august 2016 - bbva research...eurozone watch august 2016 3 section 1 economic development: a...

Short-term Indicators and

Updated Forecasts

Eurozone

August

2016

Eurozone Watch August 2016

• Economic recovery continues at a moderate pace in 2Q16 (0.3% QoQ), once the temporary

effects that boosted internal demand earlier this year disappeared, while net exports improved

• Activity data at the end of 2Q16 suggest less optimistic signals than confidence surveys, which

even so remain stable in the early stages after Brexit

• Brexit will weigh on the recovery of the eurozone as a whole in the forecast horizon. The

impact will be limited, and will be transmitted above all through the trade channel and its impact

on confidence, which will put a brake on consumption and investment

• The ECB is ready to take further stimulus measures if needed; an extension until September

2017 and a fine-tuning of the QE programme are not to be ruled out

• Updated forecasts: we maintain our growth projection for the eurozone at 1.6% in 2016, but

due to Brexit and lower tailwinds, it is revised downwards to 1.5% in 2017. The revision affects all

the main eurozone countries

• Risks remain tilted to the downside and are especially political, beyond those related to global

growth

2

Economic Outlook


3

Section 1

Economic development: a moderate recovery continues in the first stages after Brexit

Section 2

Updated forecasts: downward revision of GDP growth in 2017, due to the impact of Brexit and lower tailwinds

Section 3

Risks: tilted to the downside, especially the political ones

Index


Section 1

Economic development


80

85

90

95

100

105

110

115

120

1Q

08

3Q

08

1Q

09

3Q

09

1Q

10

3Q

10

1Q

11

3Q

11

1Q

12

3Q

12

1Q

13

3Q

13

1Q

14

3Q

14

1Q

15

3Q

15

1Q

16

GDP Private consumption Investment Exports

100

5

GDP (% QoQ), contribution by components (pp) and MICA BBVA forecast

GDP and its components (1Q08=100)

• GDP growth moderated to 0.3% QoQ in the second quarter due to the reversion of some of the temporary factors which

supported the strong upturn in earlier this year (0.6% QoQ), especially in France and Germany

• Available data point to the fact that the slower growth was due to the moderation of internal demand, partly offset by the

improvement in net exports

Source: Eurostat and BBVA Research Source: Eurostat and BBVA Research

0.3

-2.0

-1.0

0.0

1.0

2.0

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14

2Q

14

3Q

14

4Q

14

1Q

15

2Q

15

3Q

15

4Q

15

1Q

16

2Q

16

Private consumption Public consumptionGross fixed capital formation Change in inventoriesExports ImportsReal GDP

GDP growth in the eurozone slowed down in 2Q16 to the moderate pace of the last two years


GDP (% QoQ), contribution by component (pp) and forecasts

6

• GDP was flat in France in 2Q16 after the strong moderation in private consumption, due to temporal factors, and the fall in

investment. In Germany growth slows down because of more moderate growth in domestic demand

• In Italy and Spain growth remains relatively stable, with the former still growing somewhat below the growth rate in the whole of the

eurozone, while Spain maintains a strong positive differential

Source: Eurostat and BBVA Research

0.30.0

0.2

0.7

-10

-8

-6

-4

-2

0

2

4

6

8

10

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2Q

15

3Q

15

4Q

15

1Q

16

2Q

16

(f)

2Q

15

3Q

15

4Q

15

1Q

16

2Q

16

(e)

2Q

15

3Q

15

4Q

15

1Q

16

2Q

16

(f)

2Q

15

3Q

15

4Q

15

1Q

16

2Q

16

(f)

Ge

rma

ny

Fra

nce

Ita

ly

Spa

in

Germany France Italy Spain Difference relative to2008

Private consumption Public consumption Gross fixed capital formation Change in inventories

Exports Imports Real GDP Eurozone GDP

This slowdown was widespread across large countries


PMI and GDP (% QoQ) ESI and GDP (% YoY)

