rd quarter 2012<br />
Political will and the ability to lead<br />
• In the West, politicians are finding it difficult to stabilise the <strong>economic</strong> and financial situation. Currently, the<br />
situation in Greece and Spain is attracting the attention <strong>of</strong> markets. It could be the turn <strong>of</strong> the US in the next few<br />
months with the „fiscal cliff‟ at the end <strong>of</strong> the year (programmes slated to expire at year-end would trim the federal<br />
deficit by about 5% <strong>of</strong> GDP) moving back into focus as the November elections draw closer.<br />
• Markets are challenging both the current <strong>economic</strong> model followed in most advanced countries and the<br />
institutional architecture <strong>of</strong> Europe. The model <strong>of</strong> a permanent recycling <strong>of</strong> excess savings around the globe,<br />
which has been very popular in previous decades, is severely questioned. Replacing saving efforts with a<br />
persistent accumulation <strong>of</strong> debt, with the hope that this will allow higher productivity gains and thus a fairly strong<br />
recovery in asset prices, has led nowhere. At a certain stage, investors from countries with an external surplus<br />
question the scheme; simply because the large productivity gains and rise in asset prices are not as solidly in place<br />
as the current account and government deficits. Isn‟t this the recent experience <strong>of</strong> a couple <strong>of</strong> European countries?<br />
• In the EU, a consensus is emerging on the need to move towards more integration, whether on fiscal policy,<br />
banking supervision or indeed politics itself. The main difficulty is knowing what the best sequencing should be.<br />
France supports the principle <strong>of</strong> a thematic approach, prior to a great political quantum leap; Germany takes a more<br />
contrasting line.<br />
• While EM countries have been forced to adjust their policies to a less supportive <strong>economic</strong> and financial environment<br />
in the West, investors are likely still to prefer short-term tactical plays for the foreseeable future, simply<br />
because the distribution <strong>of</strong> risks remains very large. However, beyond the immediate uncertainties that will dissipate<br />
only gradually, our more medium-term call is for an exit from the current crisis that is able to bring a more solid<br />
European framework. This will require political will and the ability to lead.<br />
Contents:<br />
Europe will not disinteg<strong>rate</strong> via its single currency .................. 1<br />
Risk: High and unstable risk now the new standard ................ 6<br />
Monetary Policy: Potential and limits <strong>of</strong> the ECB‟s arsenal ...... 7<br />
Banking Regulation: Undergoing in-depth transformation ...... 10<br />
US <strong>Interest</strong> Rates: Benefits <strong>of</strong> a „risk-free‟ asset ................... 13<br />
Eurozone <strong>Interest</strong> Rates: When (how) will the crisis end? ..... 14<br />
Exchange Rates: USD reigns supreme ................................ 15<br />
Gold: downside risks ........................................................... 16<br />
Energy: Oil prices back to more sustainable levels................ 17<br />
US: Muddling through .......................................................... 18<br />
Japan: Mind the external risks .............................................. 20<br />
Eurozone: Waiting for Godot? .............................................. 21<br />
France: Growth reprieved… ................................................. 22<br />
Germany: brain teaser ......................................................... 23<br />
Italy: Keeping it under control ............................................... 24<br />
Greece: Alarming situation ................................................... 25<br />
Spain: Fears accumulating................................................... 26<br />
Portugal: On hold ................................................................ 27<br />
UK: Not in Olympic shape .................................................... 28<br />
Australia: Hit by external woes ............................................. 29<br />
New Zealand: Rebuilding coming soon ................................ 29<br />
Canada: External risks temper the outlook ........................... 30<br />
Emerging Markets: Time to use the existing leeway ............. 31<br />
Brazil: A clogged engine (for now) ....................................... 32<br />
Russia: Long-term challenges front-loaded .......................... 33<br />
India: Going through a rough patch… .................................. 34<br />
China: Growth target at risk ................................................. 35<br />
Central Europe: Hopes dashed ........................................... 36<br />
Turkey: Delicate landing ...................................................... 36<br />
South Africa: Weak ZAR and lacklustre growth .................... 37<br />
Mexico: Growth is helping, but what will politics do? ............. 37<br />
Egypt: A welcome stabilisation in currency reserves ............. 38<br />
Morocco and Tunisia: Serious budget difficulties in 2012 ...... 38<br />
Exchange <strong>rate</strong> <strong>forecasts</strong>...................................................... 39<br />
<strong>Interest</strong> <strong>rate</strong> <strong>forecasts</strong> – developed countries ....................... 40<br />
<strong>Interest</strong> <strong>rate</strong> <strong>forecasts</strong> – emerging countries......................... 41<br />
Economic <strong>forecasts</strong>............................................................. 42<br />
Economic <strong>forecasts</strong> – quarterly breakdown .......................... 43<br />
Economic <strong>forecasts</strong>............................................................. 44<br />
Commodities <strong>forecasts</strong> ........................................................ 44<br />
More information: Video – Time is our only ally
Europe will not disinteg<strong>rate</strong> via its single currency 1<br />
Europe remains the central concern, despite the US outlook being dimmed by the upcoming presidential election and by<br />
the choices to be made about cutting the Federal budget deficit next year, and China seeing the first changes to its<br />
leadership in a decade this autumn. In fact, the Eurozone could be defined by a double paradox: it lurches from crisis to<br />
crisis, despite the fact that its <strong>economic</strong> fundamentals are not really any worse than those <strong>of</strong> its peers; and it is looking for<br />
ways to emerge from the crisis by reverting, at least in part, to proposals <strong>of</strong>ten mooted in the past.<br />
10Y Greek government bond <strong>rate</strong>s: a<br />
pr<strong>of</strong>ile shaped by crisis<br />
40<br />
35<br />
30<br />
25<br />
20<br />
15<br />
10<br />
5<br />
0<br />
Source: Bloomberg, Crédit <strong>Agricole</strong> CIB<br />
Current account imbalances:<br />
Germany versus the average <strong>of</strong><br />
Greece, Ireland and Portugal<br />
10<br />
5<br />
0<br />
-5<br />
-10<br />
-15<br />
06 07 08 09 10 11 12<br />
Greece 10Y Rate<br />
99 00 01 02 03 04 05 06 07 08 09 10 11 12<br />
Germany Current Account<br />
Average Periphery Current Account<br />
Source: Bloomberg, Crédit <strong>Agricole</strong> CIB<br />
Hervé Goulletquer<br />
herve.goulletquer@ca-cib.com<br />
+33 1 41 89 88 34<br />
A look back at the timeline <strong>of</strong> the Greek crisis makes the head spin rather,<br />
so strongly does it seem to show just how difficult Europe is finding it to resolve,<br />
once and for all, the <strong>economic</strong> and financial situation <strong>of</strong> a country whose GDP<br />
amounts to just 3% <strong>of</strong> the Eurozone total.<br />
• In May 2010, a three-year EUR110bn rescue package was approved.<br />
• In July 2011 a new Greek bailout package was granted (in the meantime,<br />
Ireland and Portugal – in November 2010 and May 2011 respectively – were<br />
also placed on EU „life support‟ with IMF participation). This featured a set <strong>of</strong><br />
financial conditions that were more favourable to the country and a private<br />
sector contribution to public-debt-reduction efforts.<br />
• In October 2011, the Greek rescue package was strengthened, with a<br />
considerable increase (from 21% to 50%) in the private sector‟s voluntary<br />
debt forgiveness contribution („haircut‟). In the meantime, Europe‟s leading<br />
banks saw their access to USD financing dry up spectacularly, and investor<br />
distrust <strong>of</strong> Italian and Spanish sovereign debt emerged.<br />
• In November 2011, the Greek crisis took on a political slant, with the prime<br />
minister‟s proposal to put the EU and IMF rescue plans to a referendum <strong>of</strong><br />
Greek voters. The project was withdrawn, and a transitional coalition<br />
government was appointed.<br />
• In May 2012, after a start to the year marked by the deployment <strong>of</strong> the<br />
expected measures in Greece and by the lenders releasing funds (and more<br />
generally by an improvement in the situation in Europe), a snap general<br />
election saw the coalition formed in Athens lose its parliamentary majority,<br />
but with no other coalition emerging.<br />
• Greek voters were called back to the polls on 17 June. A majority was<br />
apparently won by a coalition in favour <strong>of</strong> the bailout plan, with a series <strong>of</strong><br />
adjustments to make it not less restrictive, but more bearable to the Greek<br />
people. This suggests that the repayment schedule would be more spread<br />
out over time. In all cases, observers wonder (is it still the case?) about<br />
Greece‟s ability to remain within the EU. This begs the question: if the<br />
integration machine that is Europe were to go down, could it restart?<br />
The special character <strong>of</strong> the Greek case cannot disguise Europe‘s difficulty<br />
in creating a framework that will enable it to manage effectively the<br />
<strong>economic</strong> and financial imbalances revealed by the crisis within and<br />
between Eurozone countries.<br />
• How do you reduce balance <strong>of</strong> payment imbalances, which largely reflect<br />
widening competitiveness gaps, between Germany & several other Northern<br />
European countries and most <strong>of</strong> those <strong>of</strong> the „South‟?<br />
• How do you resolve the moral hazard issue raised by the payment <strong>of</strong><br />
financial aid that could encourage others to slacken <strong>of</strong>f on the necessary<br />
efforts?<br />
• How do you increase Europe‟s capacity for intervention without disrupting the<br />
public finances <strong>of</strong> the main contributors?<br />
• How can you ask private investors to pay for past mistakes (lack <strong>of</strong> ability to<br />
discriminate between the different sovereign risks in Europe), at the same<br />
time as continuing to ardently desire them to continue massively underwriting<br />
1<br />
Alluding to a dictum by Jacques Rueff in 1950: “Europe will integ<strong>rate</strong> on the back <strong>of</strong> a single<br />
currency or not at all”.<br />
Macro Prospects – no. 137 – 3 rd quarter 2012 2
GDP per capita growth: marginal<br />
advantage for the US<br />
3%<br />
0%<br />
-3%<br />
-6%<br />
Source: OECD, Crédit <strong>Agricole</strong> CIB<br />
Government income excessively<br />
high in Europe<br />
50%<br />
40%<br />
30%<br />
20%<br />
10%<br />
0%<br />
Source: OECD, Crédit <strong>Agricole</strong> CIB<br />
A tiny EU budget<br />
1.5%<br />
1.0%<br />
0.5%<br />
0.0%<br />
02 03 04 05 06 07 08 09 10<br />
US GDP per capita growth <strong>rate</strong><br />
Eurozone GDP per capita growth <strong>rate</strong><br />
99 00 01 02 03 04 05 06 07 08 09 10<br />
US Gov Income/GDP<br />
EZ Gov Income/GDP<br />
01 02 03 04 05 06 07 08 09 10 11 12 13<br />
EU Budget/GDP (%)<br />
Source: EC, Crédit <strong>Agricole</strong> CIB<br />
upcoming government bond issues?<br />
• Finally, how do you encourage the ECB, as part <strong>of</strong> its mandate, to do more to<br />
achieve monetary stability (in both the banking and capital market spheres)?<br />
There appears to be something slightly awry in the Eurozone. Yet the<br />
statistics, while not exactly flattering, compare favourably with those <strong>of</strong> peers.<br />
Jean-Claude Trichet famously likes to point out that since 1999 the Eurozone has<br />
created 14.5 million jobs compared with 8.5 million in the US, and that per-capita<br />
GDP growth has been 0.8% for the former and 0.6% for the latter over the same<br />
period. Similarly, balances – whether we are talking about the public accounts or<br />
foreign trade in goods and services – are somewhat better on the European side<br />
<strong>of</strong> the fence: this year the Eurozone budget deficit is forecast to come in at 3ppt<br />
<strong>of</strong> GDP, compared with 8.3ppt in the US, and the current account balance is a<br />
positive 1ppt <strong>of</strong> GDP in the former and a negative 3.7ppt in the latter. Of course, if<br />
we looked at some other indicators, we would be tempted to put the US ahead.<br />
This holds true, for example, in the higher level <strong>of</strong> labour productivity and lower<br />
level <strong>of</strong> government income. The fact remains that there is nothing in this<br />
comparison <strong>of</strong> figures to justify putting the Eurozone on the „naughty step‟. In fact,<br />
while the markets do not give a hoot, most <strong>of</strong> the time, about the <strong>economic</strong> and<br />
financial situation <strong>of</strong> this or that American state, but worry about this or that<br />
Eurozone country, this is because the Eurozone‟s institutional and governance<br />
architecture is incomplete. And, <strong>of</strong> course, it is in times <strong>of</strong> crisis that this is easiest<br />
to observe.<br />
The debate on monetary union in Europe is nothing new. Think <strong>of</strong> the Barre<br />
memorandum in the late 1960s, the Werner report in the 1970s and, following the<br />
collapse <strong>of</strong> the Bretton Woods agreement, the currency snake and the EMS<br />
(European Monetary System). The aim pursued right up to the present has not<br />
changed: to contribute to the consolidation and development <strong>of</strong> trade within<br />
Europe, which became a “burning obligation” with the creation <strong>of</strong> the single<br />
market in 1986, and to assert the role <strong>of</strong> Europe as a vital player in the “concert <strong>of</strong><br />
nations”. Clearly, ideas about integration and a strengthening <strong>of</strong> Europe<br />
both <strong>economic</strong>ally and politically have been present in debates going back<br />
decades. Similarly, the question <strong>of</strong> an „optimum currency area‟ has been argued<br />
over during all this time, concluding invariably that Europe is a highly imperfect<br />
optimum currency area, whether we are talking about the mobility <strong>of</strong> production<br />
factors (above all, labour) or the asymmetry in response to external shocks. What<br />
is more, the capacity for budgetary or fiscal intervention to make up for those<br />
shortcomings is rare.<br />
However, the dawning awareness <strong>of</strong> the need to make progress as regards a<br />
transfer mechanism is very real, even if the political will to do so sometimes lags<br />
behind. Thus, the preparatory discussions on the launch <strong>of</strong> the EMS focused not<br />
only on the best design for the exchange <strong>rate</strong> mechanism, but also on the<br />
possibility <strong>of</strong> implementing resource transfer mechanisms called cooperation<br />
funds from strong countries (above all Germany and the Netherlands) to weaker<br />
ones (Ireland, Italy and the United Kingdom, which was to join the mechanism<br />
only later). With regard to the second aspect, it would seem they failed largely<br />
because <strong>of</strong> Germany. The idea put forward in the 1977 MacDougall Report to<br />
increase the EEC (European Economic Community) budget from some 0.7% <strong>of</strong><br />
GDP to 2.0-2.5% during a pre-federal stage <strong>of</strong> European integration (then to 5-<br />
7% during a „small public sector‟ federal stage) was quickly shelved.<br />
Clearly, these topics are not dissimilar to those being debated today. On the<br />
other hand, the exit from the Eurozone <strong>of</strong> a member state has been less<br />
talked about in the past two decades than the failure <strong>of</strong> the single currency.<br />
It is well-known that a non-negligible proportion (quite a large one, in fact) <strong>of</strong> US<br />
economists was fairly sceptical about the European project‟s survivability.<br />
Perhaps we should consider the analysis by Barry Eichengreen as a good<br />
reference point 2 . According to Eichengreen, the cost to a member state <strong>of</strong> leaving<br />
the Eurozone would exceed the benefit – and by a wide margin. The costs are<br />
<strong>economic</strong> (capital flight, financial crisis, dearer credit and inflation), political<br />
2<br />
„The breakup <strong>of</strong> the Euro Area‟, Cambridge, MA, USA, Sept. 2007. For the most recent period,<br />
one should no doubt note that the rarity <strong>of</strong> comments about the immediate break-up <strong>of</strong> the<br />
Eurozone is a sign that Eurosceptic viewpoints are weaker today than was the case a decade or<br />
two back.<br />
Macro Prospects – no. 137 – 3 rd quarter 2012 3
Points <strong>of</strong> weakness in Europe,<br />
according to the market<br />
600<br />
400<br />
200<br />
0<br />
Source: Bloomberg, Crédit <strong>Agricole</strong> CIB<br />
An active ECB<br />
35%<br />
30%<br />
25%<br />
20%<br />
15%<br />
10%<br />
5%<br />
0%<br />
5Y CDS<br />
08 09 10 11<br />
Source: Bloomberg, Crédit <strong>Agricole</strong> CIB<br />
Fiscal asymmetry<br />
4<br />
0<br />
-4<br />
-8<br />
-12<br />
-16<br />
Germany<br />
Italy<br />
Greece (rhs)<br />
France<br />
Spain<br />
99 01 03 05 07 09 11<br />
ECB Balance sheet (% <strong>of</strong> GDP)<br />
Structural Primary Balance (%GDP)<br />
Source: OECD, Crédit <strong>Agricole</strong> CIB<br />
6000<br />
4000<br />
2000<br />
99 01 03 05 07 09 11 13<br />
Germany<br />
Average Greece, Ireland and Portugal<br />
0<br />
(becoming the „bad apple‟ <strong>of</strong> the European Union) and practical (reintroducing a<br />
national currency and rewording all contracts). As for the risk <strong>of</strong> contagion<br />
following the departure <strong>of</strong> a member state, the analyst‟s response seems to have<br />
to be: „it all depends‟. The same causes produce the same effects; if a country<br />
suffers from the same ills and is characterised by similar <strong>economic</strong>, financial,<br />
social and political structures to the country that has just exited, there is a definite<br />
risk that it will suffer the same fate. Different characteristics, however, should lead<br />
to different fates, even if the difficulties are similar in style. Two comments could<br />
be added to this. In the first place, regardless <strong>of</strong> the lack <strong>of</strong> similarities in the<br />
objective situations, a certain behavioural mimicry on the part <strong>of</strong> the markets is<br />
genuinely something that should be addressed. Secondly, the shock <strong>of</strong> a member<br />
state leaving the Eurozone could (or, in fact, should) encourage the partners to<br />
strengthen the monetary union, if only to fend <strong>of</strong>f possible attacks from the<br />
market.<br />
Faced with a sovereign debt crisis in Europe that has gone on for too long,<br />
and with a Greek drama that cannot go on, the EU‘s institutions and its<br />
member states must realise that the time for half measures and small steps<br />
forward (hailed as major advances) is over. The issues were all raised a long<br />
time back and the unprecedented difficulties faced today demand to be resolved.<br />
Unless we accept the prospect <strong>of</strong> regression, the need to move forward is<br />
inescapable. This is what must be done, given that budgetary responsibility and<br />
maintaining the economy‟s competitiveness will remain unavoidable necessities<br />
at the level <strong>of</strong> each member state.<br />
• Institutionally speaking, a new awareness and a ‗leap forward‘ are<br />
necessary. In the first place, we have to admit that, within a monetary union,<br />
and even more so in the case <strong>of</strong> an <strong>economic</strong> and monetary union,<br />
sovereignty is part <strong>of</strong> the shared domain. We only need to ask Italy or Spain<br />
about the impact there currently from the Greek crisis. Secondly, should we<br />
admit, with Jean-Claude Trichet 3 , that a member state that is having difficulty<br />
in honouring its commitments as regards reforms and structural adjustments<br />
can be helped out by the Eurozone‟s institutions? Similarly, moves towards<br />
greater budgetary federalism are essential. Already, oversight <strong>of</strong> budgetary<br />
and competitiveness policies is the responsibility <strong>of</strong> the Commission.<br />
Tomorrow, the right to veto certain budgetary decisions could be approved<br />
for the Union‟s institutions, or else the Union‟s budget could be increased to<br />
the detriment <strong>of</strong> those <strong>of</strong> its member states, which would make it easier to<br />
create Eurobonds.<br />
• The much-talked-about growth initiative should be launched without<br />
delay. This should have two components: supply-side measures designed to<br />
strengthen competitiveness and ensure more efficient operation <strong>of</strong> the<br />
various markets; and other, demand-side, measures in the shape <strong>of</strong> better<br />
and more comprehensive use <strong>of</strong> the EU‟s structural funds, an increase in the<br />
European Investment Bank‟s lending capacity, and even issuance <strong>of</strong> project<br />
bonds.<br />
• Budgetary policy initiatives, and more generally growth policy<br />
initiatives, should be rolled out with greater flexibility and be more<br />
symmetrical. Thus, with respect to the countries facing the greatest<br />
imbalances in their public accounts, the setting agreed beforehand must be<br />
tailored both to circumstance (where are they in the <strong>economic</strong> cycle?) and to<br />
building up new-found credibility. From a complementary standpoint, those<br />
countries with more room for manoeuvre in terms <strong>of</strong> boosting their own<br />
domestic demand should feel themselves duty-bound to do so.<br />
• The ECB can remain on the alert only on three fronts: that <strong>of</strong> bolstering<br />
growth, so long as inflation does not seem to be a risk in the medium term;<br />
that <strong>of</strong> commercial banks‟ access to refinancing; and that <strong>of</strong> the transmission<br />
<strong>of</strong> its monetary policy to the capital markets via the government bond<br />
channel.<br />
• It is vital to restore full confidence in the state <strong>of</strong> the banking system.<br />
This involves reducing the relationship between the state and the banks <strong>of</strong> a<br />
single country that are too close: the state may <strong>of</strong>ten seem to have an<br />
3<br />
Building Europe, building institutions, Aachen, Germany, June 2011.<br />
Macro Prospects – no. 137 – 3 rd quarter 2012 4
World <strong>of</strong> giants<br />
Others,<br />
32%<br />
Share in World GDP (in ppt)<br />
Russia,<br />
3%<br />
Brazil,<br />
Japan,<br />
3% 6%<br />
India,<br />
UK,<br />
China,<br />
6%<br />
3%<br />
14%<br />
Source: IMF, Crédit <strong>Agricole</strong> CIB<br />
US, 19%<br />
Eurozone,<br />
14%<br />
insufficient financial surface relative to the size <strong>of</strong> the banks‟ balance sheets,<br />
while the banks may be over-exposed to the credit risk represented by the<br />
state. Implementing centralised oversight and regulation at the EU level<br />
would be perfectly useful, as it would contribute to minimising the second<br />
<strong>of</strong> these relationships by encouraging credit institutions to diversify their<br />
government securities portfolios more. Moreover, if emergency<br />
recapitalisations prove necessary for some institutions and call for the use <strong>of</strong><br />
public funds, the EU should be at the helm via, for example, the European<br />
Stability Mechanism and not the governments <strong>of</strong> the member states. This<br />
would have the advantage <strong>of</strong> not strengthening a relationship they are trying<br />
to loosen.<br />
The list <strong>of</strong> things to do may seem long. What is more, implementation should<br />
not be delayed. Is it possible? Asking that question runs the risk <strong>of</strong> getting<br />
the same answer as that heard every time post-war Europe has been faced<br />
with a major challenge: everything hangs on political will. In a rapidly<br />
transforming global economy, and faced with the rise <strong>of</strong> <strong>economic</strong> giants, that<br />
political will should exist. But we should never forget that nothing is possible<br />
without a guarantee that each member state will honour its commitments.<br />
Macro Prospects – no. 137 – 3 rd quarter 2012 5
Risk: High and unstable risk now the new standard<br />
Regardless <strong>of</strong> the slight improvement expected on the macro<strong>economic</strong>/policy front, the distribution <strong>of</strong> risks remains very<br />
large, with many possible outcomes and fat tail-risks, while the global deleveraging continues and room for manoeuvre is<br />
minimal in most developed countries. Short-term tactical plays will continue to prevail for the foreseeable future.<br />
Sovereign CDS: very different paths<br />
in the US and the Eurozone<br />
400<br />
350<br />
300<br />
250<br />
200<br />
150<br />
100<br />
50<br />
0<br />
Big 4 is the equally weighted average <strong>of</strong> 5Y<br />
CDS in Germany, France, Spain and Italy<br />
Source: Bloomberg, Crédit <strong>Agricole</strong> CIB<br />
The cycle <strong>of</strong> risk, at an accele<strong>rate</strong>d<br />
pace<br />
60<br />
55<br />
50<br />
45<br />
40<br />
35<br />
30<br />
25<br />
20<br />
15<br />
10<br />
08 09 10 11 12<br />
Eurozone Big 4 5Y CDS (*)<br />
United States 5Y CDS<br />
Germany 5Y CDS<br />
1 2 3 4 5<br />
1 – Lehman‟s<br />
2 – Eurozone debt crisis I (Greece)<br />
3 – US debt ceiling + Eurozone debt crisis II<br />
(Greece + Italy + Spain)<br />
4 – Eurozone debt crisis III (Greece + Spain)<br />
5 - US presidential election<br />
Source: Bloomberg, Crédit <strong>Agricole</strong> CIB<br />
Hervé Goulletquer<br />
herve.goulletquer@ca-cib.com<br />
+ 33 1 41 89 88 34<br />
Jean-Francois Perrin<br />
jean-francois.perrin@ca-cib.com<br />
+ 33 1 41 89 94 22<br />
?<br />
08 09 10 11 12 13<br />
Euro Stoxx implied volatility<br />
Average<br />
Average - 0.8 stdev<br />
Average + 1.2 stdev<br />
Almost five years after the subprime crisis began – if setting point zero during the<br />
summer <strong>of</strong> 2007 – things have definitely not returned to normal. Phases <strong>of</strong> high<br />