The performance of PMIs in July can be explained by the increase of new orders in the services sector, thanks to which employment

has increased, offset by the fall in the manufacturing index

Source: Eurostat and BBVA Research Source: Eurostat and BBVA Research 7

-0,7

-0,6

-0,5

-0,4

-0,3

-0,2

-0,1

0,0

0,1

0,2

0,3

0,4

0,5

0,6

0,7

44

46

48

50

52

54

56

Jan-1

2

Apr-

12

Jul-1

2

Oct-

12

Jan-1

3

Apr-

13

Jul-1

3

Oct-

13

Jan-1

4

Apr-

14

Jul-1

4

Oct-

14

Jan-1

5

Apr-

15

Jul-1

5

Oct-

15

Jan-1

6

Apr-

16

Jul-1

6

Real GDP (% QoQ) PMI Manufacturing PMI Services PMI

PMIs level

GDP (% QoQ)

-2,5

-2,0

-1,5

-1,0

-0,5

0,0

0,5

1,0

1,5

2,0

84

88

92

96

100

104

108

112

Jan-1

2

Apr-

12

Jul-1

2

Oct-

12

Jan-1

3

Apr-

13

Jul-1

3

Oct-

13

Jan-1

4

Apr-

14

Jul-1

4

Oct-

14

Jan-1

5

Apr-

15

Jul-1

5

Oct-

15

Jan-1

6

Apr-

16

Jul-1

6

Real GDP (% YoY) ESI

ESI level

GDP (% YoY)

PMIs stable in 2Q16 and increasing slightly in July, in spite of Brexit uncertainty…


8

National PMIs showed that growth was mainly driven by higher expansion in Germany. The index decreased in Italy and Spain in July,

while France moves out of contraction territory

PMI (level)


40

42

44

46

48

50

52

54

56

58

60

40

42

44

46

48

50

52

54

56

58

60

4Q

15

1Q

16

2Q

16

3Q

16

4Q

15

1Q

16

2Q

16

3Q

16

4Q

15

1Q

16

2Q

16

3Q

16

4Q

15

1Q

16

2Q

16

3Q

16

4Q

15

1Q

16

2Q

16

3Q

16

4Q

15

1Q

16

2Q

16

3Q

16

4Q

15

1Q

16

2Q

16

3Q

16

4Q

15

1Q

16

2Q

16

3Q

16

4Q

15

1Q

16

2Q

16

3Q

16

4Q

15

1Q

16

2Q

16

3Q

16

4Q

15

1Q

16

2Q

16

3Q

16

4Q

15

1Q

16

2Q

16

3Q

16

Comp. Manuf. Serv. Comp. Manuf. Serv. Comp. Manuf. Serv. Comp. Manuf. Serv.

Germany France Italy Spain

PMI average ±1 standard deviation PMI

50 50

* 3Q16 calculated using only data for July

… driven by Germany


* April and May compared to previous 3 months

• Industrial production declined in May by 1.1% MoM after increasing by 1.4% in April. The fall was widespread across sectors,

especially in the production of consumer durables and capital goods

• The gradual increase in capacity utilization during the last year and a half, together with better prospects for external demand, point to

the consolidation of the recovery in equipment and machinery investment


Industrial production (% QoQ)

IP Capital (% QoQ), Investment in machinery and

equipment (% QoQ) and utilization capacity (%)

9

78

79

80

81

82

83

84

-4

-3

-2

-1

0

1

2

3

4

Jan-1

2

Apr-

12

Jul-1

2

Oct-

12

Jan-1

3

Apr-

13

Jul-1

3

Oct-

13

Jan-1

4

Apr-

14

Jul-1

4

Oct-

14

Jan-1

5

Apr-

15

Jul-1

5

Oct-

15

Jan-1

6

Apr-

16

Jul-1

6

Investment M&E (% QoQ) IP Capital (% QoQ)

Capacity Utilization (%)

Inv. M&E, IP capital (% QoQ)

Capacityutilization (%)