risk aversion continue to recur, still following the same pattern: (1) a „fire‟ breaks<br />
out somewhere (eg, deficit figures revisited in Greece, deficit targets abandoned<br />
in Spain or federal debt ceiling reached in the US), then (2) the problem is not<br />
addressed properly and the crisis worsens, then (3) the pain threshold is met and<br />
emergency action is taken, (4) some short-term relief takes place, hoping the<br />
worst is over. And then (1) can start again.<br />
The different risk gauges (sovereign CDS, equities P/E) clearly show this pattern,<br />
even if it has to be qualified according to the country and market. In that respect,<br />
the continuously growing CDS levels <strong>of</strong> the aggregated Eurozone is alarming<br />
(see chart left). From a medical point <strong>of</strong> view, the conclusion would be that<br />
extreme pain is necessary before any hard therapy is decided and implemented.<br />
In other words, you have to be in the very tough situation <strong>of</strong> Ireland,<br />
Portugal – or even Spain – before serious action is taken. If you are AA<br />
France or AA US, you just procrastinate.<br />
This means that, beyond our global macro and financial scenario <strong>of</strong> a slight<br />
improvement, risk (erratic volatility, low global equities P/E, high sovereign<br />
CDS in Europe) will remain both high and unstable over the coming year<br />
and probably years. For how long? Historians say that getting out <strong>of</strong> a<br />
deleveraging crisis takes about seven to eight years. If correct, this would mean<br />
that Western countries are just in the middle <strong>of</strong> the adjustment phase. It is simply<br />
too soon to believe that „trend deals‟ will reappear soon. We can only hope that<br />
the process <strong>of</strong> the gradual consolidation <strong>of</strong> balance sheets will contribute to the<br />
slow return to confidence and lower risk-aversion levels.<br />
This global crisis is unique because the three major regions <strong>of</strong> the OECD (let us<br />
say the US, Europe and Japan) are now stuck in the deleveraging process at the<br />
same time. If you launch austerity measures (the Eurozone periphery diet)<br />
without growth stimulus, the result is recession, deflation, unemployment, social<br />
and ultimately political unrest. If you <strong>of</strong>fset the private deleveraging with public<br />
deficit (the US diet), then the deleveraging issue just swallows more. In that<br />
respect, the risk ‗baton‘ may be passed from Europe to the US some time in<br />
H212. The Greek election will be in the past (with a favourable end as our central<br />
view) meaning more action possibilities for EU institutions, while the presidential<br />
election in the US will bring back another batch <strong>of</strong> issues (the „fiscal cliff‟ if<br />
stimulus measures are interrupted and a risk <strong>of</strong> more paralysing antagonism<br />
within Washington). Another risk sequence can be expected on this horizon,<br />
which in turn will spread to global markets as the tripod (US, European and<br />
Chinese economies) will be endangered again.<br />
The bottom line is that the degree <strong>of</strong> confidence in any medium-term scenario is<br />
lower than usual because the distribution <strong>of</strong> possible outcomes is very large,<br />
while room for manoeuvre is minimal. Since <strong>economic</strong> growth in the US is<br />
weak, and even weaker in the Eurozone, we will not be far from the red line <strong>of</strong><br />
recession for several years, meaning a continuous focus from investors on<br />
short-term issues, no strong views, and tactical plays rather than long-term<br />
st<strong>rate</strong>gic ones. No surprise, then, that safe havens will continue to be chased<br />
whatever the logical and rational medium-term scenarios. When a country like<br />
France – which is definitely solvent, merely thanks to the huge savings from<br />
households – has an implied probability <strong>of</strong> default <strong>of</strong> 17% priced in debt markets<br />
(with a 5Y CDS <strong>of</strong> 218bp on 1 June), you have evidence <strong>of</strong> the gap between<br />
macro and markets. In any case, if the „cycle <strong>of</strong> risk‟ – like in the second chart –<br />
continues, one should go long into risky assets when volatility breaks the pink line<br />
and short when the black one is breached. Bets for the brave though!<br />
Macro Prospects – no. 137 – 3 rd quarter 2012 6
Monetary Policy: Potential and limits <strong>of</strong> the ECB‘s arsenal<br />
Although the ECB did not cut <strong>rate</strong>s in June, the decision was a close call for the Governing Council, which clearly remains<br />
much more flexible than many had believed. The Bank stands “ready to act” on the back <strong>of</strong> “increased downside risks to<br />
activity”, and indeed we expect further monetary easing in coming months. The policy arsenal is not infinite, but many<br />
options remain that the ECB is more or less likely to use depending on the macro-financial-political environment as well as<br />
the nature <strong>of</strong> the threat.<br />
Option 1 – cut <strong>rate</strong>s to below 1%<br />
The ECB could cut <strong>rate</strong>s to 0.50% in either two steps or one single move if faced with major risks to financial<br />
stability.<br />
Pros<br />
• Rate cuts are fundamentally justified, and costless;<br />
• Strong policy signal that the ECB is ready to do more;<br />
the closer the policy <strong>rate</strong>s get to the zero bound, the<br />
more the market expects the ECB to respond with QElike<br />
policies;<br />
• Lower bank funding costs as all the ECB‟s Open-<br />
Market Operation (OMO) <strong>rate</strong>s are indexed to the Refi<br />
<strong>rate</strong>.<br />
Cons<br />
• No more conventional ‗dry powder‘ available;<br />
reduced capacity to keep the pressure on governments<br />
to deliver;<br />
• Little macro impact expected with interbank <strong>rate</strong>s<br />
already very low and monetary policy transmission<br />
channels impaired;<br />
• No impact from the deposit <strong>rate</strong> if unchanged; potential<br />
negative impact for money markets if it is cut to zero.<br />
Likelihood: highly likely as <strong>economic</strong> contagion reaches the core.<br />
Option 2 – another (round <strong>of</strong>) LTRO<br />
The ECB announces one or several LTROs with a maturity <strong>of</strong> at least 1Y, most likely 3Y, but possibly even longer.<br />
Pros<br />
• The most „natural‟ non-standard response to risk<br />
aversion;<br />
• With most banks pre-funded beyond this year,<br />
additional LTRO money could be used for further<br />
commercial margin restoration and carry trade<br />
operations easing periphery funding costs;<br />
• An extended safety net for banks and sovereigns in a<br />
transition towards greater European integration;<br />
possibly a complement to a common deposit guarantee<br />
scheme;<br />
• Positive effects through the usual transmission<br />
channels, including on confidence and risk assets.<br />
Cons<br />
• Most banks are awash with liquidity; although credit<br />
risk indicators are rising again, interbank spreads, such<br />
as OIS/BOR spreads, have remained capped, so far;<br />
• LTRO success uncertain without looser collateral<br />
rules (see Option 3) as the banks that need the cash<br />
the most are likely to be the same ones that lack the<br />
amount <strong>of</strong> eligible securities;<br />
• Risk <strong>of</strong> strengthening the feedback loop between<br />
sovereigns and banks; additional stigma attached to<br />
„LTRO banks‟;<br />
• ‗ECB impotence‘ if it appears forced to make such a<br />
decision.<br />
Likelihood: possible but no panacea, and <strong>of</strong> limited help unless combined with other measures, including Option 3.<br />
Frederik Ducrozet<br />
frederik.ducrozet@ca-cib.com<br />
+ 33 1 41 89 98 95<br />
Macro Prospects – no. 137 – 3 rd quarter 2012 7
Option 3 – even looser and/or harmonised collateral rules<br />
The ECB loosens collateral eligibility rules further, either alongside new LTROs (Option 2) or as a standalone<br />
decision applying to regular refinancing operations. In practice, this could include applying general 3Y LTRO rules<br />
to other OMOs, an acceptance <strong>of</strong> even riskier asset classes and/or looser margin calls. Alternatively, valuation<br />
haircuts could be reviewed towards a less constraining and more harmonised framework – this would be one <strong>of</strong> the<br />
most efficient measures in our view.<br />
Pros<br />
• Increase in the collateral pool; could be used for<br />
other purposes to support liquidity in the wholesale<br />
market;<br />
• Overall reduction in funding costs.<br />
Cons<br />
• Rising credit risk being transferred from banks‟<br />
balance sheets to the ECB‟s balance sheet;<br />
• Lower incentives for banks to clean up balance sheets<br />
and diversify their sources <strong>of</strong> funding;<br />
• Opposition from some „core‟ national central banks; risk<br />
<strong>of</strong> further re-nationalisation <strong>of</strong> monetary, liquidity and<br />
credit policy.<br />
Likelihood: not very likely but potentially very useful to ease bank funding stress temporarily.<br />
Option 4 – generalise ELA<br />
The Governing Council explicitly allows all 17 NCBs to use ELA up to a specific ceiling amount while<br />
communicating on the lending conditions (which it has always opposed, so far 4 ): interest <strong>rate</strong>, maturity, collateral<br />
and haircuts.<br />
Pros<br />
• Greater flexibility in dealing with the refinancing <strong>of</strong><br />
stressed banks (broader pool <strong>of</strong> eligible collateral);<br />
• Stricter lending rules, greater transparency and „bad<br />
bank stigma‟ to act as a disincentive for solvent banks<br />
to go to ELA;<br />
• Distinction between solvent and insolvent banks<br />
before the latter are restructured via a European<br />
resolution scheme.<br />
Cons<br />
• ELA supposed to a temporary and exceptional<br />
monetary policy tool, not a permanent one;<br />
• Growing confusion between monetary and quasifiscal<br />
policy.<br />
Likelihood: unlikely and potentially undesirable, although more transparency would be welcomed.<br />
Option 5 – restart SMP<br />
The ECB announces that ―it will actively implement its Securities Markets Programme‖ again, like it did in August<br />
2011, ―to help restoring a better transmission <strong>of</strong> monetary policy decisions and therefore to ensure price stability in<br />
the euro area‖.<br />
Pros<br />
• A quick fix and potential circuit-breaker given illiquid<br />
markets;<br />
• Interventions potentially unlimited, backed by the<br />
ECB‟s balance sheet;<br />
• Potentially more efficient if the ECB clearly commits to<br />
a pre-defined programme, let alone a first step before<br />
outright QE.<br />
Cons<br />
• Unless SMP becomes more flexible, its efficiency will<br />
be lower post Greek PSI as the ECB confirmed its<br />
senior creditor status by refusing to participate in the<br />
exchange, and SMP adds to the subordination <strong>of</strong><br />
private bondholders;<br />
• ECB buying seen as another opportunity for foreign<br />
investors to get rid <strong>of</strong> their holdings <strong>of</strong> peripheral<br />
debt;<br />
• Sign <strong>of</strong> desperation; growing opposition in core<br />
countries; no legitimate way for the ECB to impose<br />
conditionality;<br />
• Market reaction to depend on the buying intensity in the<br />
early weeks, leading to more uncertainty.<br />
Likelihood: possible in reaction to secondary market dislocations, but unlikely to be flexible and efficient enough<br />
4<br />
As it stands, information about ELA lending remains scarce and difficult to interpret with precision. On 24 May 2012, the ECB reported a<br />
EUR121bn increase in the category „other claims on euro area credit institutions‟ (asset item 6) due to an accounting reclassification to harmonise<br />
the disclosure <strong>of</strong> the ELA.<br />
Macro Prospects – no. 137 – 3 rd quarter 2012 8
Option 6 – give the ESM a banking licence (indirect QE)<br />
The ECB grants the ESM a banking licence to access central bank funding. The ESM would be able to buy more<br />
sovereign debt and to repo the securities with the ECB to boost its lending capacity to very large, if not potentially<br />
infinite, levels.<br />
Pros<br />
• Not inconsistent with the Treaty 5 , at least no more<br />
than previous policies;<br />
• A game-changer given the unlimited capacity <strong>of</strong> the<br />
funds;<br />
• Conditionality set by the EFSF/ESM; purchased<br />
assets to remain on the EFSF/ESM balance sheet, not<br />
the ECB‟s;<br />
• Funds used for other purposes including bank<br />
recapitalisations, flexible credit lines, purchases <strong>of</strong><br />
sovereign debt.<br />
Cons<br />
• Strong opposition from Germany and other core<br />
countries; quasi-equivalent to unlimited SMP<br />
interventions, hence German resistance;<br />
• Equivalent to fiscal transfers and debt mutualisation,<br />
with the associated risks and drawbacks: moral hazard,<br />
liquidity fix rather than structural solution, risk <strong>of</strong> large<br />
mutual losses in the event <strong>of</strong> widespread defaults.<br />
Likelihood: unlikely, barring a major financial catastrophe and bold policy measures by national governments.<br />
Option 7 – full-blown QE, or ‘super SMP’<br />
The ECB moves ‗all in‘ by announcing a large-scale asset purchase programme centred on European Government<br />
Bonds, implying an open-ended commitment to defend a certain yield/spread level for solvent but illiquid<br />
sovereigns.<br />
Pros<br />
• The monetary ‗bazooka‘ expected by some market<br />
participants and likely to be efficient in bringing down<br />
sovereign yields, as no one would dare to fight the<br />
central bank and short positions would basically be<br />
killed;<br />
• Quasi-debt monetisation is happening already through<br />
various banking channels; pure QE would merely make<br />
the situation clearer, to some extent.<br />
Cons<br />
• Explicit deficit financing is clearly forbidden by the<br />
Treaty; the ECB could ultimately be sued for having<br />
breached the rules, putting its credibility at risk; extreme<br />
opposition from the Bundesbank; moral hazard at its<br />
utmost;<br />
• Practical limitations due to bond buying ventilation<br />
across countries (in theory) according to the respective<br />
share <strong>of</strong> bond markets in order to avoid any preferential<br />
treatment.<br />
Likelihood: highly unlikely unless the very existence <strong>of</strong> the euro is at stake.<br />
Conclusion<br />
In the current environment, the ECB will have the difficult task <strong>of</strong> dealing simultaneously with the most pressing matters and<br />
adjusting monetary policy to structural changes in the European economy. Any decision in Frankfurt will depend on the<br />
nature <strong>of</strong> the shock as well as on potential initiatives at the EU and government levels. A minimal pre-requisite for ECB<br />
action would appear to be a commitment to a roadmap towards greater <strong>economic</strong>, fiscal and banking integration.<br />
Should the bond market show obvious signs <strong>of</strong> dislocation, it could be the case for instance that the ECB first has to restart<br />
SMP selectively as an emergency measure, even though we consider it least efficient in the long run. Alternatively, the<br />
ECB‟s assessment and stance could turn around rapidly if the situation in Greece and in the Eurozone were to stabilise.<br />
Near term, we believe that the most efficient ECB response to intensifying financial stress would consist in a combination <strong>of</strong><br />
existing and new tools aimed at lowering borrowing costs further. Therefore, our central case remains for the ECB to cut<br />
<strong>rate</strong>s to 0.50% in Q312 and to stand ready to provide additional liquidity to banks in the form <strong>of</strong> new ultra-long<br />
refinancing operations, possibly with looser collateral requirements.<br />
5<br />
See „Liquidity in times <strong>of</strong> crisis: Even the ESM needs it‟, 28 March 2012, Daniel Gros and Thomas Mayer.<br />
Macro Prospects – no. 137 – 3 rd quarter 2012 9
Banking Regulation: Undergoing in-depth transformation<br />
The pace <strong>of</strong> change in banking regulation is picking up both at the international level (with the extension <strong>of</strong> the Basel III<br />
reforms) and in individual countries: think Dodd-Frank Act in the US, the Liikanen Group in Europe, and the Vickers<br />
recommendations in the UK. The outcomes will be important for financing economies.<br />
Reduction in bank balance sheets in<br />
different projections<br />
4<br />
3<br />
2<br />
1<br />
0<br />
USD2.2trn<br />
(6% <strong>of</strong><br />
bank assets)<br />
1.7<br />
0.4<br />
0.1<br />
USD2.6trn<br />
(7% <strong>of</strong><br />
bank assets)<br />
0.4<br />
0.2<br />
Source: IMF, Crédit <strong>Agricole</strong> SA<br />
2.5<br />
0.9<br />
0.4<br />
Diego Ferri<br />
diego.ferri@credit-agricole-sa.fr<br />
+33 1 43 23 65 39<br />
Serge Oppenchaim<br />
serge.oppenchaim@credit-agricole-sa.fr<br />
+33 1 43 23 22 99<br />
2<br />
USD3.8trn<br />
(10% <strong>of</strong><br />
bank assets)<br />
Best scenario Baseline<br />
scenario<br />
Worst<br />
scenario<br />
Asset sales & reduction in interbank lending<br />
Reduction in RoW credit<br />
Reduction in Eurozone credit<br />
Shared objectives but non-stabilised arrangements …<br />
The four reforms underway around the world share a number <strong>of</strong> indisputable<br />
objectives, such as making the financial system more stable, protecting<br />
depositors, ensuring service continuity, decreasing the probability <strong>of</strong> default at<br />
systemic institutions, and making their eventual rescue easier and less costly for<br />
governments. All these reforms take sepa<strong>rate</strong> paths yet their timetables and<br />
spheres <strong>of</strong> application are interwoven. Consider:<br />
• From a cross-functional standpoint, the standards drawn up by the<br />
Basel III Committee are designed to be implemented by most national<br />
banking regulatory frameworks. Europe has just transposed them into the<br />
draft CRD4 Directive; China is working up a draft bill, while the US is still at<br />
the preliminary project level. These standards seek, first and foremost, to<br />
strengthen the level and quality <strong>of</strong> bank capital. They also introduce liquidity<br />
ratios which measure each institution‟s ability to cope with sudden and<br />
massive withdrawals by depositors and correlate the maturity <strong>of</strong> the loans it<br />
grants with that <strong>of</strong> its funds. They also seek to curb pro-cyclicality and<br />
financial leverage, via, for example, the creation <strong>of</strong> additional capital<br />
cushions. They also step up requirements for systemic banks. Theoretically,<br />
implementation <strong>of</strong> these standards could be spread between 2013 and 2018,<br />
but the current <strong>economic</strong> and financial environment has demanded fast-track<br />
implementation.<br />
• In parallel, in July 2010, the US passed a framework law – the Dodd-<br />
Frank Act – to be complied with by US banks and, to a certain degree,<br />
through an extra-territoriality effect, by foreign banks that have<br />
business dealings with the US. The Act sets out 250 rules to be drafted by<br />
US supervisory bodies, ranging from shareholder votes on senior executive<br />
compensation and golden parachutes, to the development <strong>of</strong> „living wills‟ for<br />
banks and restrictions on the size <strong>of</strong> banking groups. One-third <strong>of</strong> these<br />
prescriptions have so far been finalised. Among these is a key reform<br />
enacted on 20 January 2011, known as the Volker Rule. This aims to<br />
sepa<strong>rate</strong> a bank‟s riskiest activities from those covered by state guarantee.<br />
To achieve this, it bans banks, with a few exceptions, from carrying out<br />
proprietary trading and from investing more than 3% <strong>of</strong> their core equity in<br />
hedge funds and private equity funds. Banks have until 21 July 2014 to<br />
comply.<br />
• In the UK, the recommendations published by an independent<br />
Commission chaired by Sir John Vickers must be transposed into law<br />
by 2019. The main idea is to ring-fence retail banking operations<br />
<strong>economic</strong>ally and operationally, and give them governance structures<br />
independent from those <strong>of</strong> the other financial businesses carried out by the<br />
groups to which they belong. Each retail bank concerned must erect<br />
sufficient barriers to continue operating with corpo<strong>rate</strong> and individual<br />
customers in the event <strong>of</strong> unfavourable circumstances, without any external<br />
help or public support. In exchange, the ring-fenced banks will have a<br />
monopoly on basic banking services.<br />
• More recently, the European Commission asked a group <strong>of</strong> experts<br />
chaired by Erkki Liikanen, the Governor <strong>of</strong> Finland‘s central bank, to<br />
determine what structural banking reforms may need to be<br />
implemented in addition to those already scheduled. He is expected to<br />
submit his report this autumn. In the meantime, the European Commission<br />
aims to present proposals for a banking crisis resolution plan in June.<br />
Macro Prospects – no. 137 – 3 rd quarter 2012 10
Impact on distribution <strong>of</strong> bank<br />
lending in Europe<br />
%<br />
0<br />
-1<br />
-2<br />
-3<br />
-4<br />
-5<br />
-0.6<br />
Best<br />
scenario<br />
Source: IMF, Crédit <strong>Agricole</strong> SA<br />
Estimated overall capital shortfalls –<br />
big banks<br />
225<br />
119<br />
67<br />
39<br />
-1.7<br />
Baseline<br />
scenario<br />
* Minimum : CET1 = 4.5%, Tier 1 = 6%, Total<br />
=8%<br />
** Minimum plus buffer : CET1 = 7%, Tier 1 =<br />
8.5%, Total = 10.5%<br />
Source: BIS, Crédit <strong>Agricole</strong> SA<br />
-4.4<br />
Worst<br />
scenario<br />
930<br />
223<br />
221<br />
486<br />
Minimum * Minimum plus<br />
buffer **<br />
CET1 Tier 1 Total<br />
…and poorly-understood potential outcomes<br />
A certain number <strong>of</strong> standards have already been integ<strong>rate</strong>d by the various<br />
banks. Even so, several points have emerged from this flurry <strong>of</strong> complex<br />
regulatory initiatives:<br />
• Method: many aspects have been addressed without consultations, such as<br />
the additional common equity requirements imposed on institutions<br />
presenting a systemic risk pr<strong>of</strong>ile, while the calibration <strong>of</strong> parameters<br />
governing the different ratios to be complied with by banks is so far<br />
incomplete. This has led not only to operational difficulties in implementing<br />
them but most importantly to the impossibility <strong>of</strong> identifying the possible<br />
interactions between the various reforms. Similarly, some projects collide<br />
with existing and, in some cases, recently updated regulations.<br />
• Nature <strong>of</strong> the measures enacted: these are a mix <strong>of</strong> administrative<br />
prescriptions – such as the ring-fencing <strong>of</strong> business operations or the ban on<br />
working in selected business areas – and financial prescriptions, such as<br />
ratios for capital adequacy, liquidity and stable resources. They cover<br />
concepts that differ widely from country to country, as shown by the Volker or<br />
Vickers rules on the interconnections between different types <strong>of</strong> banking<br />
activity.<br />
• Structural impacts: a radical transformation <strong>of</strong> the role <strong>of</strong> banks in financing<br />
the economy could result from the new regulations (see below).<br />
• Connection between monetary policy and the operation <strong>of</strong> interbank<br />
markets. The impact <strong>of</strong> the introduction <strong>of</strong> liquidity and stable resource ratios<br />
on the transmission <strong>of</strong> monetary policy is unclear. This is a key issue to be<br />
addressed when it comes to setting levels for these ratios.<br />
Estimates <strong>of</strong> the impact <strong>of</strong> the Basel III standards<br />
The differing estimates <strong>of</strong> the capital requirements needed by banks to<br />
comply with the requirements <strong>of</strong> Basel III show the scale <strong>of</strong> the efforts<br />
demanded:<br />
• In its first impact study, the Basel Committee had concluded, based on<br />
balance sheets at end-December 2009, that the banks would need<br />
EUR602bn <strong>of</strong> additional common equity 6 .<br />
• Then, on the basis <strong>of</strong> the 30 June 2011 balance sheets <strong>of</strong> a sample <strong>of</strong> 212<br />
banks, the Basel Committee recently estimated that the big banks with<br />
international operations would need a further EUR485.6bn in core common<br />
equity (CET1), with the other players needing EUR32bn 7 .<br />
• Most recently, credit rating agency Fitch, based on end-December balance<br />
sheets, estimated that the 29 institutions with systemic importance, known as<br />
G-SIFIs, could need to raise USD566bn (EUR470bn) <strong>of</strong> common equity by<br />
2018 to meet the targets set by Basel III, or 23% <strong>of</strong> their current common<br />
equity 8 .<br />
Banks have upped their common equity significantly since 2008, but the<br />
worsening <strong>of</strong> the sovereign debt crisis has once again placed bank<br />
solvency firmly centre-stage and the timeframe has shortened. The<br />
requirements imposed by the EBA have contributed to the demand for a faster<br />
pace <strong>of</strong> compliance now announced by the big banks for 2013. Because access<br />
to the capital markets is difficult at present, banks are going about things<br />
differently – by cutting dividends, managing their liabilities, and, above all, by<br />
reducing their risk-weighted assets – in other words, by scaling back on the<br />
activities that consume most equity and concentrating on „core‟ businesses and<br />
countries.<br />
6<br />
Basel Committee on Banking Supervision, Results <strong>of</strong> the comprehensive quantitative impact<br />
study, December 2010<br />
7<br />
Basel Committee on Banking Supervision, Results <strong>of</strong> the Basel III monitoring exercise 30 June<br />
2011, April 2012<br />
8<br />
FitchRatings, Basel III: Return and Deleveraging Pressures, May 2012.<br />
Macro Prospects – no. 137 – 3 rd quarter 2012 11
Estimated overall capital shortfalls –<br />
small banks (EURbn)<br />
21<br />
5,5<br />
7.3<br />
8.6<br />
Minimum *<br />
* Minimum : CET1 = 4.5%, Tier 1 = 6%, Total<br />
=8%<br />
** Minimum plus buffer : CET1 = 7%, Tier 1 =<br />
8.5%, Total = 10.5%<br />
Source: BIS, Crédit <strong>Agricole</strong> SA<br />
61<br />
11,6<br />
16.6<br />
32,4<br />
Minimum plus<br />
buffer **<br />
CET1 Tier 1 Total<br />
In its central projection, the IMF has estimated the potential reduction in the<br />
balance sheets <strong>of</strong> Europe‟s 58 biggest banks could come to USD2.6trn, or 7% <strong>of</strong><br />
bank assets, by 2013 (see first chart above) 9 . The upshot would be that bank<br />