0.1

0.8

*-0.2

-1.0

-0.5

0.0

0.5

1.0

1.5

97

98

99

100

101

102

103

104

Fe

b-1

2

Ma

y-12

Aug

-12

Nov-1

2

Fe

b-1

3

Ma

y-13

Aug

-13

Nov-1

3

Fe

b-1

4

Ma

y-14

Aug

-14

Nov-1

4

Fe

b-1

5

Ma

y-15

Aug

-15

Nov-1

5

Fe

b-1

6

Ma

y-16

IP (2012=100) IP (% QoQ)

IP (level)

IP (% QoQ)

Industrial production declined in May, in a period of high volatility


Retail sales, consumption and disposable income (% QoQ) Retail sales (% QoQ) and consumer confidence

Retail sales growth moderated significantly in 2Q16 (0.1% QoQ) after a temporary upturn in the first quarter (0.6% QoQ), so a slowdown

in private consumption is projected for the second quarter


-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

Ma

r-1

2

Jun-1

2

Sep

-12

Dec-1

2

Ma

r-1

3

Jun-1

3

Sep

-13

Dec-1

3

Ma

r-1

4

Jun-1

4

Sep

-14

Dec-1

4

Ma

r-1

5

Jun-1

5

Sep

-15

Dec-1

5

Ma

r-1

6

Jun-1

6

Consumption (% QoQ) Retail Sales (% QoQ)

Disposable Income (% QoQ)

0.2

0.6

0.1

-30

-25

-20

-15

-10

-5

0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

Ma

r-1

2

Jun-1

2

Sep

-12

Dec-1

2

Ma

r-1

3

Jun-1

3

Sep

-13

Dec-1

3

Ma

r-1

4

Jun-1

4

Sep

-14

Dec-1

4

Ma

r-1

5

Jun-1

5

Sep

-15

Dec-1

5

Ma

r-1

6

Jun-1

6

Retail Sales (% QoQ) Consumer Confidence

Retail Sales (% QoQ)

ConsumerConfidence

Retail sales growth moderated in 2Q16, after the temporary upturn of 1Q16


* April and May compared to previous 3 months

Exports decrease in the second quarter until May (-0.2% QoQ), less than imports (-2.4%), resulting in an increase in the trade balance

surplus

Trade balance (% GDP) Exports by destination (% QoQ)


0.5

0.5

0.7

0.8

0.9

0.0

0.2

0.4

0.6

0.8

1.0

1.2

140

145

150

155

160

165

170

175

180

Ma

y-12

Aug

-12

Nov-1

2

Fe

b-1

3

Ma

y-13

Aug

-13

Nov-1

3

Fe

b-1

4

Ma

y-14

Aug

-14

Nov-1

4

Fe

b-1

5

Ma

y-15

Aug

-15

Nov-1

5

Fe

b-1

6

Ma

y-16

Trade balance (Bil.EUR) Imports

Exports Trade Balance (%GDP)

Exports, Imports, Trade balance

Trade balance (%GDP)

*-0,2

-4

-3

-2

-1

0

1

2

3

4

-40

-30

-20

-10

0

10

20

30

40

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14

2Q

14

3Q

14

4Q

14

1Q

15

2Q

15

3Q

15

4Q

15

1Q

16

2Q

16

Other EU countries United StatesChina LatAmAsia (Exc China) Rest of the WorldExports (% QoQ)

Destination

Exports (% QoQ)

Exports stand in 2Q16


Section 2

Updated forecasts


Eurozone: GDP growth and projection based on MICA-BBVA model (% QoQ)

Moderate growth is expected to continue in 3Q16

13

MICA-BBVA: 0.3% QoQ in 3Q16

Confidence resilience after Brexit, but risks

tilted to the downside

After strong figures in April, activity data

(industrial production and retail sales)

showed less optimistic signs in May and

June


-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1Q

10

2Q

10

3Q

10

4Q

10

1Q

11

2Q

11

3Q

11

4Q

11

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14

2Q

14

3Q

14

4Q

14

1Q

15

2Q

15

3Q

15

4Q

15

1Q

16

2Q

16

3Q

16

CI 20% CI 40% CI 60% Observed


Lower tailwinds are added to the materialisation of the risk of Brexit

Lower growth in

developed economies

Disappearance of the

effect of the

depreciation of the euro

Higher oil prices

Brexit

Resilience of internal

demand despite of

higher uncertainty and

lower tailwinds

Economic policies will

continue to support the

recovery, more

monetary than fiscal

policy

Gradual improvement

in world trade

14


Eurozone: BBVA Research Financial Stress Index (normalized Index)