lending would shrink by 1.7% over two years, with a negative impact on the<br />
outlook for <strong>economic</strong> growth (see second chart above). This central IMF<br />
projection could, however, result in an even more fragile situation. Combined with<br />
the ongoing process <strong>of</strong> private sector deleveraging and budget restrictions, and at<br />
a time when most financing for the European economy depends on bank and not<br />
market intermediation, there are fears that the tighter regulations will trigger a<br />
perverse dynamic with a chain <strong>of</strong> additional negative consequences. It is<br />
also worth noting that, after a financial crisis, lending generally remains at a<br />
standstill for a lengthy period <strong>of</strong> between five and seven years 10 .<br />
With respect to the effect <strong>of</strong> the new liquidity ratios, the Basel Committee, based<br />
on end-June 2011 balance sheets, has estimated that the one-month ratio,<br />
known as the LCR, will gene<strong>rate</strong> a need for EUR1.76trn in funding, and the 12-<br />
month ratio (NSFR) a need for EUR2.78trn. This quantitative impact could call<br />
into question the role <strong>of</strong> banks in transforming short-term deposits into longermaturity<br />
loans: it would encourage the banks to ensure a closer match between<br />
maturity and growth in lending on the one hand, and their sources <strong>of</strong> funding on<br />
the other. These ratios will, therefore, be especially punitive for activities in<br />
the corpo<strong>rate</strong> financing sphere, as corpo<strong>rate</strong>s are net, long-term borrowers<br />
and gene<strong>rate</strong> relatively little liquidity. They could foster a shift from the<br />
European model, where banks finance the economy, towards the American<br />
model where financing is through the capital markets.<br />
In other words, the banks will be forced not to carry the loans they grant<br />
directly but, because they have to lighten their balance sheets, to prefer a model<br />
<strong>of</strong> intermediation where their role will consist in helping their customers to issue<br />
and place their debt on the markets. This change raises questions and involves a<br />
number <strong>of</strong> risks:<br />
• While big companies can envisage obtaining disintermediated finance<br />
through the bond markets, this option will be difficult for SMEs;<br />
• Because Greece, Portugal, Spain and Italy are the European economies<br />
most dependent on bank lending and have a large SME sector, the divergent<br />
growth <strong>rate</strong>s between the countries at the centre <strong>of</strong> the monetary union and<br />
those on its periphery could widen still further;<br />
• The encouragement aimed at banks to scale back their assets in „non-core‟<br />
markets could rapidly trigger contagion effects on non-Eurozone countries,<br />
and in particular on Central and Eastern European countries, and even those<br />
further afield;<br />
• The unregulated shadow banking system could grow as a result, accelerating<br />
the need for regulation to limit its inherent risks.<br />
9<br />
IMF, Bank Deleveraging-Why, What, by How Much, and Where?, Global Financial Stability<br />
Report, April 2012<br />
10<br />
Bank <strong>of</strong> England, Financial Stability Report.<br />
Macro Prospects – no. 137 – 3 rd quarter 2012 12
US <strong>Interest</strong> Rates: Benefits <strong>of</strong> a ‗risk-free‘ asset<br />
We have revised our forecast for the US 10Y to 2.5% by the end <strong>of</strong> the year. The status <strong>of</strong> the UST market as the world‟s<br />
risk-free haven suggests a longer period <strong>of</strong> trading upon fear not fundamentals. Risk premia are negative and, adjusted for<br />
default risk, nominal 5Y yields are close to zero. Prices are volatile and so, if looking for risk-free, stay in the sub-2Y area.<br />
US 5Y vs 5Y CDS<br />
3.0<br />
2.5<br />
2.0<br />
1.5<br />
1.0<br />
0.5<br />
0.0<br />
Jan-10 Jul-10 Jan-11 Jul-11 Jan-12<br />
5Y CDS (%)<br />
5Y UST yield<br />
5Y UST adj for credit risk<br />
Source: Bloomberg, Crédit <strong>Agricole</strong> CIB<br />
Term risk premia<br />
3.5<br />
3.0<br />
2.5<br />
2.0<br />
1.5<br />
1.0<br />
0.5<br />
0.0<br />
-0.5<br />
-1.0<br />
-1.5<br />
Source: Federal Reserve<br />
Fed programmes<br />
4.5<br />
4.0<br />
3.5<br />
3.0<br />
2.5<br />
2.0<br />
1.5<br />
%<br />
%<br />
90 92 94 96 98 00 02 04 06 08 10<br />
2Y term premium<br />
5Y term premium<br />
10Y term premium<br />
% USD100bn GSE,<br />
USD500bn MBS<br />
USD1.25trn GSE,<br />
USD300bn UST<br />
Source: Federal Reserve<br />
USD600bn UST<br />
Twist<br />
May-08 May-09 May-10 May-11 May-12<br />
Mostly, US debt markets are being buffeted by events in Europe although lately<br />
American <strong>economic</strong> data has weakened too. However, the <strong>economic</strong> data has<br />
not moved to anywhere near recessionary territory and finally the banking sector<br />
is looking healthy again. Yet, the market is extreme in its opinions and desires,<br />
and it was a long time ago that Treasury yields accu<strong>rate</strong>ly reflected fundamental<br />
valuations.<br />
At the moment, US Treasuries are considered to be one <strong>of</strong> the few risk-free<br />
instruments on the planet. The pool <strong>of</strong> triple-A, risk-free assets has become<br />
very small over the course <strong>of</strong> the sovereign debt crisis compared with the<br />
quantity <strong>of</strong> risky assets. This fact has exagge<strong>rate</strong>d the reaction in Treasury yields<br />
to the riskier environment and many investors are chasing very few assets. Yet,<br />
to call Treasuries safe is debateable. US credit default swap spreads are running<br />
close to 50bp at 5Y maturities. Thus, buying a 5Y Treasury with a yield <strong>of</strong> 0.74%<br />
and better protecting it against default with a CDS produces a nominal yield <strong>of</strong><br />
near zero for the next five years. Buying Treasuries is not for value hunters and<br />
forecasting yields is mostly a risk-on or risk-<strong>of</strong>f affair.<br />
We have significantly downgraded our 10Y UST yield and associated<br />
<strong>forecasts</strong> to reflect the drag from Europe, where the crisis has scaled new<br />
heights; escape velocity is going to take longer to achieve and uncertainty will<br />
hang in the air for longer. By end-2012, we now assume only a 2.5% 10Y yield<br />
as opposed to 3.0% previously.<br />
A yield <strong>of</strong> 2.5% is a low UST yield by any fundamental valuation but it is still quite<br />
a bit higher than where we are today. Our US macro <strong>forecasts</strong> are now slightly<br />
weaker but we do not forecast a dip back into recession. Nor are we are<br />
expecting a „Grexit‟ despite the obvious risks; and, whilst there is pain in Spain,<br />
we ultimately see the situation as correctable.<br />
With our 2.5% forecast, we are not assuming that all uncertainty regarding<br />
Europe is cleared up by the end <strong>of</strong> the year. Sovereign spreads will remain<br />
volatile and the depth <strong>of</strong> problems in Europe has created strong suspicions <strong>of</strong> any<br />
improvement in risk sentiment.<br />
The Federal Reserve‟s Maturity Extension Programme (MEP) will be extended for<br />
a few months to make it look as if the Fed is still in the game following the recent<br />
market stresses. But, growth is not so weak that the unemployment <strong>rate</strong> is<br />
expected to rise again and the case for QE3 is limited. So, we see MEP<br />
continuing in approximately its current form, since altering the programme for a<br />
short time would limit the effectiveness <strong>of</strong> any programme.<br />
A QE3 programme is unlikely to pull down Treasury yields. The observable<br />
pattern from previous Fed programmes is that yields might decline as a knee-jerk<br />
reaction to a new QE programme, but soon after yields will begin to rise as risky<br />
assets begin to perform once again.<br />
If investors are looking for a risk-free asset, we strongly suggest 0-2Y US<br />
paper but there is no benefit in going out further along the yield curve. A safe<br />
haven should protect capital but the rising volatility in bond prices fails this test. It<br />
is not unreasonable to forecast yields <strong>of</strong> 2.5%; such a yield is still low but would<br />
produce nearly a 9% decline in the value <strong>of</strong> the investment.<br />
David Keeble<br />
david.keeble@ca.cib.com<br />
+1 212 261 3274<br />
Macro Prospects – no. 137 – 3 rd quarter 2012 13
Eurozone <strong>Interest</strong> Rates: When (how) will the crisis end?<br />
Contrary to our expectations, the trend towards even lower „core‟ yields and even wider periphery sovereign risk spreads<br />
returned in full force in Q2 and seemingly remains in place. With yields apparently divorced from the usual „macro‟ factors,<br />
the crucial issue is when and how the downward spiral <strong>of</strong> the periphery can be halted. Expect a „hot summer‟.<br />
Rolling three-year correlation to<br />
OBL yields<br />
1.0<br />
0.5<br />
0.0<br />
-0.5<br />
-1.0<br />
Source: Bloomberg, Crédit <strong>Agricole</strong> CIB.<br />
What does it take to break<br />
momentum like this?<br />
10<br />
9<br />
8<br />
7<br />
6<br />
5<br />
4<br />
3<br />
2<br />
1<br />
0<br />
Jan-03 Jan-06 Jan-09 Jan-12<br />
5Y - risk correl 5Y - macro correl<br />
Sep-90 Sep-95<br />
Source: Bloomberg, Crédit <strong>Agricole</strong> CIB.<br />
Periphery bank buying <strong>of</strong><br />
government bonds<br />
35<br />
30<br />
25<br />
20<br />
15<br />
10<br />
5<br />
0<br />
-5<br />
-10<br />
%<br />
EUR bn<br />
Source: ECB, Crédit <strong>Agricole</strong> CIB.<br />
Luca Jellinek<br />
luca.jellinek@ca.cib.com<br />
+44 20 7214 6244<br />
5Y OBL yield<br />
Sep-00 Sep-05 Sep-10<br />
Jul-11 Oct-11 Jan-12 Apr-12<br />
Spain Italy<br />
At the time <strong>of</strong> the last quarterly, the <strong>economic</strong> surprise index was near a relative<br />
peak and we opined that Eurozone <strong>rate</strong>s should catch up with that reality, given<br />
the strong signs <strong>of</strong> reduced periphery sovereign risk aversion. Since then, macro<br />
figures have consistently disappointed expectations, even as the latter have<br />
been continuously adjusted downwards. The root cause for the unexpected<br />
bullish run in core bonds, however, is not really down to poor cyclical<br />
performance but rather to the sharp re-emergence <strong>of</strong> crisis levels in periphery<br />
sovereign bond yields. Indeed, the intensity <strong>of</strong> the crisis is likely to be one <strong>of</strong> the<br />
main reasons why the Eurozone economy – as well as the broader context <strong>of</strong> the<br />
Atlantic rim – has turned for the worse. The waning importance <strong>of</strong> purely<br />
<strong>economic</strong> data in determining yield levels is evident when considering how<br />
models calib<strong>rate</strong>d up to 2009 seem to have broken down almost completely and<br />
even, from a simple statistical standpoint, by the falling correlation between <strong>rate</strong>s<br />
and macro indexes, as opposed to risk measures (top chart). In our example, the<br />
„risk‟ index is the average <strong>of</strong> the normalised level <strong>of</strong> average 10Y periphery EGB<br />
swap spreads and the average 10Y bank CDS level for the major European<br />
banks.<br />
If the cause <strong>of</strong> the strength <strong>of</strong> the core Eurozone market is clearly the constantly<br />
mounting periphery risk aversion, the symptom <strong>of</strong> that strength is the relative<br />
ease with which new lows have been continuously set in German yields and<br />
swap <strong>rate</strong>s. A similar tendency to break violently lower has been evident in the<br />
10s30s spread and other longer-maturity curve slope measures, with the very fact<br />
<strong>of</strong> breaking through key levels bringing with them hedging flows that perpetuate<br />
the trend.<br />
What are the prospects for a turnaround in the poor periphery sentiment? The<br />
root <strong>of</strong> the problem is the difficulty that many sovereigns continue to have in<br />
addressing their fiscal stance, growth prospects and banking system. All<br />
this has been aggravated by grudging, <strong>of</strong>ten perverse (think PSI) policy response<br />
from the Eurozone as a whole. While EU/ECB support has gradually become<br />
more flexible and plentiful, the delivery has tended to lag badly behind<br />
requirements. Overall, for instance, we view the very recent decision to support<br />
Spain‟s banking industry recapitalisation through a „non-programme‟ EFSF or<br />
ESM loan as positive, but we are less sure that it will be enough to foster the sort<br />
<strong>of</strong> renaissance in „foreign‟ demand that periphery markets badly need. Following<br />
the ECB‟s late-2011 liquidity support step-up, Spanish and Italian banks<br />
became the key buyers <strong>of</strong> government supply but, as markets began to exact a<br />
rising toll on their cost <strong>of</strong> capital and natural deposit growth decele<strong>rate</strong>d (into<br />
negative territory for some), local banks‟ appetite for government auctions<br />
appears to have waned (bottom chart). On top <strong>of</strong> all that, the perception <strong>of</strong><br />
Greece‟s inability to stem its red ink weighs heavily on the market, despite the<br />
generally positive electoral outcome. Going into the <strong>of</strong>ten difficult summer period,<br />
the question <strong>of</strong> how well bid Spanish and Italian supply will be remains<br />
unanswered.<br />
Our core set <strong>of</strong> <strong>forecasts</strong> is based on the assumption that, however gradually, the<br />
combination <strong>of</strong> EU/ECB support and home-grown <strong>economic</strong>/fiscal reform will<br />
deliver some stabilisation. In other words, that some broader demand is<br />
glimpsed in time for the primary market to remain open to Spain and Italy at<br />
terms that they can more or less afford. In such a scenario, core yields<br />
should rise from the lows they have set (negative yields all the way out to 10Y<br />
and beyond). Nonetheless, the ‗risk‘ scenario <strong>of</strong> further deterioration in the<br />
funding access <strong>of</strong> periphery sovereigns cannot be considered a very low<br />
probability one and, under such a scenario, further compression towards (and<br />
below) 0% for core <strong>rate</strong>s would be likely, especially as such a scenario would<br />
have very negative repercussions on the real economy.<br />
Macro Prospects – no. 137 – 3 rd quarter 2012 14
JPY<br />
JPY<br />
CHF<br />
CHF<br />
SEK<br />
SEK<br />
EUR<br />
USD<br />
GBP<br />
GBP<br />
NOK<br />
NOK<br />
NZD<br />
NZD<br />
CAD<br />
AUD<br />
AUD<br />
CAD<br />
Exchange Rates: USD reigns supreme<br />
The USD continues to reign supreme and is likely to strengthen further over the coming weeks against the background <strong>of</strong><br />
elevated risk aversion. Further out into Q3 and especially in Q4 we see some stabilisation <strong>of</strong> risk currencies and, while the<br />
USD will remain firm versus EUR, JPY, GBP and CHF, we expect it to lose ground against high-beta currencies<br />
USD to rise gradually<br />
125<br />
115<br />
105<br />
95<br />
85<br />
75<br />
65<br />
01 03 05 07 09 11 13<br />
USD Index<br />
USD Index (CA CIB forecast)<br />
Source: Crédit <strong>Agricole</strong> CIB, Bloomberg<br />
Commodity currencies <strong>of</strong>fer the best<br />
G10 FX returns<br />
15<br />
10<br />
5<br />
0<br />
-5<br />
-10<br />
-15<br />
%<br />
12M Carry-adjusted Return<br />
(vs USD)<br />
Source: Crédit <strong>Agricole</strong> CIB, Bloomberg<br />
Most currencies set to strengthen<br />
versus EUR<br />
15<br />
10<br />
5<br />
0<br />
-5<br />
-10<br />
-15<br />
% 12M Carry-adjusted Return<br />
(vs EUR)<br />
Source: Crédit <strong>Agricole</strong> CIB, Bloomberg<br />
Mitul Kotecha<br />
mitul.kotecha@ca-cib.com<br />
+852 28 26 98 21<br />
<strong>forecasts</strong><br />
Risk has once again been the dominant theme running through FX markets with<br />
fundamentals counting for little. The jump in our risk barometer above its high<br />
risk-aversion band means that FX markets have moved into risk-‗hating‘<br />
territory. The road ahead is unfortunately not going to be a smooth one and, as<br />
our short-term <strong>forecasts</strong> reveal, there are still plenty <strong>of</strong> downside risks to highbeta<br />
currencies in the weeks ahead. Most currencies are finding direction from<br />
events in Greece, Spain and the Eurozone in general. The lack <strong>of</strong> independent<br />
direction means investors with USD positions dominant in their portfolios are<br />
doing either very well or very badly. While we see risks <strong>of</strong> further USD<br />
appreciation against most currencies over the short term, we are wary <strong>of</strong> extreme<br />
market positioning (USD speculative long positions have reached a record level)<br />
and consequently a snap-back in risk currencies in the event <strong>of</strong> good news. Our<br />
preference in the current environment is to play relative value trades.<br />
The game <strong>of</strong> brinkmanship being played by national governments and the ECB<br />
suggests that little action will be forthcoming any time soon. This will leave risk/<br />
high-beta/commodity currencies under pressure. Although there is scope for<br />
periodic reversals we suggest selling into risk rallies until there are clearer<br />
signs <strong>of</strong> concrete Eurozone action. Even then, one should not take the<br />
Eurozone in isolation. Markets are becoming increasingly concerned with global<br />
growth. While a disaster or Eurozone break-up would undoubtedly result in a<br />
sharper-than-anticipated slowing in global growth, there are signs that growth<br />
momentum is already slowing. In this respect, currencies with high sensitivity to<br />
the global growth cycle will be threatened further.<br />
The authorities globally have some ammunition to defend against the deepening<br />
crisis but the efficacy as well as desire to utilise fresh crisis-fighting measures is<br />
debatable. In Europe, many are looking to the ECB to act as lender <strong>of</strong> last resort,<br />
perhaps monetising Eurozone debt or at the least providing a third long-term<br />
refinancing operation (LTRO). This would undoubtedly help to calm nerves,<br />
boosting the EUR and risk currencies. Whether there would be any lasting<br />
impact is doubtful unless progress on underlying structural issues moves forward.<br />
The ECB is reluctant in any case to provide more support as it does not want to<br />
let national Eurozone governments <strong>of</strong>f the hook in their austerity drives.<br />
Similarly, if there were steps towards a common Eurobond, Europe-wide bank<br />
deposit guarantees, generally stronger co-operation between governments, US<br />
Fed QE3, and fresh stimulus in China, etc, a more sustainable rally in the EUR<br />
and risk currencies would occur. At least one or two <strong>of</strong> these are possible but it<br />
will require an even bigger deterioration in sentiment/escalation in crisis risks for<br />
policymakers to move into action. In the meantime, any periods <strong>of</strong> easing in<br />
pressure will be few and far between. The EUR will be prone to further selling<br />
pressure and a potential drop to around 1.20 before any recovery can take<br />
place, although bouts <strong>of</strong> short covering cannot be ruled out.<br />
Our <strong>forecasts</strong> reflect some stabilisation and even recovery for most currencies<br />
against the USD into Q3 and especially in Q4 when (we hope) there will be some<br />
resolution <strong>of</strong> the situation in the Eurozone. In turn, a calmer Europe will allow<br />
risk appetite to improve and capital flows to emerging-market currencies to<br />
resume as relatively attractive fundamentals prove irresistible to investors. Major<br />
currencies will also experience some shift in trend over the medium term (Q3 and<br />
Q4), with safe-haven currencies registering less demand, resulting in weakness in<br />
the JPY and CHF. The EUR will see some recovery towards year-end but will still<br />
end the year below 1.30, while in contrast commodity currencies such as AUD,<br />
NZD and CAD will perform well. GBP will also make up some ground against the<br />
USD and will likely stabilise around 0.80 against the EUR, benefiting from<br />
relatively better growth prospects than the Eurozone.<br />
Macro Prospects – no. 137 – 3 rd quarter 2012 15
Gold: downside risks<br />
Gold prices have dropped sharply, notwithstanding its recent bounce. Gold is clearly losing its lustre as reflected by<br />
weakening speculative demand. Although uncertainty over more Fed QE and elevated risk aversion imply that any decline<br />
in gold prices will be gradual, we expect further downside over coming months to USD1,475 by the end <strong>of</strong> 2012.<br />
Firmer USD weighs on gold prices<br />
72<br />
74<br />
76<br />
78<br />
80<br />
82<br />
84<br />
Jun-11 Sep-11 Dec-11 Mar-12<br />
DXY, inverted Gold prices (rhs)<br />
Source: Crédit <strong>Agricole</strong> CIB, Bloomberg<br />
Speculative appetite for gold slides<br />
200<br />
190<br />
180<br />
170<br />
160<br />
150<br />
140<br />
130<br />
120<br />
Source: Crédit <strong>Agricole</strong> CIB, Bloomberg<br />
Gold losing its safe-haven allure<br />
Source: Crédit <strong>Agricole</strong> CIB, Bloomberg<br />
Mitul Kotecha<br />
mitul.kotecha@ca-cib.com<br />
+852 28 26 98 21<br />
2000<br />
1900<br />
1800<br />
1700<br />
1600<br />
1500<br />
1400<br />
Sep-11 Nov-11 Jan-12 Mar-12 May-12<br />
Net Gold Speculative Contracts (000)<br />
Gold price (rhs)<br />
135<br />
125<br />
115<br />
105<br />
95<br />
85<br />
75<br />
Jun-11<br />
.<br />
Sep-11 Dec-11 Mar-12<br />
CACIB Risk Barometer<br />
Gold prices rhs<br />
1850<br />
1750<br />
1650<br />
1550<br />
2000<br />
1900<br />
1800<br />
1700<br />
1600<br />
1500<br />
1400<br />
<strong>Interest</strong>ingly, and perhaps surprisingly, after a strong rally during the first couple<br />
<strong>of</strong> months <strong>of</strong> the year, gold prices have dropped sharply, albeit notwithstanding<br />
the recent bounce in prices. The fall in gold is surprising because it has come at a<br />
time when risk aversion has intensified. Indeed, gold‟s relationship with risk has<br />
actually inverted over recent months, with a negative but significant correlation<br />
registered over the past three months between gold prices and the Crédit<br />
<strong>Agricole</strong> CIB Risk Aversion Barometer. The lustre <strong>of</strong> gold as a safe haven<br />
seems to have faded as investors pull capital out <strong>of</strong> this asset class. However,<br />
gold‟s drop is not unusual when compared to other commodity prices, with oil and<br />
copper prices falling too. Our <strong>forecasts</strong> continue to show a steady decline in<br />
gold prices over coming months, with the recent bounce likely to prove<br />
temporary.<br />
The deterioration in sentiment towards gold prices has been reflected in the drop<br />
in speculative appetite for the commodity. Speculative demand for gold hit a<br />
cyclical high in August 2011 but since then there has been a steady<br />
reduction in gold demand from these investors. Indeed, CFTC IMM data<br />
reveals that speculative gold positioning has dropped well below its three-month<br />
average although it is still well above its all-time lows reached in February 2005.<br />
Investors became increasingly bullish about gold prices through 2011, with prices<br />
reaching a high around USD1,921 in September last year. The sharp drop in gold<br />
prices over the same month, in part due to an increase in margin requirements at<br />
the CME, shook speculative investors, and it appears that confidence has not<br />
recovered since.<br />
Heightened global uncertainty and elevated risk aversion may yet prevent<br />
gold prices from slipping too quickly although the bigger impact may come<br />
from expectations <strong>of</strong> another round <strong>of</strong> US Fed quantitative easing. Recent weaker<br />
US data, especially the May jobs report, has fuelled expectations <strong>of</strong> fresh Fed<br />
balance sheet expansion. In turn, this has driven gold prices higher over recent<br />
weeks. Clearly, should the Fed implement more QE it will help to renew the<br />
attraction <strong>of</strong> gold, given that once again markets will see a consequence <strong>of</strong> the<br />
Fed‟s action as a means to debase the USD.<br />
Despite the s<strong>of</strong>ter data we doubt that the Fed is on the verge <strong>of</strong> embarking on<br />
more QE, although a shift in stance cannot be ruled out if US <strong>economic</strong><br />
conditions worsen further and/or the Eurozone crisis escalates. Assuming no<br />
more QE and no more USD debasement, gold prices ought to decline over<br />
coming months. In fact, there are more prospects for USD strength than<br />
weakness, and one <strong>of</strong> the biggest factors putting downward pressure on<br />
gold prices has been the strength <strong>of</strong> the USD. While we do not expect the<br />
USD to continue to strengthen at the same pace, further gradual gains in the<br />
currency will imply lower gold prices<br />
Another determinant <strong>of</strong> gold prices is demand from India and China. Growth in<br />
both countries is slowing, suggesting that gold demand will also weaken.<br />
While we certainly do not expect a collapse in demand from either country we<br />
have no doubt that, compared to last year, the strength <strong>of</strong> demand will be s<strong>of</strong>ter<br />
over coming months. Although we still look for a s<strong>of</strong>t landing in China, the Indian<br />
<strong>economic</strong> picture has clearly deterio<strong>rate</strong>d while the INR has weakened.<br />
Overall, a weaker real demand picture taken together with reduced speculative<br />
demand implies little support for gold prices. Elevated risk aversion and<br />
uncertainty about QE will help to limit any downside pressure on gold prices.<br />
However, a firmer USD in general will continue to weigh on prices. Assuming<br />
that risk appetite eventually improves, it will imply even less upward<br />
potential for gold prices.<br />
Macro Prospects – no. 137 – 3 rd quarter 2012 16
Energy: Oil prices back to more sustainable levels<br />
Three months ago, we expected a gradual easing <strong>of</strong> the Iranian crisis, hence an end-year target <strong>of</strong> USD110/bl for Brent.<br />
Indeed, although the dispute over Iranian nuclear ambitions has s<strong>of</strong>tened, the Eurozone debt crisis and fears regarding<br />
global growth have also made a major comeback. Our updated end-year target is USD105/bl, with downside risks.<br />
The ‘Iranian’ premium vanishes<br />
135<br />
130<br />
125<br />
120<br />
115<br />
110<br />
105<br />
27-12-2011: First<br />
Iranian threats in<br />
regard Strait <strong>of</strong><br />
Hormuz<br />
200<br />
190<br />
180<br />
170<br />
160<br />
100<br />
=> ...end <strong>of</strong> oil<br />
150<br />
95<br />
underperformance?<br />
140<br />
Oct-11 Dec-11 Feb-12 Apr-12 Jun-12<br />
Brent (USD/bl)<br />
End May 2012.<br />
End <strong>of</strong> the specific<br />
Iranian premium?<br />
Base metals Index (rs)<br />
Source: Crédit <strong>Agricole</strong> CIB, Bloomberg<br />
Jean-François Perrin<br />
jean-francois.perrin@ca-cib.com<br />
+33 1 41 89 94 22<br />
During Q211, crude oil prices (Brent) retreated sharply, from USD122/bl on<br />
average in March to less than USD100/bl in early June. Some <strong>of</strong> the correction is<br />
related to the weaker <strong>economic</strong> environment and depressed risk appetite, factors<br />
which also justify the retreat in other industrial commodities like base metals.<br />
However, the correction in oil has been sharper than that for metals (see chart),<br />
because <strong>of</strong> some oil-specific factors. More precisely, (1) a shrinking Iran-related<br />
crisis premium (fewer headlines on the topic) and (2) supply continuing to<br />
progress, namely in the US, Saudi Arabia, and Libya.<br />
Our central scenario for oil, which was slightly bearish in April (end-year target <strong>of</strong><br />
USD110/bl vs spot prices around USD120/bl) and more cautious than the<br />
consensus, as it already included some s<strong>of</strong>tening <strong>of</strong> the Iranian threat, has been<br />
adjusted downwards modestly, with an end-year target <strong>of</strong> USD105/bl. The<br />
expected recovery now comes from less acute risk sentiment expected by yearend<br />
(see our macro and European <strong>rate</strong>s <strong>forecasts</strong>) and from expected lower oil<br />
stocks, as consumption will resume in Q3 and Q4.<br />
Beyond the central target, which has not changed that much, the upside risk <strong>of</strong><br />
early Q212 has turned into a downside risk. Indeed, as the Iranian threat now<br />
looks less uncontrollable, the very uncertain short-term outlook on the global<br />
economy (Europe in particular but also China and India) combined with more<br />
stable supply (also from still-growing US production) means a risk <strong>of</strong> prices<br />
falling even more and gyrating around USD100/bl rather than around<br />
USD110/bl.<br />
Macro Prospects – no. 137 – 3 rd quarter 2012 17
US: Muddling through<br />
We look for growth at a 2.0-2.5% <strong>rate</strong> this year and next. At that pace unemployment will be slow to decline. Inflation is<br />
expected to remain close to the Fed‟s 2% inflation target and monetary policy will remain exceptionally accommodative<br />
throughout the forecast horizon. Fiscal consolidation is unlikely to be excessive but policy uncertainty will weigh on growth.<br />
Pent-up demand drives auto sales<br />
12<br />
11<br />
10<br />
9<br />
8<br />
7<br />
6<br />
Jun-08 May-09 Apr-10 Mar-11 Feb-12<br />
Ind Prod: Motor Vehicles (SA,<br />
2007=100) rhs<br />
Total Domestic Light Vehicle Retail<br />
Sales (SAAR, m Units)<br />
Source: Autodata, Federal Reserve Board/<br />
Haver Analytics<br />
Spending outpacing income<br />
4%<br />
3%<br />
2%<br />
1%<br />
0%<br />
-1%<br />
-2%<br />
Jan-10 Sep-10 May-11 Jan-12<br />
Source: Bureau <strong>of</strong> Economic Analysis/Haver<br />
Analytics<br />
Mike Carey<br />
michael.carey@ca-cib.com<br />
+1 212 261 7134<br />
120<br />
110<br />
100<br />
90<br />
80<br />
70<br />
60<br />
50<br />
40<br />
30<br />
20<br />
4%<br />
3%<br />
2%<br />
1%<br />
0%<br />
-1%<br />
-2%<br />
Real Personal Consump Expends<br />
(SAAR, USDbn chn 2005) % chg YoY<br />
Real Disposable Personal Income<br />
(SAAR, USDbn chn 2005) % chg YoY<br />
We look for real GDP growth near 2.0% in Q212 and around 2.3% in the<br />
second half <strong>of</strong> the year. Barring external shocks, domestic growth should<br />
strengthen in 2013 as the headwinds facing growth from housing, balance<br />
sheet deleveraging and policy uncertainty abate.<br />
Consumer spending over the near term is expected to grow at a mode<strong>rate</strong><br />
pace this year, faced with both positive and negative influences. On the<br />
positive side, we see pent-up demand continuing to drive spending on big-ticket<br />
items such as motor vehicles. The latter averaged a 14.5m unit sales pace in Q1<br />
compared with 12.8m for 2011. In addition, declining energy prices are boosting<br />
real discretionary consumer spending power. That will come in handy as there<br />
are also forces at play that will throttle consumer spending moving forward.<br />
Recent revisions to Q4 compensation data show that income grew much more<br />
slowly than previously estimated and it is lagging behind the growth in spending.<br />
That can only go on for so long, as the savings <strong>rate</strong> has been declining and<br />
consumers, with the notable exception <strong>of</strong> student loans, are still reducing their<br />
use <strong>of</strong> credit.<br />
The excess supply <strong>of</strong> homes, foreclosure sales and tight lending conditions<br />
have held back housing activity to levels well below those consistent with<br />
the underlying <strong>economic</strong> and demographic trends. This has been an<br />
important headwind that has led to a weak <strong>economic</strong> recovery. However, there<br />
are signs that home prices are forming a bottom this year, and many markets will<br />
see a pick-up in prices and in building and sales activity this year that will become<br />
more pronounced and widespread in 2013. The improvement in housing will also<br />
gene<strong>rate</strong> increased consumer spending on household durable goods to put in the<br />
new homes.<br />
The underlying fundamentals for capex spending, such as healthy<br />
corpo<strong>rate</strong> balance sheets and rising capacity utilisation, will likely support<br />
solid growth in business spending on equipment and s<strong>of</strong>tware. Nonresidential<br />
business investment spending slowed in Q1. Some <strong>of</strong> that slowdown<br />
may reflect the end <strong>of</strong> bonus depreciation allowances last year, but we believe<br />
that uncertainty over the outlook (for taxes, healthcare costs & global demand)<br />
led to increasing caution on the part <strong>of</strong> businesses that will slowly lessen in the<br />
second half. Business investment in inventories will likely make a negative<br />
contribution to Q2 real GDP growth but play a minor role in the second half <strong>of</strong> the<br />
year.<br />
We do not expect a significant positive contribution to growth from real net<br />
exports given the expected strengthening <strong>of</strong> the USD and weak <strong>economic</strong><br />
conditions in Europe and slower growth in emerging markets.<br />
Inflation is expected to remain restrained this year and next with core<br />
inflation running just below the Fed‘s 2.0% target. While inflation rose with<br />
higher energy prices last year, the most recent declines in energy prices will put<br />
downward pressure on the top-line inflation figures as expected by the Fed. The<br />
slack in the labour market will take time to be absorbed with growth near its<br />
potential <strong>rate</strong>. This suggests that wage pressures will be quite modest, and it is<br />
difficult to get a sustained inflationary process in train without wages growth<br />
outpacing productivity growth. In our view, commodity shock inflation is selflimiting<br />
as it does not enter the wage-price nexus given the current structure <strong>of</strong><br />
the US labour market. This was not always the case historically when wage price<br />
indexation was more prevalent. Moreover, inflation expectations remain well<br />
anchored. The latter reflects some confidence that policymakers will respond at<br />
the right time to the withdrawal <strong>of</strong> the current exceptional monetary policy<br />
accommodation and avoid any potential inflationary pressures.<br />
Macro Prospects – no. 137 – 3 rd quarter 2012 18
Fundamentals support rising capex<br />
84<br />
80<br />
76<br />
72<br />
68<br />
64<br />
Source: Federal Reserve Board, Census<br />
Bureau/Haver Analytics<br />
Core inflation subdued<br />
2.8%<br />
2.4%<br />
2.0%<br />
1.6%<br />
1.2%<br />
0.8%<br />
02 03 04 05 06 07 08 09 10 11 12<br />
Source: BEA, WSJ/Haver<br />
Fiscal cliff!<br />
70000<br />
60000<br />
50000<br />
40000<br />
30000<br />
20000<br />
10000<br />
Mfrs' New Orders: Nondefense Capital<br />
Goods ex Aircraft (SA, USDm) rhs<br />
Capacity Utilization: Ind (SA, % <strong>of</strong><br />
Capacity)<br />
Deficit reduction under current law USDbn<br />
Deficit FY12 1,171<br />
Deficit FY13 612<br />
Reduction in deficit 560<br />
1) Changes in revenues 399<br />
<strong>of</strong> which expiring „Bush Taxcuts‟ 221<br />
2) Changes in spending -103<br />
<strong>of</strong> which BCA automatic cuts -65<br />
3) Other changes in rev + spending -58<br />
0<br />
140<br />
120<br />
100<br />
80<br />
60<br />
40<br />
20<br />
02 03 04 05 06 07 08 09 10 11 12<br />
Spot Oil Price: West Texas<br />
Intermediate [Prior'82=Posted Price]<br />
(USD/bbl) rhs<br />
PCE less Food & Energy: Chain Price<br />
Index (SA, 2005=100) % Chg YoY<br />
Fiscal policy in dysfunctional Washington DC<br />
As opinion polls show that <strong>economic</strong> growth is a more important election<br />
issue than the deficit, we expect Washington <strong>of</strong>ficials to avoid committing<br />
political suicide. The looming „fiscal cliff‟ at year-end 2012 will move back into<br />
focus as the November election nears. In addition, the Federal government debt<br />
ceiling will have to be raised again, likely early in 2013. The Congressional<br />
Budget Office estimates that programmes slated to expire at year-end would trim<br />
the Federal deficit by roughly 5% <strong>of</strong> GDP between calendar year 2012 and 2013.<br />
That would likely result in a mild recession early next year if implemented. Mr<br />
Bernanke has stated that, given the size <strong>of</strong> the fiscal cliff, the Federal Reserve<br />
would not be able to use monetary policy to <strong>of</strong>fset the negative impact on growth.<br />
We believe that most <strong>of</strong> the current tax <strong>rate</strong>s will be extended. However,<br />
current low payroll tax <strong>rate</strong>s are expected to revert back to previous<br />
(higher) <strong>rate</strong>s and emergency unemployment benefits may be reduced or<br />
eliminated, creating fiscal drag <strong>of</strong> about 1.5-1.75% <strong>of</strong> GDP. No progress is<br />
expected until after the November elections. Depending on the election results, a<br />
deal could be reached during the „lame duck‟ session or early next year with the<br />
results made retroactive to 1 January. A deal may be linked to broad income tax<br />
reform measures that could lower some tax <strong>rate</strong>s but increase revenues by<br />
eliminating deductions and other tax preferences, thereby broadening the tax<br />
base. The uncertainty related to <strong>economic</strong> policy outcomes will likely lead firms to<br />
hold back on significant investment and hiring decisions until clarity improves.<br />
The „last-minute‟ deals typical in DC are also likely to add to financial market<br />
volatility.<br />
Fed state <strong>of</strong> play<br />
The Fed funds target <strong>rate</strong> was left unchanged at 0.00-0.25% in June and<br />
conditions are expected to warrant exceptionally low levels for the Federal<br />
Funds <strong>rate</strong> at least until late 2014. The FOMC decided to extend its current<br />
maturity extension program through year-end by USD267bn.<br />
The FOMC decision to increase its policy accommodation through the maturity<br />
extension program is based on concerns that the recent slowdown in <strong>economic</strong><br />
activity increases the risk that the Fed will not make material progress in reducing<br />
unemployment in line with its mandate. The Fed remains “prepared to take further<br />
action as appropriate to promote a stronger <strong>economic</strong> recovery and sustained<br />
improvement in labor market conditions in a context <strong>of</strong> price stability”.<br />
Extending Operation Twist by about USD267bn buys more time for the Fed to<br />
evaluate incoming data. It has the advantage <strong>of</strong> not expanding the Fed‟s balance<br />
sheet and avoids some <strong>of</strong> the problems <strong>of</strong> a larger Twist programme. It shows<br />
that the Fed is flexible in responding to evolving risks, which should be supportive<br />
for market sentiment.<br />
Source: Crédit <strong>Agricole</strong> CIB<br />
Steady Fed policy<br />
8<br />
7<br />
6<br />
5<br />
4<br />
3<br />
2<br />
1<br />
0<br />
Appropriate Timing <strong>of</strong> Policy<br />
Firming<br />
2012 2013 2014 2015 2016<br />
January April<br />
Source: Federal Reserve Board<br />
Macro Prospects – no. 137 – 3 rd quarter 2012 19
Q111<br />
Q211<br />
Q311<br />
Q411<br />
Q112<br />
Q212<br />
Q312<br />
Q412<br />
Q113<br />
Q213<br />
Q313<br />
Q413<br />
Japan: Mind the external risks<br />
The Japanese economy, after stalling in the Oct-Dec quarter, yet again showed a robust recovery with +1.2% QoQ real<br />
GDP growth in Jan-Mar. We maintain our view <strong>of</strong> strong real GDP growth for this year <strong>of</strong> +2.5%. However, one <strong>of</strong> the<br />
lessons from the Lehman crisis for Japan is that the Eurozone government crisis is not just a misfortune <strong>of</strong> strangers.<br />
Real GDP growth projection<br />
2.5<br />
2.0<br />
1.5<br />
1.0<br />
0.5<br />
0.0<br />
-0.5<br />
-1.0<br />
-1.5<br />
-2.0<br />
-2.5<br />
Source: Cabinet Office, Crédit <strong>Agricole</strong> CIB<br />
Inflation outlook<br />
0.8<br />
0.6<br />
0.4<br />
0.2<br />
0.0<br />
-0.2<br />
-0.4<br />
-0.6<br />
-0.8<br />
-1.0<br />
% QoQ<br />
Source: Ministry <strong>of</strong> Internal Affairs and<br />
Communications, Crédit <strong>Agricole</strong> CIB<br />
International exposure <strong>of</strong> Japanese<br />
banks (Dec 2011)<br />
150<br />
140<br />
130<br />
120<br />
110<br />
100<br />
90<br />
80<br />
70<br />
60<br />
50<br />
% YoY<br />
Source: Bank for International Settlements<br />
Yoshiro Sato<br />
yoshiro.sato@ca-cib.com<br />
+81 3 45 80 53 37<br />
Forecasts<br />
Forecasts<br />
11 12 13 14<br />
Core CPI<br />
USDbn %<br />
Q105 Q306 Q108 Q309 Q111<br />
Total exposure to Portugal, Italy,<br />
Ireland, Greece and Spain<br />
Share <strong>of</strong> total exposure (rhs)<br />
7.0<br />
6.0<br />
5.0<br />
4.0<br />
3.0<br />
2.0<br />
1.0<br />
0.0<br />
The Japanese economy, following a stall in Oct-Dec, yet again showed a robust<br />
recovery with +1.2% QoQ real GDP growth. Although capex declined significantly<br />
by -2.1% QoQ, highlighting that the uncertain <strong>economic</strong> outlook for major foreign<br />
economies is weighing on business sentiment, other demand components<br />
showed that domestic <strong>economic</strong> conditions look set to return to a steady recovery<br />
path, especially with the sharp increase in public investment (+3.8% QoQ)<br />
proving the smooth execution <strong>of</strong> the counter-disaster stimulus packages.<br />
Although we do note that the robust <strong>economic</strong> growth was partly on the back <strong>of</strong> a<br />
technical factor brought in by the leap-year effect (ie, one more day than usual for<br />
<strong>economic</strong> activities), we still maintain our view that (1) steady labour market<br />
conditions should support private consumption despite a near-term technical<br />
adjustment due to the calendar impact, and (2) the execution <strong>of</strong> counter-disaster<br />
stimulus packages on public investment should have positive repercussions on<br />
private capex. These factors should lead the <strong>economic</strong> recovery, and we<br />
continue to expect strong real GDP growth <strong>of</strong> +2.5% for 2012 followed by an<br />
adjustment to near-potential growth <strong>of</strong> +1.1% for 2013.<br />
Despite the steady <strong>economic</strong> recovery expected going forward, the monetary<br />
policy stance <strong>of</strong> the Bank <strong>of</strong> Japan should continue to stay on the dovish<br />
side. As we assume, much <strong>of</strong> the <strong>economic</strong> recovery will come from domestic<br />
demand but we do point out that risks to the growth forecast lie to the downside<br />
especially if the Eurozone government debt issue deterio<strong>rate</strong>s more than our<br />
main scenario assumes and/or China‟s <strong>economic</strong> adjustment turns out to be<br />
more severe. In addition, while it should be the case that the robust growth<br />
recorded in the Jan-Mar quarter and the stable <strong>economic</strong> recovery going forward<br />
should contribute to a mode<strong>rate</strong> rise in the inflation <strong>rate</strong> through a narrowing<br />
output gap, our inflation forecast envisages that it will still be short <strong>of</strong> the BoJ‟s<br />
price stability goal <strong>of</strong> +1% for the foreseeable forecast horizon. All in all, it is the<br />
case that the present <strong>economic</strong> conditions are almost as the Bank <strong>of</strong> Japan<br />
assumes in its main scenario, but the central bank has no choice but to stay<br />
cautious due to the combination <strong>of</strong> external risks and only benign inflation <strong>rate</strong>. In<br />
other words, the Bank <strong>of</strong> Japan would like to avoid having only a few choices left<br />
by maintaining a dovish stance despite the <strong>economic</strong> recovery. We currently<br />
expect that the Bank <strong>of</strong> Japan could decide to take further accommodative<br />
measures (possibly expansion <strong>of</strong> the asset purchase fund) in the October<br />
meeting where the BoJ has to present its <strong>economic</strong> outlook up to FY14.<br />
Aside from the fact that Japan‘s debt to nominal GDP ratio is by far the<br />
highest among developed economies, one <strong>of</strong> the major lessons from the<br />
global financial crisis triggered by Lehman is that the Eurozone government<br />
bond crisis is never just a misfortune <strong>of</strong> strangers. When the last global<br />
financial crisis emerged in the form <strong>of</strong> the widespread securitised products that<br />
incorpo<strong>rate</strong>d subprime loans, the instant reaction from the Japanese policy<br />
authorities was generally that it would have a minor impact, if not tiny, on the<br />
Japanese economy given the relatively smaller exposure <strong>of</strong> domestic financial<br />
institutions to such financial products. Looking at the current issue, according to<br />
data from the Bank for International Settlements, Japanese banks‟ total<br />
international exposure to troubled Eurozone countries (Portugal, Italy, Ireland,<br />
Greece, and Spain) amounted to USD73.0bn as at December 2011 (ultimate risk<br />
basis) – and this is only 2.7% <strong>of</strong> the total international exposure <strong>of</strong> USD2.7trn.<br />
However, as the experience <strong>of</strong> the last crisis tells us, what really matters is not<br />
the size <strong>of</strong> the direct exposure but rather that the kind <strong>of</strong> crisis the global<br />
economy is currently facing takes its toll on real <strong>economic</strong> activity through<br />
international trade. Japan recently expressed an intention to increase its stake in<br />
the IMF, which means issuing more debt; it is also in the country‟s interest to<br />
prevent the crisis from turning into another disaster.<br />
Macro Prospects – no. 137 – 3 rd quarter 2012 20
Eurozone: Waiting for Godot?<br />
The Eurozone is buying time until it can develop a common st<strong>rate</strong>gy and decide how much sovereignty that means<br />
abandoning in order to put a halt to the spiralling crisis. In our scenario, that incremental approach will succeed in keeping<br />
the Eurozone economy‟s head above water. We consider that the risk <strong>of</strong> backsliding has increased sufficiently for<br />
politicians to take it firmly in hand and reassert the common vision, downgrading the possibility <strong>of</strong> exit <strong>of</strong> one or more EMU<br />
members to extreme status with a very low probability.<br />
Eurozone: public deficit <strong>forecasts</strong><br />
% <strong>of</strong> GDP<br />
-2<br />
-4<br />
-6<br />
-8<br />
-10<br />
-12<br />
-14<br />
-16<br />
Source: Crédit <strong>Agricole</strong> SA<br />
EMU: growth <strong>forecasts</strong> (%)<br />
6<br />
4<br />
2<br />
0<br />
-2<br />
-4<br />
-6<br />
-8<br />
0<br />
2009 2010 2011 2012 2013<br />
Italy France Spain Portugal Greece<br />
Source: Crédit <strong>Agricole</strong> SA<br />
EMU: contributions to growth<br />
2.0<br />
1.0<br />
0.0<br />
-1.0<br />
-2.0<br />
07 08 09 10 11 12<br />
EMU<br />
France<br />
Spain<br />
%YoY<br />
Germany<br />
Italy<br />
2010 2011 2012 2013<br />
Change in inventories<br />
Domestic demand<br />
Net export<br />
GDP<br />
Source: Datastream, Crédit <strong>Agricole</strong> SA<br />
Paola Monperrus-Veroni<br />
paola.monperrus-veroni@credit-agricole-sa.fr<br />
+33 1 43 23 67 55<br />
At a time when the risk <strong>of</strong> financial meltdown leading to the break-up <strong>of</strong><br />
EMU is rising, the EU‘s <strong>economic</strong> authorities are trying their best to stave<br />
<strong>of</strong>f the crisis and normalise market conditions. But there is scant room for<br />
manoeuvre, since the Treaty did not make any provision for the eventuality <strong>of</strong> one<br />
<strong>of</strong> its member states defaulting. The future <strong>of</strong> the Eurozone is in the hands <strong>of</strong> the<br />
politicians, who must now decide how far they should go in consolidating the<br />
Eurozone edifice. And the electoral cycle is not conducive to a rapid lifting <strong>of</strong><br />
uncertainties or to the resumption <strong>of</strong> constructive dialogue between<br />
member states. In the meantime we move slowly towards a more growthoriented<br />
st<strong>rate</strong>gy, with an emphasis on structural reform (in the German version)<br />
and also on innovative forms <strong>of</strong> quality project finance or infrastructure finance at<br />
a pan-European level (in the French version).<br />
Efforts made in 2011 with respect to balancing current account deficits and<br />
fiscal consolidation have made a degree <strong>of</strong> st<strong>rate</strong>gic easing possible, which<br />
should dampen any moves towards greater austerity aimed at <strong>of</strong>fsetting the<br />
cyclical deterioration in public balances. Our own scenario, which does not<br />
buy into the idea <strong>of</strong> Greece‘s ordered and painless exit from the euro,<br />
involves the Troika making concessions to Greece and Portugal, with<br />
austerity plans revised to smooth adjustments over time and so make them<br />
bearable. In core countries the combination <strong>of</strong> targeted fiscal stimulus limited to<br />
the short term, along with more generous wage concessions, should drive a<br />
certain dynamism in domestic demand and positively affect the Eurozone‟s<br />
overall momentum. But the uncertainties surrounding the euro‟s future are likely<br />
to lift only gradually, taking the Eurozone into modest recession in 2012 and<br />
curbing the outlook for growth in 2013.<br />
The lull in the crisis in the early part <strong>of</strong> the year helped the Eurozone as a whole<br />
avoid falling back into recession in Q1, but this masks the increasing divergences<br />
between the north, which continues to grow (Germany, Austria, Belgium, Finland)<br />
or at worst stagnate (France), and the south, which is unable to extricate itself<br />
from recession. The reactivation <strong>of</strong> the sovereign debt crisis against the backdrop<br />
<strong>of</strong> Greece‟s political stalemate has destroyed all hope <strong>of</strong> any immediate recovery<br />
driven by core countries. The <strong>rate</strong> <strong>of</strong> fall in the confidence surveys <strong>of</strong><br />
purchasing managers (PMI) gathered pace in April and May in all the<br />
Eurozone‘s big economies. Hard data for <strong>economic</strong> activity has confirmed<br />
this gloomy outlook, with a fall-<strong>of</strong>f in orders in Q1 and an uptick in the<br />
unemployment <strong>rate</strong> to 11% in April.<br />
Of course, the global environment remains buoyant, with Chinese and US growth<br />
<strong>rate</strong>s still proving resilient. The EUR‟s recent depreciation should help the<br />
Eurozone to benefit from this foreign demand. Domestic demand remains<br />
depressed, however. Although the Eurozone‟s banking sector seems able to<br />
meet the EBA‟s demands overall, banks on the periphery are hurting. The<br />
recessionary environment has led to a deterioration in asset quality,<br />
strengthening the trend towards a squeeze on credit that is inhibiting any return to<br />
growth. The uncertainty, the funding difficulties, domestic demand<br />
depressed by a negative fiscal impulse (1.6ppt <strong>of</strong> GDP) are enough to<br />
encourage businesses to defer investment and inventory-rebuilding<br />
decisions. According to our own <strong>forecasts</strong>, GDP should fall slightly in Q2 (by<br />
0.2% QoQ), and then stagnate until year-end. The deployment <strong>of</strong> a more cooperative<br />
st<strong>rate</strong>gy, with the south still taking its austerity medicine but the<br />
north consuming more, should lead to a recovery in 2013. The very sluggish<br />
growth regime is, at any <strong>rate</strong>, here for the duration – a sort <strong>of</strong> price to pay for<br />
purging past financial excess.<br />
Macro Prospects – no. 137 – 3 rd quarter 2012 21
France: Growth reprieved…<br />
Until now, French growth has only just escaped a contraction in <strong>economic</strong> activity, posting virtually zero growth over the<br />
past two quarters (0.0% Q1/Q411; +0.1% Q4/Q3). On the basis <strong>of</strong> the surveys, however, activity is forecast to fall slightly in<br />
Q212 (-0.1% QoQ) and then pick up slowly thereafter (+0.2% QoQ in Q3 and Q412). The annual growth figure should<br />
show a very marked slowdown in 2012 (0.3% compared with 1.7% in 2011), and then a slight, 1.1%, recovery in 2013.<br />
Insee's industry survey<br />
60<br />
40<br />
20<br />
0<br />
-20<br />
-40<br />
-60<br />
-80<br />
Source: Insee, Crédit <strong>Agricole</strong> SA<br />
Growth and its components<br />
6<br />
5<br />
4<br />
3<br />
2<br />
1<br />
0<br />
-1<br />
-2<br />
-3<br />
-4<br />
Source: Insee, Crédit <strong>Agricole</strong> SA<br />
Consumption and investment<br />
10<br />
5<br />
0<br />
-5<br />
-10<br />
-15<br />
00 01 02 03 04 05 06 07 08 09 10 11 12<br />
Managers' personal outlook<br />
Managers' overall outlook<br />
YoY contributions<br />
to growth, %<br />
00 01 02 03 04 05 06 07 08 09 10 11 12 13<br />
Investment<br />
Stock rebuilding<br />
External trade Consumption<br />
GDP<br />
YoY, %<br />
Source: Insee, Crédit <strong>Agricole</strong> SA<br />
Forecasts<br />
00 01 02 03 04 05 06 07 08 09 10 11 12<br />
Household consumption<br />
Business investment<br />
Forecasts<br />
Olivier Eluère<br />
olivier.eluere@credit-agricole-sa.fr<br />
+ 33 1 43 23 65 57<br />
Werner Perdrizet<br />
wener.perdrizet@credit-agricole-sa.fr<br />
+ 33 1 57 72 08 54<br />
The relative resilience <strong>of</strong> the French economy has been confirmed. For the<br />
time being France is the only big European economy not to have experienced a<br />
drop in its activity over the past six months. The <strong>economic</strong> picture is not<br />
brilliant by any means, however. Activity is hardly moving: after rising very<br />
slightly in Q411 (0.1% QoQ), GDP remained flat in Q112 (+0% QoQ). At the start<br />
<strong>of</strong> the year, the economy had difficulty finding new growth drivers. Domestic<br />
demand has slowed, partly dragged down by the fall in corpo<strong>rate</strong> investment,<br />
down 1.2% QoQ. Consumption, on the other hand, has picked up slightly (+0.2%<br />
QoQ, after +0.1%), fuelled by a sharp increase in energy spending (+4% QoQ) as<br />
a result <strong>of</strong> February‟s cold snap. To this should be added a 0.1 point negative<br />
contribution to growth by foreign trade due to the rebound in imports, up 0.7%<br />
QoQ, after a drop <strong>of</strong> 1.4%, and the marked slowdown in exports (+0.3% after<br />
+1.1%). Although exports have been driven by large-scale orders from outside<br />
the Eurozone late last year, mainly in the aviation sector, they are fundamentally<br />
hampered by weaker demand from France‟s main European trading partners.<br />
Businesses‘ outlook for activity does not afford any hope <strong>of</strong> an<br />
improvement in the short run and is still shrouded in uncertainty. The<br />
surveys in the first two months <strong>of</strong> Q212 testify to a marked deterioration in<br />
activity, especially by SMEs, where the index level <strong>of</strong> 44.7 in May is moving<br />
further and further away from the activity expansion threshold <strong>of</strong> 50 and above. A<br />
degree <strong>of</strong> caution is nevertheless called for as regards the interpretation <strong>of</strong><br />
this survey, in particular, by a very negative perception <strong>of</strong> the overall outlook for<br />
production, whereas the personal outlook appears more resilient. This mismatch<br />
shows up clearly in Insee surveys and suggests a less-marked contraction<br />
in Q2 activity (forecast at -0.1% QoQ).<br />
The 2012 annual growth forecast is likely to remain virtually unchanged<br />
(relative to the previous Economics Quarterly) with a very modest uptick in<br />
activity <strong>of</strong> 0.3%. Household consumption (+0.1% after +0.2% in 2011), the<br />
traditional mainstay <strong>of</strong> French growth, is forecast to rise very slightly. Compare<br />
that with its average increase <strong>of</strong> 2.3% pa between 2000 and 2007. Since then,<br />
with the marked slowdown in the <strong>rate</strong> <strong>of</strong> increase in households‟ purchasing<br />
power and the deterioration in the labour market, households have reined in their<br />
spending and are being encouraged to save for precautionary reasons. Corpo<strong>rate</strong><br />
spending is also depressed due to the very limited visibility, the lack <strong>of</strong> pressure<br />
on industrial capacity and poor pr<strong>of</strong>it levels. Whereas business investment was in<br />
a catch-up phase (+4.6% in 2010; +5.3% in 2011) after falling heavily in 2009<br />
(-13.3%), its <strong>rate</strong> <strong>of</strong> increase looks set to fall significantly in 2012 (+0.6%).<br />
Businesses‟ inventory behaviour is more or less tracking the same cyclical trend.<br />
In 2011, restocking had contributed +0.9ppt to growth, after contributions <strong>of</strong> -<br />
1.2ppt in 2009 and +0.1ppt in 2010. In 2012, businesses are likely to run their<br />
inventory levels down slightly, hence their negative contribution <strong>of</strong> 0.6ppt.<br />
Our forecast for 2013 is surrounded by a great deal <strong>of</strong> uncertainty. Based<br />
on an assumption <strong>of</strong> a very gradual improvement in the European<br />
sovereign debt crisis, our central projection <strong>forecasts</strong> a very modest growth<br />
recovery (+1.1%) sustained by a slight uptick in domestic demand. This<br />
relative improvement is contingent on the impact <strong>of</strong> the measures to be<br />
implemented by the new government over the next few months, the details <strong>of</strong><br />
which have yet to be specified. While some measures are likely to bolster the<br />
economy (increase in the back-to-school allowance, public sector job creation,<br />
reduction in the company income tax <strong>rate</strong> for SMEs, creation <strong>of</strong> a public<br />
investment bank, etc), they are likely to be <strong>of</strong>fset by a number <strong>of</strong> fiscal tightening<br />
measures notably affecting high incomes, income from savings, major corpo<strong>rate</strong>s.<br />
Macro Prospects – no. 137 – 3 rd quarter 2012 22
2000<br />
2001<br />
2002<br />
2003<br />
2004<br />
2005<br />
2006<br />
2007<br />
2008<br />
2009<br />
2010<br />
2011<br />
2012<br />
Germany: brain teaser<br />
Germany fundamentally knows that it has everything to lose from a break-up <strong>of</strong> the Eurozone but would like to minimise the<br />
cost <strong>of</strong> solidarity. At the same time as it is counting on further sustained non-Eurozone demand, it has eased its <strong>economic</strong><br />
policy slightly, allowing itself more wage inflation and a little less austerity – its way <strong>of</strong> helping the rest <strong>of</strong> the EU.<br />
Germany: activity in industry<br />
70<br />
65<br />
60<br />
55<br />
50<br />
45<br />
40<br />
35<br />
30<br />
May-06 Nov-07 May-09 Nov-10 May-12<br />
PMI manufacturing IFO (rhs)<br />
Source: Cesifo, Markit, Crédit <strong>Agricole</strong> SA<br />
Germany: Labour market recovery<br />
38<br />
37<br />
37<br />
36<br />
36<br />
35<br />
35<br />
34<br />
Source: Destatis, Crédit <strong>Agricole</strong> SA<br />
Germany: contributions to growth<br />
4<br />
2<br />
0<br />
-2<br />
points<br />
millions<br />
persons<br />
%YoY<br />
millions<br />
hours<br />
Dependent employment<br />
Hours worked<br />
2010 2011 2012 2013<br />
Change in inventories<br />
Domestic demand<br />
Net export<br />
GDP<br />
Source: Destatis, Crédit <strong>Agricole</strong> SA<br />
120<br />
115<br />
110<br />
105<br />
100<br />
Paola Monperrus-Veroni<br />
paola.monperrus-veroni@credit-agricole-sa.fr<br />
+33 1 43 23 67 55<br />
95<br />
90<br />
85<br />
80<br />
12400<br />
12200<br />
12000<br />
11800<br />
11600<br />
11400<br />
The +0.7% growth overhang in Q112, on the strength <strong>of</strong> a 0.5% QoQ rise in<br />
GDP, could strengthen the German leadership‘s illusion that it can escape<br />
the crisis that is raging everywhere else in Europe. The very positive<br />
contribution <strong>of</strong> foreign trade (+0.9%) is driven by continued sustained demand<br />
from outside the Eurozone, while private and public consumption, up by 0.4% and<br />
0.2% respectively, are rising due to higher household incomes and to the room<br />
for manoeuvre left by the spontaneous improvement in the public sector balance.<br />
But the effects <strong>of</strong> the crisis are looming over the German economy and are<br />
already materialising through the channel <strong>of</strong> uncertainty, as shown by the<br />
drop in capital investment (-0.2%) and the marked slowdown in inventory<br />
build-up (-0.4% contribution to GDP growth). It is also the resulting import<br />
stagnation that has caused trade to make such a positive contribution. However,<br />
the sluggishness <strong>of</strong> exports to the Eurozone (up 0.9% in Q112) makes the<br />
German economy more dependent on trends in non-European demand (up<br />
11.2%). Yet this is likely to feel the impact <strong>of</strong> the crisis. According to the latest<br />
available survey data, the spread <strong>of</strong> uncertainty is translating into a deterioration<br />
in the outlook for the US and China.<br />
The marked fall-<strong>of</strong>f in foreign manufacturing orders in April (-3.6%) and the<br />
very sharp drop in the May PMI survey (to 49.6) indicate a contraction in<br />
<strong>economic</strong> activity for the first time since 2009. Most other indicators,<br />
however, remain at values corresponding more to a standstill in activity.<br />
This was the case not only for the April fall in turnover on both domestic and<br />
foreign markets, but also for the May IFO business survey, which saw marked<br />
falls in industry, construction and retail that were more brutal as regards<br />
sentiment about the current situation than about expectations. Others, such as<br />
the IFO survey <strong>of</strong> services, were still on the upside in May. Although the<br />
inability to repeat the growth <strong>rate</strong> observed at the start <strong>of</strong> the year seems<br />
incontrovertible to us, Germany should escape recession. We are<br />
forecasting that activity will stabilise in Q212 (+0.1% QoQ), with a very<br />
gradual recovery in the second half <strong>of</strong> 2012.<br />
Although the unemployment <strong>rate</strong> has now been stable for two months, it is at an<br />
historical low and the number <strong>of</strong> jobless has not risen. The knock-on effect <strong>of</strong> job<br />
creations has led to a new increase in the workforce. Although hiring prospects<br />
are down for the first time in two years, according to the May IFO survey, on the<br />
other hand the IAB‟s index <strong>of</strong> labour demand was up again, and working hours<br />
are back at their pre-crisis levels. We expect no more than a stabilisation in<br />
the unemployment <strong>rate</strong> in response to the activity slowdown, sustained by<br />
a slight discouraged-worker effect on the workforce. The recent negotiated<br />
wage agreements in the chemicals sector (+2.8% for 2012), public sector (+3%),<br />
steel industry (+3%) and electrical engineering (+4%) are likely to translate into a<br />
spurt in wages in comparison with 2011 (+1.9%). Although it is not possible to talk<br />
about any real excessive wage awards, because the negotiated agreements<br />
apply to only one-third <strong>of</strong> wage-earners, this boost should help sustain<br />
consumption, helping to <strong>of</strong>fset a degree <strong>of</strong> wait-and-see in investment decisions.<br />
Crisis-induced uncertainty justifies a certain caution, but the fundamentals<br />
remain positive, hence the slower, but still positive, <strong>rate</strong> <strong>of</strong> increase in<br />
capital investment. Despite the deterioration in the margin ratio as a result <strong>of</strong><br />
wage concessions and the downturn in the productivity cycle, the investment ratio<br />
is still a long way from returning to its pre-crisis levels, the self-financing <strong>rate</strong> is<br />
still very high and lending conditions are still favourable.<br />
This projection, based on a gradual dissipation <strong>of</strong> uncertainties about the euro‟s<br />
future, posits that any electoral tactics with an eye to the general election in 2013<br />
will not depart from the long-standing consensus on Germany‟s st<strong>rate</strong>gic interest<br />
in defending the integrity <strong>of</strong> the EU at all costs.<br />
Macro Prospects – no. 137 – 3 rd quarter 2012 23
Italy: Keeping it under control<br />
At the mercy <strong>of</strong> the markets, the Italian economy is clinging to its hopes for the uncertain recovery in global demand as it<br />
attempts to limit the damage done to domestic demand by a draconian austerity policy compounded with the difficulties <strong>of</strong><br />
the country‟s banking sector. By honouring its fiscal commitments as best it can, the government can hope to mould market<br />
expectations and so keep risk premia at acceptable levels. Italy should, therefore, manage to preserve the quality <strong>of</strong> its<br />
sovereign signature, but at the potential price <strong>of</strong> a long period <strong>of</strong> lacklustre activity.<br />
General government net lending<br />
0<br />
-1<br />
-2<br />
-3<br />
-4<br />
-5<br />
-6<br />
Source: Istat, Crédit <strong>Agricole</strong> SA<br />
Contributions to growth<br />
3.0<br />
2.0<br />
1.0<br />
0.0<br />
-1.0<br />
-2.0<br />
-3.0<br />
-4.0<br />
% <strong>of</strong><br />
GDP<br />
2007 2008 2009 2010 2011 2012 2013<br />
Source: Istat, Crédit <strong>Agricole</strong> SA<br />
Industrial activity<br />
30<br />
20<br />
10<br />
0<br />
-10<br />
-20<br />
-30<br />
-40<br />
YoY %<br />
Forecasts<br />
Forecasts<br />
2010 2011 2012 2013<br />
Domestic demand ex inventory<br />
Inventory chg<br />
Foreign trade<br />
GDP<br />
% YoY<br />
Apr-06 Oct-07 Apr-09 Oct-10 Apr-12<br />
Industrial production<br />
Orders to industry<br />
The latest drop in GDP in Q112 (-0.8% QoQ, after a fall <strong>of</strong> 0.7% in Q4) is<br />
consistent with the recessionary effects <strong>of</strong> a draconian austerity plan,<br />
compounded with difficulties in the banking sector. The inability to use the<br />
exchange <strong>rate</strong> to stimulate <strong>economic</strong> activity marks a sharp difference between<br />
the situation today and that <strong>of</strong> 1992. The ambient uncertainty is not helping either,<br />
with <strong>economic</strong> agents (consumers and businesses) mired in wait-and-see<br />
territory, which will contribute to keeping the economy in recession throughout<br />
2012.<br />
Following an expected drop in all components <strong>of</strong> GDP in Q112, a<br />
continuation <strong>of</strong> the recessionary wave in Q212, signalled by our leading<br />
indicator (-0.7%), seems plausible and has been confirmed by several other<br />
indicators. Q1 order books have fallen again (-5.1% QoQ, after -4.5%),<br />
especially as regards the domestic demand component (-6.1%). Industrial<br />
production in April was again down, by 1.9%, while the Confindustria survey<br />
again pointed to a further drop in orders in April (-0.6% MoM). Istat‟s May<br />
business survey was at its lowest since end-2009. The capacity utilisation <strong>rate</strong><br />
saw a further fall, wiping out any chance <strong>of</strong> a rebound in business investment.<br />
The large number <strong>of</strong> SME insolvencies recorded in Q112 – the highest in the<br />
past decade with the exception <strong>of</strong> 2009 – underscores the fragility <strong>of</strong> the<br />
industrial fabric and the lengthy ongoing restructuring process. The<br />
succession <strong>of</strong> earthquakes in one <strong>of</strong> the most heavily industrialised regions <strong>of</strong><br />
northern Italy, and the prolonged interruption in <strong>economic</strong> activity, will have an<br />
adverse effect on industrial production beyond Q2. The only indicator to rise in<br />
May was the PMI, which nevertheless remains on the contracting activity side <strong>of</strong><br />
the line.<br />
The marked fall in household confidence in May is the outcome <strong>of</strong> a<br />
deterioration in all components <strong>of</strong> the survey and is underpinned by a<br />
savings ratio (12% at end-2011) at its lowest since 1995. That is not enough<br />
to cushion the drop in real incomes and smooth the consumption pr<strong>of</strong>ile, which<br />
will therefore continue to adjust downwards. Only a degree <strong>of</strong> resilience in<br />
exports to non-EU countries (aided by a depreciating EUR), combined with weak<br />
exports, has resulted in a positive contribution from foreign trade.<br />
The risk in connection with fiscal execution is controllable. Additional<br />
spending cuts planned in the Spending Review, which is currently going<br />
through Parliament, and receipts from the fight against tax evasion, which<br />
have not been counted in the Finance Act, leave the government with a little<br />
room for manoeuvre. That should <strong>of</strong>fset, partially at least, the cyclical<br />
deterioration in the government balance, thereby averting any request for<br />
additional austerity measures from the EU, in a context that would justify the<br />
application <strong>of</strong> exceptional circumstances. But, although the risk <strong>of</strong> an early<br />
election is receding with the recent defeat <strong>of</strong> the coalition parties<br />
supporting the technocrat government <strong>of</strong> Mario Monti, popular support is<br />
waning and the social climate is becoming tenser. The main risk linked to our<br />
growth forecast (-1.9% in 2012 and +0.1% in 2013) is on the downside and would<br />
derive from poor management <strong>of</strong> the sovereign debt crisis leading to panic and<br />
contagion, with the markets unable to discriminate and recognise Italy‟s efforts.<br />
Source: Istat, Crédit <strong>Agricole</strong> SA<br />
Paola Monperrus-Veroni<br />
paola.monperrus-veroni@credit-agricole-sa.fr<br />
+33 1 43 23 67 55<br />
Macro Prospects – no. 137 – 3 rd quarter 2012 24
Greece: Alarming situation<br />
The economy continues to contract sharply (Q112 GDP: -6.2% YoY) under the weight <strong>of</strong> the painful austerity measures.<br />
The reform programme has suffered serious delays due to the prolonged election period.<br />
Employment and unemployment<br />
<strong>rate</strong><br />
25<br />
20<br />
15<br />
10<br />
5<br />
Jan-08 Jan-09 Jan-10 Jan-11 Jan-12<br />
Source: Hellenic Statistical Authority<br />
Business expectations & consumer<br />
confidence indicators<br />
140<br />
120<br />
100<br />
80<br />
60<br />
40<br />
20<br />
Source: Foundation for Economic and<br />
Industrial Research (IOBE)<br />
Output retail trade, private building<br />
activity, manufacturing<br />
10<br />
0<br />
-10<br />
-20<br />
-30<br />
-40<br />
Employment (annual % chg, rhs)<br />
Unemployment <strong>rate</strong> (%)<br />
08 09 10 11 12<br />
Consumer Conf. Indicator (rhs)<br />
Manufacturing<br />
Construction<br />
Retail Trade<br />
Services<br />
Annual % change <strong>of</strong> 12-month moving<br />
average<br />
Source: Hellenic Statistical Authority<br />
Aikaterini Anagnostopoulou<br />
anagnostopoulou.k@emporiki.gr<br />
+ 30 2 10 32 10 952<br />
4<br />
2<br />
0<br />
-2<br />
-4<br />
-6<br />
-8<br />
-10<br />
-20<br />
-35<br />
-50<br />
-65<br />
-80<br />
-95<br />
2008 2009 2010 2011 2012<br />
Retail Trade<br />
Private building activity<br />
Manufacturing<br />
The risk <strong>of</strong> the May 2012 elections not producing a stable government<br />
materialised. The ensuing high uncertainty has resulted in serious delays in the<br />
implementation <strong>of</strong> the structural reform agenda agreed upon with the Troika in the<br />
context <strong>of</strong> the second financing programme. Additional measures to meet the<br />
programme's targets this year have been postponed until after the new<br />
elections on 17 June.<br />
The deep recession is continuing and the outlook for the economy remains<br />
fragile. Real GDP contracted by 6.2% YoY in Q112 (overall in 2011: -6.9%).<br />
Consumer spending remains low as unemployment is soaring (February 2012<br />
unemployment <strong>rate</strong>: 22.6%) and the business environment is anything but<br />
conducive to undertaking new projects.<br />
Domestic demand is undermined by receding bank financing <strong>of</strong> households<br />
and enterprises as liquidity conditions in the economy are exceptionally<br />
tight. Major projects in the context <strong>of</strong> the ESPA (National St<strong>rate</strong>gic Reference<br />
Framework) are stalling due to the serious shortage <strong>of</strong> either domestic or<br />
European resources to finance them. Besides, the public investment programme<br />
has been cut drastically in the context <strong>of</strong> economising on public expenditure.<br />
Activity should be underpinned by net exports. The decline in imports should<br />
account for the greatest part <strong>of</strong> net exports' positive contribution to GDP<br />
growth this year. Despite competitiveness gains brought about by reductions in<br />
unit labour costs, the export momentum is not particularly strong. Demand for<br />
Greek goods from abroad may be weaker as the external <strong>economic</strong> environment<br />
is losing strength, while the tourism sector – the country's 'heavy industry' – may<br />
perform worse than expected this year (Q112: non-resident arrivals -11.7%, nonresident<br />
travel spending -15.1% YoY).<br />
Considering the deteriorating external environment and the setbacks from the<br />
prolonged election period, the decline in activity in all <strong>of</strong> 2012 will most likely be<br />
more intense – in the region <strong>of</strong> -6.0% – than the <strong>of</strong>ficial projections for a GDP fall<br />
<strong>of</strong> less than 5.0% and our previous forecast <strong>of</strong> -5.0%.<br />
On an encouraging note, the central government deficit in the January-April 2012<br />
period stood at EUR9.1bn versus a target <strong>of</strong> EUR11bn in the same period. This<br />
was the result <strong>of</strong> reining in expenses as public revenue was <strong>of</strong>f target (by<br />
EUR0.5bn) due to tax evasion and also decreased consumption. However,<br />
failing to form a government and declaring new elections is estimated to<br />
have resulted in a more serious shortfall in tax revenue in May 2012,<br />
jeopardising the smooth execution <strong>of</strong> the budget.<br />
Reducing fiscal imbalances and advancing structural reforms remain key<br />
challenges in an economy mired in recession for five consecutive years.<br />
Downside risks are considerable. Forming a stable government which will<br />
proceed with the needed structural reforms is crucial for the country's prospects.<br />
Other risks relate to social reaction and the difficulties the banking sector is<br />
facing. But, in any case, the timely realisation <strong>of</strong> the targets <strong>of</strong> the bailout<br />
programme is being put to the test as the deep recession continues.<br />
Macro Prospects – no. 137 – 3 rd quarter 2012 25
Apr-06<br />
Oct-06<br />
Apr-07<br />
Oct-07<br />
Apr-08<br />
Oct-08<br />
Apr-09<br />
Oct-09<br />
Apr-10<br />
Oct-10<br />
Apr-11<br />
Oct-11<br />
Apr-12<br />
Spain: Fears accumulating<br />
Spain‟s recession is deepening, with a more pronounced drop in activity forecast for the coming quarters. We are<br />
forecasting a fall-<strong>of</strong>f in activity in 2012 (-1.8%), which is likely to extend into 2013 (-0.8%). Despite a series <strong>of</strong> relatively<br />
timely reforms, concerns about Spain‟s banking sector have resurfaced. Europe has been forced once again to react,<br />
providing financial assistance <strong>of</strong> up to EUR100bn to Spanish banks.<br />
Unemployment <strong>rate</strong> and NPL<br />
evolution<br />
12%<br />
10%<br />
8%<br />
6%<br />
4%<br />
2%<br />
0%<br />
99 01 03 05 07 09 11<br />
Source: Bank <strong>of</strong> Spain<br />
Business climate<br />
65<br />
60<br />
55<br />
50<br />
45<br />
40<br />
35<br />
30<br />
25<br />
Source: Markit, Crédit <strong>Agricole</strong> SA<br />
Residential home prices<br />
Base index 100 = Q3 1996<br />
400<br />
350<br />
300<br />
250<br />
200<br />
150<br />
100<br />
Source: Halifax & CSO , Spanish MoD, Fnaim,<br />
Crédit <strong>Agricole</strong> SA<br />
Bénédicte Kukla<br />
benedicte.kukla@credit-agricole-sa.fr<br />
+ 33 1 43 23 18 89<br />
Antonio Teixeira<br />
antonio.teixeira@credit-agricole-sa.fr<br />
25%<br />
20%<br />
15%<br />
10%<br />
5%<br />
Unemployment <strong>rate</strong> (rhs)<br />
NPL - Total<br />
NPL - Mortgages<br />
NPL - Consumer credit<br />
CDL - Enterprises (incl. Real estate)<br />
Points<br />
Contraction in activity<br />
PMI manufacturing<br />
Expansion in activity<br />
PMI services<br />
96979899000102030405060708091011<br />
UK Spain Ireland<br />
Spain‟s GDP fell by 0.3% in Q112, for the second quarter running. However,<br />
unlike Q411, the drop was mainly due to shrinking external demand. Exports fell<br />
by 0.9% over the quarter, reflecting falling demand from the country‟s European<br />
trading partners. Imports were also down (by 0.4% QoQ), in line with the<br />
contraction in domestic demand. This is because domestic activity continues<br />
to suffer from the aftershocks <strong>of</strong> the burst housing bubble, with a further<br />
large-scale correction in construction investment, down 3.3% QoQ in Q112.<br />
However, it is also likely that the underground economy, accounting for c.20% <strong>of</strong><br />
the economy, is cushioning some <strong>of</strong> the contraction in activity. Private<br />
consumption rose by 0.1% in Q112, while the unemployment <strong>rate</strong> was a<br />
persistent 24.1% in March 2012.<br />
Business climate surveys point to a more pronounced drop in activity in the<br />
quarters ahead. PMI surveys in manufacturing and services remain well below<br />
the 50-point threshold forming the line between contraction and growth in activity.<br />
In addition, expected orders remain gloomy, even for export orders. On the<br />
household front, consumer confidence is falling due to concerns about the<br />
deployment <strong>of</strong> further austerity measures. The Spanish government – forced by<br />
the markets to deploy a draconian austerity plan in 2012 – could go back on its<br />
promise not to increase VAT in 2013. In the first four months <strong>of</strong> the year, VAT<br />
receipts fell 8.2% relative to the same period in 2011. The risk Spain faces is <strong>of</strong><br />
falling into an austerity trap, asphyxiated by both recession and public finances.<br />
We are forecasting a drop in activity in 2012 (-1.8%), which should extend<br />
into 2013 (-0.8%). The relative good behaviour <strong>of</strong> budgets in the autonomous<br />
regional authorities in Q1 has reduced the risk <strong>of</strong> slippage in public finances, but<br />
the recession and banking risk have amplified risk aversion towards Spain.<br />
Since 2010, a process <strong>of</strong> mergers between the Cajas, with the subsequent<br />
participation <strong>of</strong> the commercial banks, together with increased capitalisation for<br />
the banking system, has been rolled out. In 2012, the government launched a<br />
second raft <strong>of</strong> reforms, notably including the requirement to write additional<br />
provisions for property assets in order to reassure the markets (EUR74bn in 2012<br />
on top <strong>of</strong> the EUR110bn already provisioned). Despite these relatively timely<br />
reforms, concerns about Spain‘s banks have not been put to rest. The<br />
government‟s hesitant communication, coupled with the nationalisation <strong>of</strong> Spain‟s<br />
fourth-biggest bank, Bankia, exacerbated fears regarding the solidity <strong>of</strong> the<br />
banking sector, at a time when risk premiums on sovereign debt had already<br />
moved higher (+151bp on the 10Y <strong>rate</strong> since January 2012). The ability <strong>of</strong> the<br />
government aid programme, the FROB, to raise the funds needed to recapitalise<br />
Bankia (EUR4.5bn already allocated by the government + EUR19bn requested<br />
from the FROB) seemed limited given the adverse market conditions. Europe was<br />
thus obliged to come to Spain‟s rescue, providing a bank bailout <strong>of</strong> up to<br />
EUR100bn in order to cover recapitalisation needs. While the amount is known<br />
and duly calib<strong>rate</strong>d (IMF estimates recapitalisation needs to be EUR40-80bn), the<br />
details <strong>of</strong> the plan remain unknown (source <strong>of</strong> funding, EFSF or ESM, degree <strong>of</strong><br />
seniority between creditors, financial conditions…). The bank bailout will have a<br />
significant impact on the public debt-to-GDP ratio (an increase <strong>of</strong> up to 10% <strong>of</strong><br />
GDP if the entire sum is used); however, no additional austerity measures are<br />
expected as a strong fiscal adjustment programme is already underway (reducing<br />
the deficit to 3% in 2013). The low level <strong>of</strong> public debt before the crisis had given<br />
the government some room for manoeuvre, but this is rapidly decreasing. The<br />
sustainability <strong>of</strong> Spanish public debt could become an additional cause for<br />
concern, especially if fiscal adjustment disappoints and risk premia remain high.<br />
The real or anticipated fragility <strong>of</strong> public finances could retrograde onto Spanish<br />
banks, which carry an increasing amount <strong>of</strong> sovereign risk.<br />
Macro Prospects – no. 137 – 3 rd quarter 2012 26
Portugal: On hold<br />
The outlook for the Portuguese economy is highly dependent on external factors, such as the ability <strong>of</strong> exports to <strong>of</strong>fset the<br />
fall in domestic activity, and the impact <strong>of</strong> the sovereign debt crisis on <strong>economic</strong> sentiment. We forecast a fall in GDP <strong>of</strong><br />
2.4% in 2012. The balance <strong>of</strong> risks is tilted to the downside, linked to the high risk <strong>of</strong> contagion from the Greek crisis.<br />
Annual contrib. to GDP growth<br />
6<br />
4<br />
2<br />
0<br />
-2<br />
-4<br />
-6<br />
-8<br />
Source: Crédit <strong>Agricole</strong> SA<br />
Contribution to annual export<br />
growth by destination<br />
40<br />
35<br />
30<br />
25<br />
20<br />
15<br />
10<br />
5<br />
0<br />
-5<br />
2007 2008 2009 2010 2011 2012<br />
Trade balance (export-import)<br />
Chg in inventories<br />
Investment (total)<br />
Public consumption<br />
Household consumption<br />
GDP (rhs)<br />
Source: IMF trade data, Crédit <strong>Agricole</strong> SA<br />
Impact on prices <strong>of</strong> indirect tax<br />
hikes (%)<br />
5<br />
4<br />
3<br />
2<br />
1<br />
0<br />
-1<br />
-2<br />
-3<br />
%<br />
Dec-10 Mar-11 Jun-11 Sep-11 Dec-11<br />
France<br />
Germany<br />
UK<br />
Netherlands<br />
EU other<br />
Export gwth YoY %<br />
Italy<br />
Spain<br />
excl EU<br />
Apr-04 Apr-06 Apr-08 Apr-10 Apr-12<br />
difference<br />
Harmonised CPI<br />
Harmonised CPI (at constant tax <strong>rate</strong>)<br />
Source: Eurostat<br />
Bénédicte Kukla<br />
benedicte.kukla@credit-agricole-sa.fr<br />
+ 33 1 43 23 18 89<br />
4<br />
2<br />
0<br />
-2<br />
-4<br />
The contraction in Q112 GDP was significantly smaller than expected, with a drop<br />
<strong>of</strong> 0.1% QoQ, compared with the -0.7% QoQ forecast by our leading indicator,<br />
and -1.3% QoQ in Q411. According to the INE, this relatively limited contraction in<br />
overall activity is linked to a weaker-than-expected slowdown in domestic<br />
demand. Imports also fell less than expected in Q1. As a result, the contribution<br />
<strong>of</strong> net exports to GDP was small, despite a relatively good performance in exports<br />
over the quarter. Moreover, following a significant run-down in inventories in<br />
Q411, inventory changes and investment made a positive, although<br />
temporary, contribution to GDP in Q112. Looking ahead, domestic demand<br />
remains under increasing pressure from both fiscal tightening and the uncertain<br />
environment linked to developments in the sovereign debt crisis. This is mostly<br />
due to the level <strong>of</strong> fiscal adjustment forced on Portugal by its international<br />
creditors. In 2012, Portugal has to cut its public deficit by 3.3 points <strong>of</strong> GDP<br />
compared to its 2011 level (excluding the transfer <strong>of</strong> EUR6bn worth <strong>of</strong> pension<br />
funds from the banking system to the state in 2011), which is comparable to that<br />
initially required <strong>of</strong> Greece in 2011 (-2.9 points <strong>of</strong> GDP) and to that required <strong>of</strong><br />
Spain in 2012 (-3.5 points). Households‘ disposable income is to remain<br />
under very strong pressure with the rise in the unemployment <strong>rate</strong> (+2.7<br />
points since October 2011, to 15.3% in March), a fall in wages, and higher<br />
taxes (in particular the VAT hike, which is being increased from 21% to 23%).<br />
On the business front, emergence from the crisis will mainly depend on the<br />
export performance <strong>of</strong> enterprises. In 2011, non-European exports accounted<br />
for over one-third <strong>of</strong> total exports. These are encouraging figures, but they are<br />
probably not yet sufficient to immunise Portuguese exports against the Eurozone<br />
business climate, and Spain‟s in particular. In addition, Portugal‟s manufacturing<br />
base is still handicapped by a lack <strong>of</strong> capital investment and very high debt ratios.<br />
Even if the banks are reportedly trying to channel financing more towards<br />
export businesses, their ability to lend is hampered by the necessity <strong>of</strong><br />
bank deleveraging. The fall in unit labour costs, together with reforms to make<br />
the labour market more flexible and attract foreign investment, should enable<br />
Portugal to catch up with a certain level <strong>of</strong> competitiveness and productivity.<br />
However, as with the other fragile Eurozone countries, these measures are<br />
progressive and will not help Portuguese exports to make up entirely for the fall in<br />
domestic demand in the short run.<br />
Overall, we expect the recession to continue over the coming quarters, despite<br />
this upside surprise in Q1. However, the scale <strong>of</strong> the recession has been revised<br />
down in 2012 from -3.6% <strong>of</strong> GDP to -2.4%. While the non-European export<br />
performance may still surprise us on the upside, we feel that the balance <strong>of</strong><br />
risks is still unfavourable for Portugal if contagion from the Greek crisis<br />
spreads. For the foreseeable future, it is unlikely that Portugal will be able to<br />
return to the financial markets, and a further request for financial assistance from<br />
the Troika should prove necessary before the end <strong>of</strong> 2012. For the time being,<br />
provided the government satisfies the demands <strong>of</strong> the structural deficit criteria,<br />
the Troika has not announced any further requirements above and beyond those<br />
already included in the EU/IMF adjustment programme, given the scale <strong>of</strong> the<br />
expected adjustment and the ongoing recessionary environment. In our view,<br />
fiscal slippage remains a possibility, but should remain within the bounds <strong>of</strong><br />
acceptability, especially if the Eurozone eases its position by accepting a certain<br />
degree <strong>of</strong> deviation for those overly ambitious deficit-reduction targets as a<br />
means <strong>of</strong> preserving growth.<br />
Macro Prospects – no. 137 – 3 rd quarter 2012 27
UK: Not in Olympic shape<br />
The pattern <strong>of</strong> growth will remain volatile in 2012 and, with exports threatened by the European crisis and fundamentals for<br />
domestic demand remaining weak, the UK economy is set to register a contraction this year. The persistent squeeze in real<br />
incomes and weak labour market will likely continue to weigh on household spending before a gradual recovery next year.<br />
UK growth – contributions<br />
1<br />
0<br />
-1<br />
Source: ONS, Crédit <strong>Agricole</strong> CIB<br />
Compressed pr<strong>of</strong>it margins<br />
20<br />
18<br />
16<br />
14<br />
Mar11 Dec11 Sep12 Jun13<br />
GFCF<br />
net trade<br />
HH cons.<br />
inventories<br />
gov. cons.<br />
GDP<br />
Source: ONS, Crédit <strong>Agricole</strong> CIB<br />
Money growth picks up but credit<br />
remains weak or falling<br />
25<br />
20<br />
15<br />
10<br />
5<br />
0<br />
-5<br />
% QoQ<br />
%<br />
<strong>forecasts</strong><br />
00 02 04 06 08 10<br />
corpo<strong>rate</strong> pr<strong>of</strong>it share<br />
% YoY<br />
00 01 02 03 04 05 06 07 08 09 10 11 12<br />
Households<br />
Private non financial companies<br />
M4 (aggregate excl. OFC)<br />
Source: BoE, Crédit <strong>Agricole</strong> CIB<br />
Slavena Nazarova<br />
slavena.nazarova@ca-cib.com<br />
+ 33 1 41 89 99 18<br />
GDP <strong>of</strong>ficially contracted by 0.3% QoQ in Q1 but, excluding the weakness in the<br />
construction sector, growth in output was actually flat. Together with relatively firm<br />
business surveys at the beginning <strong>of</strong> this year, the expenditure breakdown <strong>of</strong><br />
Q1 GDP data does not suggest an economy in genuine recession. Net trade<br />
was broadly flat in Q1 and domestic consumption registered relatively solid<br />
growth (0.5% QoQ), within which household consumption made a small but still<br />
positive contribution. However, this was more than compensated by a sharp fall in<br />
inventories. The latter subtracted 0.6ppt from overall growth, a similar pattern to<br />
that observed in Q411. Abstracting from the volatility <strong>of</strong> the inventories<br />
component, growth in total domestic demand was relatively firm (0.4% QoQ) and<br />
even accele<strong>rate</strong>d slightly relative to Q411.<br />
In the near term, however, leading indicators argue for a prolonged contraction in<br />
overall activity into Q2. We have revised down the growth outlook for 2012 to<br />
-0.2% (from 0.5% previously), partially as a result <strong>of</strong> the negative carryover effect,<br />
but we have also factored in weaker prospects for exports and have assumed<br />
domestic demand will suffer from the fall in asset prices and higher funding costs.<br />
Meanwhile, special factors will introduce significant volatility to growth this year:<br />
the Diamond Jubilee celebrations will likely result in activity being partially<br />
delayed from Q2 to Q3. Hosting the Olympic Games (27 July to 9 September) will<br />
translate into higher expenditure on goods and services in Q3 but that effect will<br />
be reversed in Q4.<br />
In the medium term, we continue to believe that easing inflationary pressures will<br />
allow for a gradual improvement in household consumption while the public<br />
sector will continue to weigh on growth. As part <strong>of</strong> the fiscal consolidation<br />
st<strong>rate</strong>gy, public sector net investment will continue to fall sharply by 2014-15.<br />
Gross fixed capital formation fell by 0.3% QoQ in Q1 and, together with a firm<br />
rebound in business investment <strong>of</strong> 3.6% QoQ, this suggests that the weakness in<br />
fixed investment was concent<strong>rate</strong>d in the public sector.<br />
CPI inflation will likely continue to ease further in the coming months, though<br />
some upside risks remain in the near term. Increases in indirect taxes on utilities<br />
prices as well as some rebuilding <strong>of</strong> companies‟ margins will likely put pressure<br />
on prices. Nevertheless, favourable base effects and the recent fall in commodity<br />
prices mean that CPI inflation will continue to fall towards target while the<br />
weakness in credit flows and the slack in the labour market speak <strong>of</strong> low<br />
domestically gene<strong>rate</strong>d price pressures. With the recovery projected to restart<br />
next year, we do not forecast a significant undershoot in CPI inflation<br />
relative to target in the medium term. Money growth has started to pick up,<br />
from low levels, possibly leading to some easing in the downside risks to mediumterm<br />
inflation.<br />
UK policymakers have taken bold measures recently to try to mitigate the<br />
impact <strong>of</strong> the Eurozone crisis on the UK economy. The response is taking the<br />
form <strong>of</strong> additional monetary stimulus rather than fiscal measures. More asset<br />
purchases (possibly GBP50bn) will likely be announced as soon as in July, which<br />
would bring the APF to GBP375bn (about 25% <strong>of</strong> nominal GDP). The BoE has<br />
also activated its Extended Collateral Term Rate Facility, through which it will<br />
auction sterling liquidity (<strong>of</strong> at least GBP5bn per month) with a maturity <strong>of</strong> 6M. A<br />
„funding for lending‟ scheme will be implemented jointly by the BoE and Treasury<br />
within a few weeks, aiming to provide cheap funding to banks conditional on their<br />
performance in lending. Although such actions will likely result in lower interest<br />
<strong>rate</strong>s (but not necessarily lower GBP), their efficiency in boosting bank loans<br />
remains uncertain as long as the demand for credit is constrained.<br />
Macro Prospects – no. 137 – 3 rd quarter 2012 28
Australia: Hit by external woes<br />
Australia‟s economy grew strongly in Q1 but its outlook has deterio<strong>rate</strong>d amid the ongoing Eurozone crisis and China<br />
slowdown. We have revised down our GDP growth <strong>forecasts</strong> to 2.8% and 3.0% in 2012 and 2013, respectively. We have<br />
revised our CPI inflation and policy <strong>rate</strong> <strong>forecasts</strong>, with one more <strong>rate</strong> cut to 3.25% likely by the end <strong>of</strong> 2012.<br />
Weaker growth ahead<br />
2.5<br />
2.0<br />
1.5<br />
1.0<br />
0.5<br />
0.0<br />
-0.5<br />
-1.0<br />
-1.5<br />
-2.0<br />
%<br />
Australia GDP<br />
QoQ<br />
QoQ F<br />
YoY (rhs)<br />
YoY F (rhs)<br />
00 02 04 06 08 10 12<br />
Source: Crédit <strong>Agricole</strong> CIB, Bloomberg<br />
KinTai Cheung<br />
kintai.cheung@ca-cib.com<br />
+852 28 26 10 33<br />
%<br />
8<br />
7<br />
6<br />
5<br />
4<br />
3<br />
2<br />
1<br />
0<br />
-1<br />
The Eurozone crisis and China slowdown have led to a deterioration in the outlook<br />
for Australia. Given its high exposure to China (which represents around 23%<br />
<strong>of</strong> exports), a slowing in Chinese growth will be a drag on the economy. On<br />
the domestic side, the announcement <strong>of</strong> a surplus budget plan suggests less<br />
government stimulus in the years ahead. Taking into account these<br />
developments, we have revised down our GDP growth <strong>forecasts</strong> to 2.8% and<br />
3.0% in 2012 and 2013, respectively. Meanwhile, strong capital expenditure<br />
readings, alongside USD180bn <strong>of</strong> natural gas projects in the pipeline, suggest that<br />
the resource boom will continue and investment will be a major component <strong>of</strong><br />
growth over coming years.<br />
Against this backdrop, the RBA delivered aggressive <strong>rate</strong> cuts in May and June on<br />
lower CPI inflation and rising external uncertainties. The inflation outlook<br />
remains s<strong>of</strong>t due to falling oil and food prices, although the introduction <strong>of</strong> the<br />
carbon tax in H212 will likely push CPI inflation upwards. We have revised our CPI<br />
<strong>forecasts</strong> and our call for policy <strong>rate</strong>s, with one more <strong>rate</strong> cut to 3.25% likely by<br />
the end <strong>of</strong> 2012. Q1 growth came in strong, suggesting less pressure on the RBA<br />
to cut its policy <strong>rate</strong>s more aggressively. Indeed, we believe that the current<br />
market interest <strong>rate</strong> expectation, with over 100bp <strong>of</strong> <strong>rate</strong> cuts priced in, is<br />
overdone. If our central scenario that risk appetite recovers later this year proves<br />
correct, the correction in interest <strong>rate</strong> expectations will likely bring the AUD back to<br />
1.08 and 1.04 by the end <strong>of</strong> 2012 and 2013, respectively.<br />
New Zealand: Rebuilding coming soon<br />
Considering the small size and export-oriented growth <strong>of</strong> New Zealand‟s economy, ongoing Eurozone woes continue to<br />
pose significant downside risks to its growth. We have revised down our GDP and CPI inflation <strong>forecasts</strong>, with GDP to<br />
grow at 2.3% and 3.3% and CPI inflation to rise by 2.5% and 3.0% in 2012 and 2013, respectively.<br />
Reconstruction to support growth<br />
2.0<br />
1.5<br />
1.0<br />
0.5<br />
0.0<br />
-0.5<br />
-1.0<br />
-1.5<br />
%<br />
New Zealand GDP<br />
QoQ<br />
QoQ F<br />
YoY (rhs)<br />
YoY F (rhs)<br />
00 02 04 06 08 10 12<br />
Source: Crédit <strong>Agricole</strong> CIB, Bloomberg<br />
KinTai Cheung<br />
kintai.cheung@ca-cib.com<br />
+852 28 26 10 33<br />
%<br />
6<br />
5<br />
4<br />
3<br />
2<br />
1<br />
0<br />
-1<br />
-2<br />
-3<br />
-4<br />
Considering the small size and export-oriented growth <strong>of</strong> New Zealand‘s<br />
economy, ongoing Eurozone woes continue to pose significant downside<br />
risks to its growth. Meanwhile, the darkening outlook for trading partners‟<br />
demand is likely to put a drag on growth, suggesting that the domestic sector will<br />
likely play a more important role for overall growth. With favourable climate<br />
conditions, the primary sector is expected to strengthen over the year, keeping<br />
growth supported. At the same time, delayed rebuilding activity is expected to<br />
kick <strong>of</strong>f later this year. This will likely boost growth and raise upward inflationary<br />
pressure later this year, although the inflation outlook remains s<strong>of</strong>t on the back <strong>of</strong><br />
spare capacity. Overall, we have revised down our GDP and CPI inflation<br />
<strong>forecasts</strong>, with GDP to grow at 2.3% and 3.3% and CPI inflation to rise by 2.5%<br />
and 3.0% in 2012 and 2013, respectively.<br />
On the policy front, the RBNZ has maintained its policy <strong>rate</strong> at 2.5% for over a<br />
year. Recently, the RBNZ‟s stance has turned a bit dovish, noting that it would<br />
need to reassess its policy outlook if the NZD remains strong. Given the recent<br />
retracement in the NZD (which implies higher imported inflationary pressure), we<br />
do not expect the RBNZ to deliver more <strong>rate</strong> cuts over the forecast period, but the<br />
RBNZ is likely to lift its <strong>rate</strong>s later than expected on the back <strong>of</strong> the deepening<br />
Eurozone crisis. We have revised our call for policy <strong>rate</strong>s and now look for a first<br />
<strong>rate</strong> hike in Q213. At the same time, the Kiwi will likely outperform the AUD on<br />
its upward interest <strong>rate</strong> expectation, climbing to 0.84 and 0.79 in 2012 and<br />
2013, respectively.<br />
Macro Prospects – no. 137 – 3 rd quarter 2012 29
Jun-08<br />
May-11<br />
Jun-11<br />
Jul-11<br />
Aug-11<br />
Sep-11<br />
Oct-11<br />
Nov-11<br />
Dec-11<br />
Jan-12<br />
Feb-12<br />
Mar-12<br />
Apr-12<br />
May-12<br />
Dec-08<br />
Jun-09<br />
Dec-09<br />
Jun-10<br />
Dec-10<br />
Jun-11<br />
Dec-11<br />
Canada: External risks temper the outlook<br />
The Canadian economy grew at a 1.9% pace in the first quarter; however, the composition <strong>of</strong> growth was less supportive<br />
for the outlook. We see domestic <strong>economic</strong> conditions gradually improving but we do not expect any withdrawal <strong>of</strong> policy<br />
stimulus by the Bank <strong>of</strong> Canada until early next year.<br />
Slower Q1 domestic spending<br />
8%<br />
4%<br />
0%<br />
-4%<br />
-8%<br />
Source: Statistics Canada/Haver Analytics<br />
Recent inflation trends<br />
4%<br />
3%<br />
2%<br />
1%<br />
0%<br />
-1%<br />
Source: Statistics Canada/Haver Analytics<br />
Employment springs back<br />
Source: Statistics Canada/Haver Analytics<br />
Mike Carey<br />
michael.carey@ca-cib.com<br />
+1 212 261 7134<br />
8%<br />
4%<br />
0%<br />
-4%<br />
-8%<br />
GDP at market prices (SAAR, CADm Chn<br />
2002) % Chg - Annual Rate<br />
Personal Consump Expend (SAAR, CADm<br />
Chn 2002) % Chg - Annual Rate<br />
May-08 May-09 May-10 May-11 May-12<br />
CPI: All Items [V41690914] (SA,<br />
2002=100) % Chg - YoY<br />
17520<br />
17480<br />
17440<br />
17400<br />
17360<br />
17320<br />
17280<br />
2.8%<br />
2.4%<br />
2.0%<br />
1.6%<br />
1.2%<br />
0.8%<br />
Bank <strong>of</strong> Canada Core CPI ex Indirect<br />
Taxes [V41690926] (SA, 2002=100) %<br />
Chg - YoY<br />
Canada: Employment: Both Sexes,<br />
15 Years and Over<br />
SA, Thous<br />
Given the lacklustre pace <strong>of</strong> growth expected south <strong>of</strong> the border, a strong<br />
pick-up in Canadian activity appears unlikely. The Q1 real GDP figures<br />
showed a slower pace <strong>of</strong> domestic demand with consumption slowing to a 0.9%<br />
pace from a more robust 2.8% <strong>rate</strong> in Q4. That was not surprising given that real<br />
retail sales were essentially flat in Q1. Investment in inventories increased,<br />
adding a full percentage point to growth last quarter. A s<strong>of</strong>ter pace <strong>of</strong> consumer<br />
spending and rising inventories raise some concerns over the pace <strong>of</strong> growth<br />
moving ahead.<br />
With imports outpacing exports in the first quarter, net exports trimmed 0.6<br />
percentage points from the quarterly GDP advance. A recovery in real net<br />
exports is likely to be s<strong>of</strong>t given modest external demand and persistent<br />
strength in the CAD. A smaller merchandise trade surplus in the first quarter<br />
contributed to the deterioration in the Q1 current account to -CAD10.3bn. That is<br />
2.3% <strong>of</strong> GDP down from an average <strong>of</strong> 2.8% last year. However, some<br />
deterioration in the current account is likely next quarter given the less optimistic<br />
outlook for exports and the recent declines in commodity prices.<br />
Government spending and investment declined at a 2.1% pace. Given the<br />
constraints on government budgets, growth should be modest at best. However,<br />
residential investment surged 12.3% and business investment in non-residential<br />
structures and equipment maintained a 4.9% growth <strong>rate</strong> in Q1.<br />
There have been positive developments in the labour markets; after a 14,000<br />
decline in employment in Q4, March and April racked up a 141,000 increase!<br />
While we do not expect such gains to be continued in the months ahead, the<br />
pick-up in hiring in the goods-producing sector was encouraging. The<br />
unemployment <strong>rate</strong> has declined to 7.3% from 7.6% at the beginning <strong>of</strong> the year.<br />
Inflation is expected to remain close to the Bank <strong>of</strong> Canada‘s 2% target<br />
given ―a small degree <strong>of</strong> excess capacity,‖ according to the Bank‟s June <strong>rate</strong><br />
announcement. Last quarter‟s GDP growth came in below the Bank <strong>of</strong> Canada‟s<br />
2.5% projection, suggesting that the output gap may close a bit more slowly than<br />
estimated in the Spring Monetary Policy Report.<br />
In April, the BoC introduced a tightening bias and indicated that ―some<br />
modest withdrawal <strong>of</strong> the present considerable monetary policy stimulus<br />
may become appropriate‖. In June, the forward-looking language retained the<br />
tightening bias but toned it down by making it conditional on the extent to which<br />
“the <strong>economic</strong> expansion continues and the current excess supply in the<br />
economy is gradually absorbed”. We see this as reflecting the increased<br />
uncertainty over the global outlook with heightened risk in Europe and a slower<br />
pace <strong>of</strong> growth in emerging markets.<br />
On balance, we see domestic <strong>economic</strong> conditions gradually improving in<br />
the quarters ahead but we do not expect any withdrawal <strong>of</strong> policy stimulus<br />
until early next year. The global risks emanating from Europe are likely to<br />
persist for a while even as Europe muddles through with a mild recession. Later<br />
this year, concerns over US growth (so important for Canada) will be linked to the<br />
budget imbroglio in Washington and the approaching fiscal cliff. Given that risk<br />
pr<strong>of</strong>ile for the balance <strong>of</strong> the year, we think the Bank <strong>of</strong> Canada will see it as<br />
prudent to wait before beginning to hike <strong>rate</strong>s.<br />
Given our view that the Fed is not likely to hike <strong>rate</strong>s through 2013, when the<br />
Bank <strong>of</strong> Canada begins to withdrawal its policy accommodation it will proceed at<br />
a leisurely pace in 25bp moves as it raises the real policy <strong>rate</strong> out <strong>of</strong> negative<br />
territory. We believe that the Bank will have to wait for the Fed before moving the<br />
policy <strong>rate</strong> above 2% given concerns over potential appreciation <strong>of</strong> the loonie.<br />
Macro Prospects – no. 137 – 3 rd quarter 2012 30
Emerging Markets: Time to use the existing leeway<br />
EMs, and BRICs in particular, are decelerating more than expected. However, it is key to note that consumer demand is<br />
more resilient than exports. Moreover, the existing monetary and fiscal leeway should help (in China in particular). In our<br />
central scenario, we expect EM <strong>economic</strong> growth to slow by about 1ppt to a still-decent 5.3% in 2012.<br />
Slowing momentum: BRICs…<br />
20%<br />
15%<br />
10%<br />
5%<br />
0%<br />
-5%<br />
Source: Bloomberg, Datastream, Crédit<br />
<strong>Agricole</strong> CIB<br />
… and BRI (excluding China)<br />
20%<br />
15%<br />
10%<br />
5%<br />
0%<br />
-5%<br />
-10%<br />
-15%<br />
Source: Bloomberg, Datastream, Crédit<br />
<strong>Agricole</strong> CIB<br />
EM real interest <strong>rate</strong>s<br />
10%<br />
8%<br />
6%<br />
4%<br />
2%<br />
0%<br />
-2%<br />
06 07 08 09 10 11 12<br />
Retail sales YoY IP YoY<br />
Source: Bloomberg, Datastream, Crédit<br />
<strong>Agricole</strong> CIB<br />
Sébastien Barbé<br />
sebastien.barbe@ca-cib.com<br />
+ 33 1 57 87 17 23<br />
BRIC<br />
'BRI' (excl. China)<br />
06 07 08 09 10 11 12<br />
Retail sales YoY IP YoY<br />
04 05 06 07 08 09 10 11 12<br />
EM average real policy interest <strong>rate</strong><br />
EM average policy interest <strong>rate</strong><br />
EM average inflation (CPI YoY)<br />
BRICs under pressure<br />
Emerging countries have come under mounting pressure in Q2. This has been<br />
reflected in the sharp depreciation observed in the EM universe. Even the CNY<br />
has depreciated significantly, to an extent that has never been seen before.<br />
China has been the first source <strong>of</strong> worries. Chinese momentum has weakened<br />
across the board, with industrial production and investment, in particular,<br />
s<strong>of</strong>tening to a significant extent. The decline in PMI indices has not helped. These<br />
releases, as well as the absence <strong>of</strong> any strong reaction from the authorities so<br />
far, have fuelled fears <strong>of</strong> a hard landing. Other BRICs are also facing significant<br />
challenges. India‟s Q1 GDP growth reached a multi-year low in Q1 (5.3% – down<br />
from more than 9% just one year earlier). The pattern is worse in Brazil while<br />
Russian prospects are being challenged by declining oil prices.<br />
Weak outside, more resilient inside<br />
In a nutshell, the risk to growth in Q3 is to the downside for EMs in general and<br />
BRICs in particular. However, interestingly, these economies are suffering<br />
from slowing exports and the prospects <strong>of</strong> slower external demand, but<br />
they are more resilient internally. There is actually a significant difference<br />
between how supply and demand indicators have behaved over the past few<br />
months. As illust<strong>rate</strong>d in the side charts, industrial production (pink line) has<br />
dropped, but retail sales (green line) has been more resilient. This is even more<br />
so when China is excluded (a set including only Brazil, India and Russia is<br />
considered – see second chart). This reflects that the shock is coming from<br />
outside. Weakening global demand (mainly because <strong>of</strong> Europe, partly because <strong>of</strong><br />
China) has impacted the manufacturing sectors in EMs (Asia in particular). But<br />
EM consumers seem more resilient for the time being. This may not remain<br />
the case for too long, but at least most EMs enjoy some leeway that could be<br />
used to limit the impact <strong>of</strong> the global shock on domestic demand.<br />
What leeway to address the challenge?<br />
Once again, to focus on BRICs, there is significant fiscal leeway in China,<br />
Russia, and to a lesser extent Brazil (not so much in India). On the monetary<br />
front, there is leeway in China and to a more limited extent in the other three<br />
EM giants. A key point here is that China enjoys both monetary and fiscal<br />
leeway. True, China will try to avoid overshooting, like it did in 2008-09 when a<br />
large (too large?) stimulus was unveiled. However, we do expect a mix <strong>of</strong> greater<br />
bank credit, lower reserve ratios and government-driven investment to deliver a<br />
s<strong>of</strong>t landing. BRICs apart, should there be a persistent problem with demand<br />
coming from developed markets, fiscal leeway would be used to support<br />
domestic demand. Lower oil prices will also provide some fresh air to<br />
manufacturing sectors in EMs (Asia in particular).<br />
Our central scenario<br />
In a nutshell, under a central scenario whereby Greece does not exit the<br />
Eurozone and European institutions find a way to cap the financial stress, we<br />
expect EMs‘ <strong>economic</strong> growth to stabilise at some point in H2. We expect<br />
EMs to decele<strong>rate</strong> by about 1ppt from 6.2% in 2011 to 5.3% in 2012. The main<br />
risks to this scenario are: (1) the possible persistence <strong>of</strong> financial stress in<br />
Europe; (2) a stronger-than expected deceleration in China, possibly coming from<br />
the property price correction; and (3) improvements in the US job market falling<br />
short <strong>of</strong> expectations.<br />
Macro Prospects – no. 137 – 3 rd quarter 2012 31
Brazil: A clogged engine (for now)<br />
Economic growth has failed to pick up until now, in spite <strong>of</strong> the significant level <strong>of</strong> monetary stimulus. This is probably<br />
related to rising NPLs and the household debt burden. However, we believe that this situation will not prevent stronger<br />
growth in H212. The BCB will probably cut the Selic <strong>rate</strong> by another 50bp at its July meeting, keeping it at this level until<br />
the end <strong>of</strong> the year. The currency has depreciated and this trend may continue in the short term. However, more<br />
pronounced weakening will occur only if there is a disruption to the international <strong>economic</strong> environment<br />
Brazil: household debt service to<br />
disposable income (%)<br />
25<br />
20<br />
15<br />
10<br />
5<br />
0<br />
Source: BCB<br />
Brazil: USD/BRL<br />
2.2<br />
2.1<br />
2.0<br />
1.9<br />
1.8<br />
1.7<br />
1.6<br />
1.5<br />
05 06 07 08 09 10 11 12<br />
Amortization <strong>Interest</strong><br />
Jan-10 Jul-10 Jan-11 Jul-11 Jan-12<br />
Source: BCB<br />
Industrial production<br />
2003=100, s.a.<br />
135<br />
130<br />
125<br />
120<br />
115<br />
110<br />
105<br />
100<br />
07 08 09 10 11 12<br />
Source: IBGE<br />
Industrial Production<br />
3 per. Mov. Avg. (Industrial Production)<br />
Most <strong>economic</strong> indicators released in Brazil during Q212 were disappointing,<br />
particularly those related to manufacturing. These negative surprises are<br />
occurring even though labour market conditions remain tight, fiscal policy<br />
is not becoming more restrictive and significant monetary stimulus is being<br />
given to the economy. Part <strong>of</strong> this can be explained by the uncertainty<br />
surrounding the international environment. However, since <strong>economic</strong> growth in<br />
Brazil is usually driven by household consumption and the economy is relatively<br />
closed, the monetary stimulus should be working by now.<br />
We believe that the main reason behind the surprisingly weak activity up<br />
until now is the increase in the household debt burden that has taken place<br />
over recent years, causing it to reach an all-time high at the beginning <strong>of</strong> 2012.<br />
This in turn has led to an increase in NPLs and has created some hurdles for<br />
PCE growth. Under these conditions, both banks and families are reluctant to<br />
take advantage <strong>of</strong> easier credit conditions. The credit channel <strong>of</strong> the<br />
transmission <strong>of</strong> monetary policy will remain clogged until this situation is<br />
somehow alleviated.<br />
There are many reasons to expect that the deleveraging <strong>of</strong> Brazilian families will<br />
not be as painful or long-lived as in developed countries. Firstly, the labour<br />
market is very tight, causing nominal labour income to grow by as much as 12%<br />
on a yearly basis. Also, the average maturity <strong>of</strong> household debt is very short<br />
(slightly above 600 days), causing it to be amortised rather quickly. Thirdly, while<br />
total new credit concessions to households have decele<strong>rate</strong>d lately, mortgages<br />
are still surging and there is no reason to expect that this trend will not continue.<br />
This change in the composition <strong>of</strong> credit concessions also helps to reduce the<br />
debt burden, since mortgages have much longer maturities and lower interest<br />
<strong>rate</strong>s. Finally, the government is putting a lot <strong>of</strong> pressure on public banks to<br />
reduce spreads and <strong>of</strong>fer more credit to consumers. So, we remain optimistic<br />
that growth will pick up in H212.<br />
Meanwhile, inflation continues to fall and the BCB is likely to keep cutting its<br />
policy <strong>rate</strong>. Currently, the Selic <strong>rate</strong> is at 8.5%, an all-time low, and we believe<br />
that it will be cut again to 8% in July before the easing cycle is over.<br />
In the FX market, the combination <strong>of</strong> lower interest <strong>rate</strong>s in Brazil, aggressive<br />
intervention, taxation <strong>of</strong> capital inflows and a deterioration <strong>of</strong> the international<br />
scenario has finally caused the BRL to become weaker – a development that the<br />
government has been trying to achieve for quite some time. In fact, the sharp<br />
depreciation over the past month has led the government to intervene on the<br />
other side, selling FX swap contracts in order to avoid problems on the inflation<br />
front. While the intervention has worked to reverse the downward trend, if risk<br />
aversion remains high and commodity prices fall, we could see the<br />
currency depreciating a little bit further. However, the government has<br />
many tools at its disposal to smooth this trend: from the possibility <strong>of</strong> further<br />
interventions through derivatives to the dismantling <strong>of</strong> the capital controls<br />
framework. Last but not least, it also has USD370bn in reserves. Thus, unless<br />
there is further disruption to the international environment in the short<br />
term, we do not expect the FX <strong>rate</strong> go higher than USD/BRL 2.15.<br />
Vladimir Vale<br />
vladimir.vale@ca-cib.com<br />
+55 11 38966418<br />
Macro Prospects – no. 137 – 3 rd quarter 2012 32
Russia: Long-term challenges front-loaded<br />
The recent depreciation <strong>of</strong> the RUB highlights the need to diversify the economy out <strong>of</strong> oil and to modernise the country‟s<br />
structural framework. Low inflation should allow interest <strong>rate</strong>s not to be hiked too quickly, and the fiscal leeway may help to<br />
weather the global shock as well. But Russia has to decide quickly how it wants to change its business model.<br />
Investment and retail sales<br />
40%<br />
30%<br />
20%<br />
10%<br />
0%<br />
-10%<br />
-20%<br />
-30%<br />
Source: Datastream, Crédit <strong>Agricole</strong> CIB<br />
Supportive job market<br />
25%<br />
20%<br />
15%<br />
10%<br />
5%<br />
0%<br />
-5%<br />
-10%<br />
Source: Datastream, Crédit <strong>Agricole</strong> CIB<br />
Trade surplus and oil prices<br />
160<br />
140<br />
120<br />
100<br />
80<br />
60<br />
40<br />
20<br />
0<br />
01 02 03 04 05 06 07 08 09 10 11 12<br />
Retail sales (real YoY 3mma)<br />
Fixed investment (real YoY 3mma)<br />
01 0203 04 0506 07 0809 10 1112<br />
Real wages YoY (LHS) 3mma<br />
Unemployment <strong>rate</strong> (3mma %)<br />
01 02 03 04 05 06 07 08 09 10 11 12<br />
Oil prices WTI (USD/b LHS)<br />
Trade surplus (USD Bn RHS)<br />
Source: Datastream, Crédit <strong>Agricole</strong> CIB<br />
Sébastien Barbé<br />
sebastien.barbe@ca-cib.com<br />
+ 33 1 57 87 17 23<br />
11%<br />
10%<br />
9%<br />
8%<br />
7%<br />
6%<br />
5%<br />
4%<br />
25<br />
20<br />
15<br />
10<br />
5<br />
0<br />
The RUB has been under strong pressure over the past few weeks, reflecting not<br />
only the rise in global risk aversion, but also specific challenges currently facing<br />
Russia.<br />
Under oil’s influence<br />
True, as with almost every single EM currency, the RUB has been sold amid a<br />
rise in global risk aversion. However, Russia‟s case is special: Russia‟s<br />
vulnerability comes from oil prices. The rather sharp decrease in oil prices<br />
suggests that the record-large trade surplus recorded in the December-<br />
March period is unlikely to be replicated immediately ahead. From more than<br />
USD20bn on average during that period, the trade surplus may drop to about<br />
USD15bn in coming months – still a rather large surplus, but also meaning<br />
significantly less support granted to the currency. More fundamentally, the drop in<br />
oil prices suggests that Russia is poised for a structural decline in its current<br />
account surplus, given the robust momentum <strong>of</strong> domestic demand and the lack <strong>of</strong><br />
strong production capacity in the manufacturing and consumer goods sector.<br />
Momentum slowing<br />
Beyond the impact on the balance <strong>of</strong> payments, lower oil prices also challenge<br />
future <strong>economic</strong> growth. True, GDP growth has been strong in Q1. GDP actually<br />
increased by a stronger-than-expectations 4.9% YoY. This certainly provides<br />
some leeway in the short term. However, the <strong>economic</strong> momentum seems to<br />
have mode<strong>rate</strong>d since March, on the supply (industrial production) as well as<br />
the demand side (retail sales). True, a rather supportive job market and rising<br />
PMI in April-May suggest only a mild deceleration ahead, rather than a hard<br />
landing.<br />
What business model?<br />
However, s<strong>of</strong>tening growth reminds investors that Russia needs to diversify its<br />
<strong>economic</strong> model out <strong>of</strong> oil. True, fiscal leeway is not a problem here. Russia<br />
displays one <strong>of</strong> the lowest government-debt-to-GDP ratios in the world, and<br />
such fiscal leeway could be <strong>of</strong> great help in modernising and diversifying<br />
the economy. Still, as at today the st<strong>rate</strong>gy to achieve this goal is not completely<br />
clear. In particular, there seems to be an ongoing debate between those willing to<br />
invest in the hydrocarbon sector to enhance Russia‟s role as a super-power in the<br />
energy sector and those that would prefer the money to be spent outside <strong>of</strong> the<br />
oil & gas industry in order to diversify the economy. Also, in both cases, the<br />
institutional framework would have to be improved for Russia to unleash its<br />
potential. This is, however, a medium-term task. In the short term, Russia is<br />
vulnerable to lower oil prices, and to capital outflows, which have remained rather<br />
large in April.<br />
Balancing act<br />
The reaction <strong>of</strong> the central bank to the global negative shock that seems to be<br />
intensifying (bad US jobs reports, recent European PMIs, disappointing Chinese<br />
numbers) is likely to be a mix <strong>of</strong> growth-supporting measures together with<br />
attempts to limit the RUB depreciation. Hence, we recently revised down our<br />
interest <strong>rate</strong> <strong>forecasts</strong>. We now expect the CBR to increase interest <strong>rate</strong>s only<br />
very gradually. We also acknowledge that the risk remains on the downside:<br />
should the global shock intensify, <strong>rate</strong>s could be kept stable for longer. FX-wise,<br />
the CBR has stepped in and increased its FX interventions in order to limit the<br />
depreciation <strong>of</strong> the RUB. It will likely continue to do so, and we expect the RUB to<br />
stabilise against its reference EUR-USD basket in Q3 as oil prices stabilise.<br />
Macro Prospects – no. 137 – 3 rd quarter 2012 33
India: Going through a rough patch…<br />
Economic activity is marking time (somewhat), inflation still looks threatening, the current account deficit is widening and<br />
the INR is in free-fall. The Indian authorities have scant room for manoeuvre. It looks like high time they re-launched the<br />
structural reform programme, but this is difficult in the current climate. Growth is likely to disappoint in 2012/13 and to settle<br />
durably below the 8-9% potential level to which India could aspire even quite recently.<br />
India: INR and current account<br />
balance<br />
60<br />
55<br />
50<br />
45<br />
40<br />
35<br />
Jun-07 Dec-08 Jun-10 Dec-11<br />
Current acct balance (12-mth aggr,<br />
USDbn) (rhs)<br />
USD/INR<br />
Source: RBI, Ministry <strong>of</strong> Trade and Industry,<br />
Reuters)<br />
India: inflation<br />
25<br />
20<br />
15<br />
10<br />
5<br />
0<br />
-5<br />
-10<br />
-15<br />
Source: OEA<br />
India: capital goods production and<br />
car/motorcycle sales<br />
70<br />
50<br />
30<br />
10<br />
-10<br />
-30<br />
Source: CSO, OEA<br />
Sylvain Laclias<br />
sylvain.laclias@credit-agricole-sa.fr<br />
+33 1 43 23 65 55<br />
0<br />
-10<br />
-20<br />
-30<br />
-40<br />
-50<br />
-60<br />
-70<br />
Jun-07 Dec-08 Jun-10 Dec-11<br />
Wholesale prices Food products<br />
Energy products Manuf. products<br />
YoY, %<br />
Jun-07 Dec-08 Jun-10 Dec-11<br />
Capital goods production<br />
Motorcycle sales<br />
Car sales<br />
Growth came out at 5.3% YoY in Q112 (the fourth in India‟s financial year), ie,<br />
below the 6.1% <strong>of</strong> the previous quarter. This was due, first <strong>of</strong>f, to the slower <strong>rate</strong><br />
<strong>of</strong> increase in public and private consumption. On the other hand, investment<br />
rebounded, although the general trend was anaemic. Over 2011/12 as a whole,<br />
GDP grew 6.7%. We need to go back nine years, to 2002/03, to find a worse<br />
performance.<br />
The slowdown in <strong>economic</strong> activity that began in the second quarter <strong>of</strong><br />
2011 thus extended into the first three months <strong>of</strong> 2012, and in a rather<br />
marked fashion. This trend could prompt the Reserve Bank <strong>of</strong> India (RBI) to cut<br />
its interest <strong>rate</strong>s a little more in the near future, or at least to take quantitative<br />
measures to boost the liquidity in circulation in the economy. Inflation is a<br />
problem, however, as it is proving sticky on the downside. This is due to<br />
supply-side constraints (and in the agriculture and agribusiness sectors in<br />
particular), the high price <strong>of</strong> oil, and the depreciation <strong>of</strong> the INR (by around 13%<br />
since February, taking it to a record low), rather than to an excessively<br />
accommodative monetary policy. Even so, it limits the RBI‘s room for<br />
manoeuvre.<br />
The government‘s elbow room seems even more restricted. For the past<br />
three years, the federal government‟s budget deficit has run at around 9% <strong>of</strong><br />
GDP. Public debt stands at 65-70% <strong>of</strong> GDP, and the growth slowdown will do<br />
little to help bring it down. The condition <strong>of</strong> the state‟s financial accounts calls for<br />
a degree <strong>of</strong> austerity, especially as S&P put India‟s sovereign rating on credit<br />
watch with a negative outlook in April.<br />
There is unlikely to be any external helping hand in the short term – not from<br />
European demand, at any <strong>rate</strong>. Foreign investors, for their part, seem likely to<br />
remain cautious, as the deterioration in India‟s <strong>economic</strong> climate, also marked by<br />
a widening <strong>of</strong> its current account deficit (currently at 3.5-4.0% <strong>of</strong> GDP), together<br />
with the lack <strong>of</strong> political visibility (see below), is having a negative and perhaps<br />
lasting impact on foreign investor perceptions <strong>of</strong> Indian risk. Only the recent fall in<br />
the oil price, if it lasts, could ease pressures on the price <strong>of</strong> energy products.<br />
Because <strong>of</strong> this, Indian growth is likely to continue to disappoint over the<br />
coming months. In any event, the latest capital goods production and car &<br />
motorcycle sales data points to continued poor investment and consumption<br />
levels at the start <strong>of</strong> the second quarter <strong>of</strong> the calendar year. From now on, the<br />
central scenario is based on GDP growth close to 6.7% in 2012/13, comparable<br />
to that in 2011/12.<br />
Unless, that is, the weather conditions during the June-September monsoon<br />
season result in an excellent harvest – which is highly unlikely – and unless,<br />
above all, the government can find in this difficult <strong>economic</strong> climate a sufficiently<br />
strong reason to clarify its policy and re-launch its programme <strong>of</strong> structural<br />
reforms. This is not outside the realms <strong>of</strong> probability, but the currently weak<br />
position <strong>of</strong> the Congress Party raises fears <strong>of</strong> a certain inaction or only very<br />
modest and insufficient advances. There are even grounds for fearing a<br />
heightening <strong>of</strong> political tension, especially as the prospect <strong>of</strong> a general election in<br />
2014 is likely to exacerbate uncooperative behaviour within the ruling coalition.<br />
That in turn would affect foreign investor confidence even more, undermine the<br />
INR further and, at the end <strong>of</strong> the day, weigh further on <strong>economic</strong> activity.<br />
India‘s economy is in a parlous state. It is up to the country‘s leadership to<br />
react. The challenge is not only short-term, but also medium-term, namely<br />
to safeguard both growth potential and India‘s country/sovereign risk<br />
pr<strong>of</strong>ile.<br />
Macro Prospects – no. 137 – 3 rd quarter 2012 34
China: Growth target at risk<br />
Slowing growth momentum is threatening the 7.5% policy target. Unless policymakers stimulate the economy by the<br />
summer, it will likely be missed. We expect another 25bp in lending <strong>rate</strong> cuts and up to 150bp in RRR cuts.<br />
Stimulus needs to happen soon to<br />
support 2012 growth target<br />
14<br />
12<br />
10<br />
8<br />
6<br />
4<br />
2<br />
0<br />
GDP growth<br />
Q108 Q109 Q110 Q111 Q112 Q113<br />
QoQ YoY<br />
Source: CEIC, Crédit <strong>Agricole</strong> CIB<br />
CNY appreciation has stalled<br />
6.50<br />
6.45<br />
6.40<br />
6.35<br />
6.30<br />
6.25<br />
%<br />
Source: Bloomberg, Crédit <strong>Agricole</strong> CIB<br />
Chinese policy <strong>rate</strong>s<br />
8<br />
7<br />
6<br />
5<br />
4<br />
3<br />
2<br />
Stimulus <strong>of</strong><br />
9 Nov 2008<br />
recovery<br />
takes 1 - 2<br />
quarters<br />
USD/CNY<br />
Jun-11 Sep-11 Dec-11 Mar-12<br />
%<br />
USD/CNY<br />
USD/CNY fixing<br />
1Y USD/CNY NDF<br />
Forecasts<br />
Downward<br />
trend reversed<br />
-25bp<br />
-85bp<br />
+7.5bp<br />
-25bp<br />
Forecasts<br />
Jul-08 Jul-09 Jul-10 Jul-11 Jul-12<br />
1Y benchmark lending<br />
1Y best lending<br />
1Y benchmark deposit<br />
1Y best deposit<br />
Time for policymakers to act more decisively<br />
The latest data is pointing to an accele<strong>rate</strong>d slowdown in growth momentum.<br />
Both demand and output indicators have weakened, and sentiment measures<br />
point to further deceleration. At the same time, the deteriorating external<br />
environment and slowing domestic residential real estate market are posing<br />
additional downside risks.<br />
The situation in Europe is particularly dangerous. Exports to the Eurozone are<br />
shrinking, which will likely contribute to trade subtracting 1.0-1.5ppt from 2012<br />
growth. The Eurozone crisis is also exacerbating the already sharp<br />
slowdown in capital spending. Investment contributed only 2.7ppt to Q1 YoY<br />
GDP growth – the least in the history <strong>of</strong> the data series – partly due to weak<br />
direct investment coming from the Eurozone. In the first months <strong>of</strong> 2012, foreign<br />
direct investment fell 2.4% YoY – mostly because inflows from seven key<br />
Eurozone countries dropped 12.1%.<br />
The housing market is another weak spot. Home prices have been falling for<br />
almost ten months. This reflects the government‟s policy to make housing more<br />
affordable. Recent State Council comments point to the maintenance <strong>of</strong> real<br />
estate curbs, which implies that prices will keep declining. This is having a major<br />
negative impact on demand and construction, and poses a bigger risk to<br />
GDP growth than weak exports.<br />
As a result, GDP growth is likely to slow towards 7.0% YoY in Q212 and Q312,<br />
threatening the annual target <strong>of</strong> 7.5%. Unless the government acts soon, the<br />
target may be missed. We believe that an extra CNY500bn in aggregate<br />
demand is needed this year. Fortunately, policymakers have begun to act. PM<br />
Wen said that they should give “more priority to maintaining growth”, and the<br />
State Council announced a series <strong>of</strong> measures to stimulate demand. They<br />
have not been billed as a Lehman-style package, because downside risks to<br />
growth are smaller and the government does not want to grow through debt. The<br />
announcement listed three avenues through which the stimulus will be delivered:<br />
infrastructure investment, increase in financing, and support for consumption. We<br />
also continue to expect another 25bp in lending <strong>rate</strong> cuts following the reduction<br />
earlier in June, and up to 150bp in RRR cuts.<br />
Another tool being used for stimulus is FX policy. In May, the CNY saw its biggest<br />
monthly fall since 1994, which was policy-driven, as most <strong>of</strong> it can be explained<br />
by weaker fixings. The slowdown in exports convinced the PBoC that it<br />
needs to provide support for exporters, and FX policy has apparently<br />
shifted away from gradual appreciation against the USD towards preventing<br />
further REER gains. In an environment where the USD is rising against most<br />
currencies <strong>of</strong> China‟s major trading partners, stabilising the REER requires a<br />
decline in the CNY against the US unit. As long as the USD keeps rising in global<br />
markets, the CNY will likely weaken. Gains may not resume until either the<br />
USD falls in global markets or the Eurozone crisis eases enough to convince<br />
policymakers that further REER appreciation will not weigh unduly on exports and<br />
thus on GDP growth.<br />
Source: Bloomberg, Crédit <strong>Agricole</strong> CIB<br />
Dariusz Kowalczyk<br />
dariusz.kowalczyk@ca-cib.com<br />
+852 28 26 15 19<br />
Macro Prospects – no. 137 – 3 rd quarter 2012 35
Central Europe: Hopes dashed<br />
Central European growth has continued to deterio<strong>rate</strong> and will barely rebound in the months ahead given the renewed<br />
European tensions. Hopefully, Central European countries are on track to meet fiscal targets, but mounting unrest may<br />
spur a higher risk premium. Therefore, central banks‟ room for manoeuvre is limited and they should cap FX depreciation.<br />
Growth outlook deterioration<br />
20<br />
15<br />
10<br />
5<br />
0<br />
-5<br />
-10<br />
%<br />
Jun-08 Jun-09 Jun-10 Jun-11 Jun-12<br />
CZK PLN HUF<br />
Source: Bloomberg, Crédit <strong>Agricole</strong> CIB<br />
Guillaume Tresca<br />
guillaume.tresca@ca-cib.com<br />
+33 1 41 89 18 47<br />
While the CE4 rally in Q1 raised hopes, <strong>economic</strong> activity has finally deterio<strong>rate</strong>d<br />
in Central Europe with the Czech Republic and Hungary falling back into<br />
recession. The renewed tensions within the Eurozone will cap any rebound<br />
in the months ahead and activity will remain anaemic.<br />
The <strong>economic</strong> background, in other words, is roughly similar to what we observed<br />
three months ago while the outlook is worsening on the back <strong>of</strong> the European<br />
deterioration. Exports will hardly rebound while domestic demand is hampered<br />
by austerity measures. Thankfully, fiscal slippage seems to be minimal and<br />
budget targets will likely be reached.<br />
Nevertheless, as in the Eurozone, unrest is mounting, challenging the ruling<br />
governments in the implementation <strong>of</strong> austerity. It should not be a major threat<br />
but will likely push risk premia higher. In Romania, the new government is likely<br />
committed to following the IMF‟s requests while the Czech government should<br />
face a new confidence vote. Poland and Hungary seem to be more immune.<br />
Given this backdrop, central banks‘ room for manoeuvre is limited. Economic<br />
deceleration would call for easier monetary policy but capping FX depreciation<br />
will remain one <strong>of</strong> the main objectives, especially in Poland (FX intervention and<br />
tighter monetary policy) and Hungary, where the central bank should remain on<br />
hold. Admittedly, any agreement with the IMF would ease the Hungarian central<br />
bank‟s stance and pressure on the HUF, but we sense that the negotiation path<br />
will be bumpy, with the government reluctant to commit to the IMF‟s demand.<br />
Turkey: Delicate landing<br />
For the first time in 15 years, Ankara looks like achieving a successful s<strong>of</strong>t landing. However, the country is still one <strong>of</strong> the<br />
most sensitive to a downturn in market confidence. This keeps the exchange <strong>rate</strong> highly volatile and locks in its sovereign<br />
rating.<br />
Turkey: activity and prices<br />
20<br />
15<br />
10<br />
5<br />
0<br />
-5<br />
-10<br />
-15<br />
-20<br />
-25<br />
Moving 3-month avges<br />
% change, YoY<br />
2006 2007 2008 2009 2010 2011<br />
Industrial prod.<br />
Consumer prices (rhs)<br />
Source: Crédit <strong>Agricole</strong> SA<br />
Tania Sollogoub<br />
tania.sollogoub@credit-agricole-sa.fr<br />
+33 1 43 23 49 27<br />
14<br />
12<br />
10<br />
8<br />
6<br />
4<br />
2<br />
0<br />
The two best indicators <strong>of</strong> a s<strong>of</strong>t landing are industrial production (strongly<br />
correlated with GDP), which fell to 1.9% in April compared with 4.4% in February,<br />
and lending to the economy, which should dip below the 20% threshold in 2012.<br />
The slowdown in domestic demand is contributing to a rebalancing <strong>of</strong> the<br />
external accounts: the current account deficit came out at USD71.8bn in March<br />
(12-month aggregate), compared with a deficit <strong>of</strong> USD78.6bn in October, while<br />
the April trade deficit is 27% down on its 2011 level. Most importantly, the<br />
speedy redirection <strong>of</strong> export flows reveals the flexibility in the economy<br />
(while also benefiting from a weak TRL): the EU now accounts for only 38% <strong>of</strong><br />
sales compared with 49% in 2011, and trade with the Middle East is rocketing<br />
(Iraq is Turkey‟s biggest export market after Germany). The shrinkage in the<br />
current account deficit is reinforcing market confidence and it is easy to roll over<br />
commercial borrowing (down for banks). Public debt levels are also reassuring,<br />
falling to 37% <strong>of</strong> GDP in 2012.<br />
Despite all this, currency risk remains high, and promotion to investment<br />
grade is out <strong>of</strong> the question: the amounts to finance are too high, currency<br />
reserves too low relative to short-term debt levels, and inflation too high, coming<br />
in at 9.2% in May. In view <strong>of</strong> this, the central bank is acting cautiously, stabilising<br />
interest <strong>rate</strong>s (and regulating liquidity thanks to obligatory reserves). This caution<br />
is essential, as Greek turbulence could spill over at any time, making financing<br />
more difficult for Turkey.<br />
Macro Prospects – no. 137 – 3 rd quarter 2012 36
South Africa: Weak ZAR and lacklustre growth<br />
The ZAR‟s current weakness is due more to a widespread rise in risk aversion than to the South African economy‟s poor<br />
growth performance. This has been disappointing, however, and could fall further if tensions worsen in Europe.<br />
South Africa: ZAR and risk aversion<br />
120<br />
115<br />
110<br />
105<br />
100<br />
95<br />
90<br />
85<br />
80<br />
1/1/2010=100<br />
2010 2011 2012<br />
ZAR/USD<br />
BRL/USD<br />
INR/USD<br />
EMBI Global Composite (rhs)<br />
Source: Reuters, JP Morgan, Crédit <strong>Agricole</strong><br />
SA<br />
Jean-Louis Martin<br />
jean-louis.martin@credit-agricole-sa.fr<br />
+33 1 43 23 65 58<br />
500<br />
450<br />
400<br />
350<br />
300<br />
250<br />
200<br />
150<br />
100<br />
The ZAR has deterio<strong>rate</strong>d sharply in recent months, with two periods where<br />
it plummeted – in September 2011 (down 12.6% over one month) and, after<br />
rallying, in May 2012, this time depreciating by 9.6%. Its trajectory, especially<br />
over the past year, correlates closely with levels <strong>of</strong> risk aversion (see graph) far<br />
more than for other emerging currencies (the BRL, INR, MXN and COP, etc),<br />
almost all <strong>of</strong> which have depreciated. The ZAR‟s weakness is, therefore, much<br />
more closely linked to a general trend towards capital flight than to South Africa‟s<br />
specific <strong>economic</strong> performance.<br />
The Governor <strong>of</strong> South Africa‘s central bank has also said that she is not<br />
considering intervening on the markets, arguing that this would not be an<br />
effective use <strong>of</strong> its foreign currency reserves. She even went further, saying<br />
that more weight should be accorded to growth prospects in any decision on<br />
interest <strong>rate</strong>s, even though the key <strong>rate</strong> has been below the inflation <strong>rate</strong> since<br />
September 2011.<br />
Growth prospects, however, are poor. Growth was no more than 2.1% in Q112,<br />
after falling in each quarter in 2011 (3.7%, then 3.3%, 2.9%, 2.6%). It will be very<br />
difficult for the South African economy to come close to 3% growth in 2012. It<br />
therefore risks shedding more jobs (75,000 in Q1, with the unemployment <strong>rate</strong><br />
rising from 23.9% to 25.2%).<br />
Mexico: Growth is helping, but what will politics do?<br />
Mexico is traversing through acceptable <strong>economic</strong> fundamentals. The question, however, is whether or not this will be<br />
enough to counteract current political trends that increasingly seem to be becoming tighter. Although the PRI is still the<br />
frontrunner in the presidential election race, the PRD is closing the gap quickly.<br />
Mexico and US IP: Carbon-copy<br />
cycles<br />
10<br />
5<br />
0<br />
-5<br />
-10<br />
-15<br />
-20<br />
%, YoY<br />
07 08 09 11<br />
US IP<br />
MX IP<br />
Source: Bloomberg<br />
Mario Robles<br />
mario.robles@ca-cib.com<br />
+1 212 261 7736<br />
On the one hand, the Mexican economy continues to deliver good results in spite<br />
<strong>of</strong> the global deceleration trend seen in past quarters. The close links to the US<br />
seem to be working in its favour, as the demand for Mexican exports,<br />
manufacturing in particular, continues to be a pillar <strong>of</strong> growth. Moreover,<br />
auto-mobile production remains an industry that has been delivering better-thanexpected<br />
results, in line with still-acceptable US domestic demand and<br />
consumption trends.<br />
On the other hand, politics – presidential race campaigning, a topic that seemed<br />
harmless until a few weeks ago – is gaining momentum. The latest polls show<br />
that the gap between the frontrunner, PRI, and PRD is closing at a fast pace.<br />
During 2006, the same event created a stir in local markets as participants<br />
punished local assets, with local <strong>rate</strong>s and the MXN being the chosen vehicles to<br />
do so. This time around, the picture is moving in the same direction according to<br />
some polls published recently. while other surveys still do not clearly show the<br />
same results. In any case, this is an outcome that has not been priced in until<br />
recently and thus there may be room for volatility in the run-up to election day, 1<br />
July.<br />
Macro Prospects – no. 137 – 3 rd quarter 2012 37
Egypt: A welcome stabilisation in currency reserves<br />
The stabilisation <strong>of</strong> Egypt‟s currency reserves since April, after a prolonged fall over 15 months, plus the news <strong>of</strong> a Saudi<br />
Arabian loan, has slowed the deterioration in the central bank‟s ability to ensure exchange <strong>rate</strong> stability during summer<br />
2012. A strong, rapid devaluation <strong>of</strong> the EGP during that period could negatively impact the political transition process.<br />
Currency reserves and exchange<br />
<strong>rate</strong><br />
40<br />
35<br />
30<br />
25<br />
20<br />
15<br />
10<br />
5<br />
0<br />
USDbn<br />
May-10 Nov-10 May-11 Nov-11<br />
Currency reserves<br />
USD/EGP (rhs)<br />
Source: Central Bank <strong>of</strong> Egypt<br />
USD/EGP<br />
Riadh El-Hafdhi<br />
riadh.el-hafdhi@credit-agricole-sa.fr<br />
+33 1 57 72 33 35<br />
6.1<br />
6.0<br />
5.9<br />
5.8<br />
5.7<br />
5.6<br />
5.5<br />
5.4<br />
In 2011, in the wake <strong>of</strong> the revolution, Egypt posted a record 8% <strong>of</strong> GDP<br />
balance <strong>of</strong> payments deficit. In parallel, the country‘s foreign currency<br />
reserves fell from the equivalent <strong>of</strong> eight months‘ imports to three between<br />
January 2011 and May 2012. That fall raises the spectre <strong>of</strong> a rapid and perhaps<br />
disorderly devaluation <strong>of</strong> the EGP, which is currently being supported by the<br />
central bank at close to USD/EGP 6. For several weeks, the markets have also<br />
been forecasting a 20% devaluation by end-2012. It is highly likely that a largescale,<br />
rapid devaluation <strong>of</strong> the EGP would have a negative impact on the political<br />
transition by driving already high inflation even higher and widening the budget<br />
deficit, already forecast at close to 10% <strong>of</strong> GDP.<br />
News <strong>of</strong> a stabilisation in the country‘s foreign currency reserves since<br />
April has, therefore, been welcome. In the short term, this will strengthen the<br />
central bank‟s ability to maintain, if it so wishes, a degree <strong>of</strong> stability in the EGP<br />
during the weeks <strong>of</strong> the ongoing fragile and difficult political transition – all the<br />
more since the central bank should receive about USD4bn in June (a Saudi loan<br />
and proceeds from the sale <strong>of</strong> Mobinil shares). The stabilisation <strong>of</strong> the currency<br />
reserves is also strengthening a number <strong>of</strong> other positive signals, such as the<br />
20% rise in the stock market since January, higher exports, and the recent<br />
success <strong>of</strong> an over-subscribed USD-denominated bond issue. At present,<br />
financial assistance representing close to 5% <strong>of</strong> GDP would be sufficient to<br />
avert the gloomiest crisis scenarios over the next year, but that support<br />
would be facilitated by a successful transfer <strong>of</strong> transitional powers to a<br />
legitimate government during the summer months. This still remains a<br />
challenge.<br />
Morocco and Tunisia: Serious budget difficulties in 2012<br />
Price subsidies are pushing public budgets to record highs, and the slowdown in the European economy is affecting trade<br />
and currency inflows. The two countries want to limit their application to the markets this year because <strong>of</strong> the high cost, but<br />
they will have to come up with new sources <strong>of</strong> tax receipts.<br />
Morocco and Tunisia: budget<br />
balance<br />
2%<br />
0%<br />
-2%<br />
-4%<br />
-6%<br />
-8%<br />
-10%<br />
% GDP<br />
2007 2008 2009 2010 2011 2012f<br />
Tunisia: budget deficit<br />
Morocco: Budget deficit<br />
Source: Crédit <strong>Agricole</strong> CIB<br />
Riadh El-Hafdhi<br />
riadh.el-hafdhi@credit-agricole-sa.fr<br />
+33 1 57 72 33 35<br />
Both Morocco and Tunisia will run 2012 budget deficits <strong>of</strong> 6% <strong>of</strong> GDP. For<br />
each country, limiting the deficit to this already high level will be something <strong>of</strong> a<br />
challenge because growth in tax receipts is limited by unprecedented political and<br />
social unrest – especially in Tunisia, by the <strong>economic</strong> crisis in Europe, and by a<br />
system <strong>of</strong> food and oil price subsidies that is widening the public deficit as prices<br />
rocket. Zero growth in Europe, the political crisis in Tunisia, and the forecast 40-<br />
50% drop in Morocco‟s cereals production have also caused <strong>of</strong>ficial 2012 growth<br />
<strong>forecasts</strong> to be revised downwards, to 3% in Morocco and 2.5% in Tunisia.<br />
The question <strong>of</strong> financing public deficits is thus one <strong>of</strong> the main challenges<br />
facing the two newly-elected governments against degraded social<br />
backdrops. Morocco can still rely on its foreign currency reserves that add up to<br />
close to 5 month <strong>of</strong> imports, while Tunisia has a US guarantee to raise up to 600<br />
million dollars. But those funds alone will not be enough for Tunisia, which wants<br />
to pursue a stimulus policy. In addition, Morocco‟s foreign exchange reserves are<br />
expected to take the hit <strong>of</strong> the European <strong>economic</strong> slowdown and decrease<br />
markedly through 2012. Increased support from multilateral agencies would<br />
seem useful for the two economies, failing any sharp falls in oil and food<br />
prices, or the decision to implement higher taxes.<br />
Macro Prospects – no. 137 – 3 rd quarter 2012 38
Exchange <strong>rate</strong> <strong>forecasts</strong><br />
21-Jun Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Jan-00<br />
USD Exchange <strong>rate</strong><br />
Industrialised countries<br />
Euro EUR/USD 1.26 1.27 1.26 1.26 1.25 1.25 1.25 0.00<br />
Japan USD/JPY 80 81 83 87 88 89 90 0<br />
United Kingdom GBP/USD 1.57 1.57 1.58 1.58 1.58 1.60 1.60 0.00<br />
Sw itzerland USD/CHF 0.95 0.94 0.98 1.01 1.06 1.06 1.06 0.00<br />
Canada USD/CAD 1.02 0.99 0.96 0.94 0.93 0.95 0.96 0.00<br />
Australia AUD/USD 1.01 1.03 1.08 1.08 1.06 1.05 1.04 0.00<br />
New Zealand NZD/USD 0.80 0.80 0.84 0.82 0.80 0.81 0.79 0.00<br />
Asia<br />
China USD/CNY 6.36 6.29 6.20 6.16 6.13 6.09 6.05 0.00<br />
Hong Kong USD/HKD 7.76 7.77 7.77 7.77 7.77 7.77 7.77 0.00<br />
India USD/INR 56.52 56.00 52.00 51.25 50.50 49.75 49.00 0.00<br />
Indonesia USD/IDR 9479 9400 9200 8975 8750 8525 8300 0<br />
Malaysia USD/MYR 3.18 3.18 3.09 3.03 2.97 2.91 2.85 0.00<br />
Philippines USD/PHP 42.4 44.0 42.7 42.3 41.9 41.4 41.0 0.0<br />
Singapore USD/SGD 1.27 1.29 1.25 1.23 1.21 1.19 1.17 0.00<br />
South Korea USD/KRW 1152 1185 1140 1113 1085 1058 1030 0<br />
Taiw an USD/TWD 29.9 29.9 29.3 29.1 28.8 28.6 28.3 0.0<br />
Thailand USD/THB 31.7 31.5 30.9 30.5 30.1 29.7 29.3 0.0<br />
Vietnam USD/VND 20920 21150 21300 21500 21750 22000 22250 0<br />
Latin America<br />
Argentina USD/ARS 4.50 4.65 4.50 4.40 4.30 4.30 4.30 0.00<br />
Brazil USD/BRL 2.03 2.10 2.02 1.95 1.95 1.90 1.95 0.00<br />
Mexico USD/MXN 13.73 13.40 12.60 12.40 12.20 12.50 12.40 0.00<br />
Africa<br />
South Africa USD/ZAR 8.26 7.80 7.70 7.50 7.40 7.40 7.40 0.00<br />
TRY/ZAR 4.59 4.46 4.53 4.55 4.63 4.63 4.63 0.00<br />
Emerging Europe<br />
Poland USD/PLN 3.37 3.44 3.41 3.41 3.44 3.36 3.32 0.00<br />
Russia USD/RUB 32.93 32.55 33.35 32.68 33.71 33.71 34.16 0.00<br />
Basket/RUB 36.85 36.50 37.25 36.50 37.50 37.50 38.00 0.00<br />
Turkey USD/TRY 1.80 1.75 1.70 1.65 1.60 1.60 1.60 0.00<br />
Euro Cross <strong>rate</strong>s<br />
Industrialised countries<br />
Japan EUR/JPY 101 103 105 110 110 111 113 0<br />
United Kingdom EUR/GBP 0.807 0.810 0.800 0.800 0.790 0.780 0.780 0.000<br />
Sw itzerland EUR/CHF 1.20 1.20 1.24 1.27 1.33 1.33 1.33 0.00<br />
Sw eden EUR/SEK 8.84 9.20 9.30 9.40 9.35 9.32 9.30 0.00<br />
Norw ay EUR/NOK 7.50 7.45 7.40 7.35 7.30 7.25 7.20 0.00<br />
Central Europe<br />
Czech Rep. EUR/CZK 25.56 25.30 25.00 25.00 24.60 24.60 24.60 0.00<br />
Hungary EUR/HUF 287 300 300 300 300 290 290 0<br />
Poland EUR/PLN 4.26 4.37 4.30 4.30 4.30 4.20 4.15 0.00<br />
Romania EUR/RON 4.46 4.40 4.40 4.40 4.30 4.30 4.30 0.00<br />
Source: Crédit <strong>Agricole</strong> CIB<br />
Macro Prospects – no. 137 – 3 rd quarter 2012 39
<strong>Interest</strong> <strong>rate</strong> <strong>forecasts</strong> – developed countries<br />
21-Jun Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Jan-00<br />
USA<br />
Fed funds 0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0.00<br />
3M 0.47 0.40 0.40 0.40 0.40 0.55 0.60 0.00<br />
2Y 0.30 0.40 0.75 1.30 1.80 2.15 2.50 0.00<br />
10Y 1.63 2.25 2.50 2.60 2.75 3.20 3.50 0.00<br />
Japan<br />
Call 0.08 0-0.10 0-0.10 0-0.10 0-0.10 0-0.10 0-0.10 0.00<br />
3M 0.20 0.20 0.20 0.20 0.20 0.20 0.20 0.00<br />
2Y 0.10 0.10 0.15 0.15 0.20 0.20 0.25 0.00<br />
10Y 0.82 0.95 1.05 1.15 1.25 1.30 1.40 0.00<br />
Eurozone<br />
Repo 1.00 0.50 0.50 0.50 0.50 0.50 0.50 0.00<br />
3M 0.57 0.50 0.50 0.50 0.75 0.75 0.75 0.00<br />
2Y (Ger) 0.14 0.10 0.30 0.70 1.00 1.50 2.00 0.00<br />
10Y (Ger) 1.59 1.50 1.75 2.00 2.25 2.75 3.25 0.00<br />
United Kingdom<br />
Base <strong>rate</strong> 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.00<br />
3M 0.92 0.80 0.75 0.75 1.00 1.00 1.00 0.00<br />
2Y 0.29 0.35 0.55 0.95 1.25 1.75 2.25 0.00<br />
10Y 1.75 1.90 2.10 2.30 2.55 3.05 3.55 0.00<br />
Sw eden<br />
Repo 1.50 1.50 1.50 1.50 1.50 1.75 2.00 0.00<br />
Norw ay<br />
Deposit 1.50 1.50 1.50 1.75 2.00 2.25 2.50 0.00<br />
Canada<br />
Overnight Target 1.00 1.00 1.00 1.25 1.50 1.75 2.00 0.00<br />
Australia<br />
Cash Target 3.50 3.50 3.25 3.25 3.25 3.50 3.50 0.00<br />
New Zealand<br />
Official Cash Rate 2.50 2.50 2.50 2.50 2.75 2.75 3.00 0.00<br />
Note: 3M <strong>rate</strong>s are interbank, 2Y and 10Y <strong>rate</strong>s are government bond yields<br />
Source: Crédit <strong>Agricole</strong> CIB<br />
Macro Prospects – no. 137 – 3 rd quarter 2012 40
<strong>Interest</strong> <strong>rate</strong> <strong>forecasts</strong> – emerging countries<br />
USA<br />
Japan<br />
Eurozone<br />
21-Jun Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Jan-00<br />
Fed funds 0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0.00<br />
3M 0.47 0.40 0.40 0.40 0.40 0.55 0.60 0.00<br />
2Y 0.30 0.40 0.75 1.30 1.80 2.15 2.50 0.00<br />
10Y 1.63 2.25 2.50 2.60 2.75 3.20 3.50 0.00<br />
Call 0.08 0-0.10 0-0.10 0-0.10 0-0.10 0-0.10 0-0.10 0.00<br />
3M 0.20 0.20 0.20 0.20 0.20 0.20 0.20 0.00<br />
2Y 0.10 0.10 0.15 0.15 0.20 0.20 0.25 0.00<br />
10Y 0.82 0.95 1.05 1.15 1.25 1.30 1.40 0.00<br />
Repo 1.00 0.50 0.50 0.50 0.50 0.50 0.50 0.00<br />
3M 0.57 0.50 0.50 0.50 0.75 0.75 0.75 0.00<br />
2Y (Ger) 0.14 0.10 0.30 0.70 1.00 1.50 2.00 0.00<br />
10Y (Ger) 1.59 1.50 1.75 2.00 2.25 2.75 3.25 0.00<br />
Asia<br />
China 1Y lending <strong>rate</strong> 6.31 6.06 6.06 6.06 6.31 6.31 6.56 0.00<br />
Hong Kong Base <strong>rate</strong> 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.00<br />
India Repo <strong>rate</strong> 8.00 7.50 7.50 7.50 7.50 7.75 7.75 0.00<br />
Indonesia BI <strong>rate</strong> 5.75 5.75 5.75 5.75 6.00 6.00 6.00 0.00<br />
Korea Call <strong>rate</strong> 3.25 3.25 3.25 3.25 3.50 3.50 3.50 0.00<br />
Malaysia OPR 3.00 3.00 3.00 3.00 3.00 3.00 3.00 0.00<br />
Philippines Repo <strong>rate</strong> 4.00 4.00 4.00 4.00 4.25 4.25 4.50 0.00<br />
Singapore 6M SOR 0.50 0.59 0.63 0.66 0.66 0.69 0.70 0.00<br />
Taiw an Redisc 1.88 1.88 1.88 1.88 1.88 2.00 2.13 0.00<br />
Thailand Repo 3.00 3.00 3.00 3.00 3.00 3.25 3.50 0.00<br />
Vietnam Refinancing <strong>rate</strong> 11.00 11.00 11.00 11.00 11.00 11.50 12.00 0.00<br />
Latin America<br />
Argentina 3M deposit 12.60 16.00 17.00 17.00 16.00 16.00 16.00 0.00<br />
Brazil Overnight/Selic 8.50 8.00 8.00 8.00 8.00 8.50 9.00 0.00<br />
Mexico Overnight <strong>rate</strong> 4.50 4.50 4.50 4.75 5.00 5.25 5.50 0.00<br />
Emerging Europe<br />
Czech Rep. 14D repo 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.00<br />
Hungary 2W repo 7.00 7.00 6.75 6.50 6.25 6.00 6.00 0.00<br />
Poland 7D repo 4.75 4.75 4.75 4.50 4.25 4.25 4.25 0.00<br />
Romania 2W repo 5.25 5.25 5.00 5.00 5.00 5.00 5.00 0.00<br />
Russia O/N Deposit <strong>rate</strong> 4.00 4.25 4.25 4.50 5.00 5.50 6.00 0.00<br />
O/N repo <strong>rate</strong> 5.25 5.25 5.25 5.25 5.75 6.25 6.75 0.00<br />
Turkey 1W repo <strong>rate</strong> 5.75 5.75 6.25 6.50 7.00 7.00 7.00 0.00<br />
Africa & Middle East<br />
South Africa Repo 5.50 5.50 5.75 6.00 6.25 6.50 7.00 0.00<br />
UAE Repo 1.00 1.00 1.00 1.00 1.00 1.50 2.00 0.00<br />
Saudi Arabia Repo 2.00 2.00 2.00 2.00 2.00 2.50 3.00 0.00<br />
Source: Crédit <strong>Agricole</strong> CIB<br />
Macro Prospects – no. 137 – 3 rd quarter 2012 41
Economic <strong>forecasts</strong><br />
Real GDP (YoY. %)<br />
CPI (YoY. %)<br />
Current Account (% GDP)<br />
11 12 13 11 12 13 11 12 13<br />
USA 1.7 2.2 2.3 3.1 2.2 2.2 -3.1 -3.3 -3.1<br />
JAPAN -0.7 2.5 1.1 -0.2 0.4 0.5 2.0 2.1 2.3<br />
EUROZONE 1.5 -0.3 0.8 2.7 2.4 1.8 0.0 0.1 0.5<br />
Germany 3.1 1.0 1.5 2.5 2.2 2.2 5.8 4.7 5.0<br />
France 1.7 0.3 1.1 2.3 2.1 1.9 -2.2 -1.8 -2.3<br />
Italy 0.5 -1.9 0.1 2.9 3.3 2.0 -3.2 -3.6 -2.5<br />
Spain 0.7 -1.8 -0.8 3.1 1.8 1.4 -3.5 -2.8 -1.9<br />
Greece -6.9 -6.0 -1.4 3.1 1.2 0.8 -9.4 -7.3 -6.5<br />
Other developed countries<br />
United Kingdom 0.7 -0.2 1.1 4.5 2.9 2.0 -3.0 -3.0 -2.5<br />
Norw ay 1.7 2.2 2.7 1.3 1.5 1.9 13.2 16.0 15.5<br />
Sw eden 4.0 0.8 2.3 3.0 1.6 2.0 6.7 6.9 6.7<br />
Sw itzerland 1.8 0.2 1.5 0.2 -0.4 1.0 12.5 11.0 11.0<br />
Canada 2.4 2.0 2.4 2.9 2.2 2.1 -2.8 -2.7 -2.7<br />
Australia 2.0 2.8 3.0 3.4 2.8 2.9 -2.2 -3.1 -2.6<br />
New Zealand 2.0 2.3 3.3 4.0 2.5 3.0 -4.0 -3.3 -2.5<br />
Asia 7.3 6.6 7.3 5.9 4.1 4.6 1.8 0.8 1.0<br />
China 9.2 8.0 8.5 5.4 3.4 4.0 2.7 1.3 1.1<br />
Hong Kong 5.0 2.5 5.0 5.6 3.8 4.0 6.6 4.8 7.5<br />
India 6.7 6.7 7.5 8.8 6.7 6.9 -4.2 -3.9 -3.8<br />
Indonesia 6.5 5.9 6.0 5.4 4.6 5.0 0.2 -0.3 0.7<br />
Korea 3.6 3.6 5.0 4.0 3.0 4.2 2.4 1.9 2.8<br />
Malaysia 5.1 3.2 4.0 3.2 2.2 2.6 11.0 8.9 10.0<br />
Philippines 3.7 3.5 4.5 4.8 3.0 3.8 0.2 1.2 2.0<br />
Singapore 4.9 3.4 5.5 5.3 4.1 4.5 21.8 18.0 20.0<br />
Taiw an 4.0 3.4 5.0 1.4 2.0 1.5 8.8 5.8 6.5<br />
Thailand 0.1 4.5 4.5 3.8 3.2 3.3 4.9 2.5 3.8<br />
Vietnam 5.9 4.9 6.3 18.7 9.5 10.5 -3.4 -3.6 -3.5<br />
Latin America 3.9 3.0 4.2 5.9 5.8 6.0 -1.7 -2.0 -2.1<br />
Argentina 8.5 3.5 4.0 11.0 12.0 14.0 -0.5 -1.1 -0.8<br />
Brazil 2.7 2.3 4.7 6.3 5.5 5.7 -2.7 -3.0 -3.2<br />
Mexico 3.9 3.9 3.7 3.4 3.8 3.4 -0.8 -1.1 -1.0<br />
Emerging Europe 4.8 3.1 3.4 6.7 5.9 5.4 -0.7 -0.8 -2.0<br />
Czech Republic 1.6 0.1 1.9 2.1 3.0 2.0 -3.7 -3.0 -3.5<br />
Hungary 1.7 -0.5 1.6 4.0 4.3 4.0 1.9 3.2 3.8<br />
Poland 4.4 2.7 2.8 4.3 4.0 3.0 -5.4 -4.1 -3.9<br />
Russia 4.3 3.9 3.3 8.5 5.4 6.5 5.3 3.2 1.0<br />
Romania 2.4 1.5 3.3 5.8 4.0 3.3 -4.1 -5.0 -5.3<br />
Turkey 8.7 3.5 5.0 6.5 10.2 6.5 -10.0 -7.0 -7.5<br />
Africa & Middle East 4.2 3.7 4.3 5.1 5.6 4.8 8.8 8.4 6.7<br />
Algeria 2.5 3.0 4.0 4.5 4.5 3.0 10.0 11.0 10.5<br />
Egypt 1.8 2.5 4.5 10.2 11.0 10.0 -2.5 -2.0 -0.5<br />
Kuw ait 4.4 5.0 5.0 3.1 4.0 4.0 42.0 40.0 35.0<br />
Lebanon 1.5 2.8 4.0 3.1 4.5 3.0 -27.0 -26.0 -24.0<br />
Morocco 4.9 2.5 3.5 1.4 1.5 2.4 -8.2 -9.0 -5.9<br />
Qatar 14.0 7.5 6.0 2.1 3.0 4.0 30.0 33.0 31.0<br />
Saudi Arabia 7.0 5.0 5.0 5.0 4.5 3.5 25.0 23.0 16.0<br />
South Africa 3.1 3.0 3.5 5.0 6.0 5.0 -3.3 -4.0 -4.0<br />
United Arab Emi<strong>rate</strong>s 3.3 3.5 4.0 0.9 2.0 1.5 7.5 8.9 6.2<br />
Tunisia -2.2 2.3 3.5 3.5 4.5 4.0 -7.2 -8.0 -6.5<br />
Total 3.6 3.2 3.7 4.2 3.3 3.3 0.1 -0.3 -0.2<br />
Industrialised countries 1.3 1.3 1.6 2.6 2.1 1.9 -1.1 -1.2 -0.9<br />
Emerging countries 6.2 5.3 6.1 6.0 4.7 4.9 1.6 0.8 0.6<br />
Notes:<br />
(1) CPI – for UK: HICP; for India: wholesale prices; for Brazil: IPCA<br />
(2) India – fiscal year ending in March<br />
Source: Crédit <strong>Agricole</strong> CIB<br />
Macro Prospects – no. 137 – 3 rd quarter 2012 42
Economic <strong>forecasts</strong> – quarterly breakdown<br />
Real GDP grow th, QoQ %<br />
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4<br />
USA (annualised) 0.4 1.3 1.8 3.0 1.9 2.0 2.4 2.2 1.9 2.4 2.9 3.0<br />
JAPAN -2.0 -0.4 1.9 0.0 1.2 0.3 0.2 0.1 0.4 0.4 0.3 0.5<br />
EUROZONE 0.7 0.1 0.1 -0.3 0.0 -0.2 0.0 0.1 0.3 0.3 0.4 0.4<br />
Germany 1.3 0.3 0.6 -0.2 0.5 0.1 0.2 0.3 0.4 0.4 0.5 0.6<br />
France 0.9 0.0 0.3 0.1 0.0 -0.1 0.2 0.2 0.4 0.3 0.4 0.3<br />
Italy 0.1 0.3 -0.2 -0.7 -0.8 -0.7 -0.1 0.0 0.0 0.1 0.3 0.3<br />
Spain 0.4 0.2 0.0 -0.3 -0.3 -0.7 -1.0 -1.1 -0.1 0.4 0.5 0.6<br />
United Kingdom 0.2 -0.1 0.6 -0.3 -0.3 -0.2 0.4 0.2 0.3 0.3 0.4 0.4<br />
Consumer prices, YoY %<br />
USA 2.2 3.3 3.8 3.3 2.8 2.2 1.9 2.0 2.1 2.1 2.2 2.2<br />
JAPAN -0.8 -0.3 0.2 -0.2 0.1 0.2 0.3 0.4 0.4 0.5 0.6 0.6<br />
EUROZONE 2.5 2.8 2.7 2.9 2.7 2.5 2.3 2.0 1.9 1.6 1.9 1.9<br />
Germany 2.2 2.5 2.6 2.6 2.4 2.3 2.1 1.9 1.8 1.9 2.3 2.6<br />
France 2.0 2.2 2.3 2.6 2.6 2.1 1.8 1.7 1.7 1.8 2.1 2.0<br />
Italy 2.3 2.9 2.7 3.7 3.6 3.6 3.2 2.8 2.5 1.6 2.0 1.7<br />
Spain 3.2 3.3 2.9 2.7 1.9 2.0 2.0 1.7 1.7 0.9 1.4 1.4<br />
United Kingdom 4.1 4.4 4.7 4.7 3.5 3.1 2.8 2.3 1.9 1.8 2.0 2.1<br />
Unemployment <strong>rate</strong>, %<br />
2011 2012<br />
2013<br />
USA 9.0 9.0 9.1 8.7 8.3 8.2 8.0 8.0 7.9 7.8 7.7 7.7<br />
JAPAN 4.7 4.6 4.4 4.5 4.5 4.3 4.3 4.3 4.3 4.3 4.2 4.2<br />
EUROZONE 10.0 10.0 10.2 10.5 10.8 11.0 11.2 11.3 11.3 11.3 11.3 11.2<br />
Germany 6.3 6.0 5.9 5.6 5.5 5.5 5.5 5.5 5.4 5.4 5.3 5.3<br />
France 9.6 9.6 9.6 9.8 10.0 10.1 10.3 10.3 10.3 10.3 10.4 10.4<br />
Italy 7.9 8.1 8.5 9.1 9.8 10.0 10.5 11.0 11.0 10.7 10.2 9.7<br />
Spain 20.7 20.9 22.0 23.0 23.8 24.8 25.3 25.8 26.0 26.1 26.1 26.0<br />
United Kingdom 7.7 7.9 8.3 8.4 8.2 8.5 8.7 8.7 8.6 8.6 8.6 8.4<br />
Source: Crédit <strong>Agricole</strong> CIB<br />
Macro Prospects – no. 137 – 3 rd quarter 2012 43
Economic <strong>forecasts</strong><br />
Government balance<br />
Public debt<br />
11 12 13 11 12 13<br />
USA -8.7 -7.6 -6.1 67.3 72.6 76.4<br />
JAPAN -11.9 -9.8 -9.2 204.7 212.0 219.5<br />
EUROZONE -4.1 -3.2 -2.3 87.2 91.4 91.7<br />
Germany -1.0 -0.8 -0.4 81.2 82.2 80.7<br />
France -5.2 -4.4 -3.0 85.8 89.1 89.6<br />
Italy -3.9 -2.6 -1.8 120.1 124.4 123.8<br />
Spain -8.9 -6.3 -4.9 68.5 80.1 85.7<br />
Netherlands -4.6 -4.1 -2.8 65.6 69.6 70.0<br />
Belgium -3.7 -2.8 -2.2 98.0 98.9 97.8<br />
Greece -9.1 -6.9 -5.3 165.3 160.1 166.0<br />
Ireland -13.1 -8.3 -7.7 108.2 115.4 120.6<br />
Portugal -4.2 -5.2 -4.1 107.8 111.3 114.8<br />
United Kingdom -8.3 -7.0 -6.9 85.7 91.2 95.0<br />
Source: Crédit <strong>Agricole</strong> CIB<br />
Commodities <strong>forecasts</strong><br />
Oil price <strong>forecasts</strong><br />
Source: Crédit <strong>Agricole</strong> CIB<br />
End quarter prices<br />
2012 2013<br />
21-Jun Q3 Q4 Q1 Q2 Q3 Q4<br />
Brent USD/bl 91.87 104 105 106 107 108 110<br />
Metals <strong>forecasts</strong><br />
Precious metals<br />
2012<br />
2013<br />
21-Jun Q3 Q4 Year Q1 Q2 Q3 Q4 Year<br />
Gold USD/oz 1,598 1,500 1,475 1,540 1,405 1,340 1,260 1,190 1,299<br />
Source: Crédit <strong>Agricole</strong> CIB<br />
Publication Manager: Jean-Paul BETBEZE<br />
Chief Edition: Hervé GOULLETQUER, Isabelle JOB<br />
Production and Sub-Editor: Fabienne Pesty<br />
Contact : publication.eco@credit-agricole-sa.fr<br />
Crédit <strong>Agricole</strong> S.A. — Economic Research Department— 75710 PARIS Cedex 15 — Fax : +33 143 23 58 60<br />
This publication reflects the opinion <strong>of</strong> Crédit <strong>Agricole</strong> S.A. on the date <strong>of</strong> publication, unless otherwise specified (in the case <strong>of</strong> outside<br />
contributors). Such opinion is subject to change without notice. This publication is provided for informational purposes only. The information and<br />
analyses contained herein are not to be construed as an <strong>of</strong>fer to sell or as a solicitation whatsoever. Crédit <strong>Agricole</strong> S.A. and its affiliates shall not<br />
be responsible in any manner for direct, indirect, special or consequential damages, however caused, arising therefrom. Crédit <strong>Agricole</strong> does not<br />
warrant the accuracy or completeness <strong>of</strong> such opinions, nor <strong>of</strong> the sources <strong>of</strong> information upon which they are based, although such sources <strong>of</strong><br />
information are considered reliable. Crédit <strong>Agricole</strong> S.A. or its affiliates therefore shall not be responsible in any manner for direct, indirect, special<br />
or consequential damages, however caused, arising from the disclosure or use <strong>of</strong> the information contained in this publication.<br />
www.credit-agricole.com - Economic Research<br />
Subscribe to our free online publications<br />
Macro Prospects – no. 137 – 3 rd quarter 2012 44