-1.2%

-1.0%

-0.8%

-0.6%

-0.4%

-0.2%

0.0%

Baseline1 Baseline2 Risk1 Risk2

2016 2017 2018

Eurozone: Impact of Brexit on GDP (%)

Brexit could drain between 0.4pp and 0.6pp from GDP growth in 2016-18

15 Source: Eurostat and BBVA Research Source: BBVA Research

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

05 06 07 08 09 10 11 12 13 14 15 16 17 18

Contrafactual Risk 2 Risk 1

Baseline 2 Baseline 1


BBVA EZ Inflation Monitor Index

-6

-5

-4

-3

-2

-1

0

1

2

3

4

Jan

-09

Jul-

09

Jan

-10

Jul-

10

Jan

-11

Jul-

11

Jan

-12

Jul-

12

Jan

-13

Jul-

13

Jan

-14

Jul-

14

Jan

-15

Jul-

15

Jan

-16

short term medium term long term

Whatever it takes

Forward guidance

TLTROs,CBPP3 & ABSPP

QE

Jackson Hole meeting

Extension and fine-tuning of QE

Highly likely

Increase in the amount of QE

Cut in depo rate

Unlikely for now

Helicopter money is out of the question

ECB: increasing pressure for additional measures due to the risk balance

16 Source: Reuters and BBVA Research forecasts


-0.2

0.9

1.6

1.61.5

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

2013 2014 2015 2016 2017

Jul-16 Apr-16

Eurozone: GDP growth (%) Better-than-expected incoming data,

especially on the internal demand side

Brexit will weigh on forecasts despite

monetary policy support (and fiscal, but to

a lesser extent)

ECB’s further measures: an extension and

fine-tuning of QE are the more likely

options

Downward GDP growth revision: more moderate recovery

17 Source: Eurostat and BBVA Research


Eurozone: contribution to annual GDP growth (pp)

2014 2015

2016

(f)

2017

(f)

Activity

Real GDP (% QoQ) 0.9 1.6 1.6 1.5

Private consumption 0.8 1.7 1.7 1.4

Public consumption 0.8 1.3 1.5 1.1

Investment 1.3 2.7 3.0 2.7

Internal demand (contr. pp) 0.9 1.7 2.0 1.5

Exports 4.1 5.1 2.9 3.0

Imports 4.5 5.9 4.1 3.4

Net exports (contr. %) 0.0 -0.1 -0.4 -0.1

Current account (% GDP) 2.5 3.2 3.2 3.0

Budget balance (% GDP) -2.6 -2.1 -2.0 -1.9

HICP, % average 0.4 0.0 0.2 1.4

Higher uncertainty will put a brake on internal demand

18 Source: Eurostat and BBVA Research Source: Eurostat and BBVA Research

-4

-2

0

2

4

6

2010 2011 2012 2013 2014 2015 2016 2017

Domestic Demand Exports Imports Net exports GDP


2014 2015

2016

(f)

2017

(f)

Activity

Real GDP (% QoQ) 1.6 1.4 1.4 1.5



Investment 3.5 1.6 3.0 2.5

Internal demand (cont. pp) 1.2 1.3 1.9 1.8

Exports 3.9 4.8 2.1 2.7

Imports 3.7 5.4 3.6 3.8

Net exports (cont. pp) 0.4 0.1 -0.5 -0.3


Budget balance (% GDP) 0.3 0.7 0.2 0.0

HICP, % average 0.8 0.1 0.1 1.4

Germany: strong consumption, but lower exports and investment after Brexit

Higher uncertainty will weigh on

consumption, somewhat weaker than

expected earlier this year…

… and especially on investment from the

second half of 2016 and in 2017

Lower exports after Brexit will put

somewhat more downward pressure on

GDP growth this year and the following



2014 2015

2016

(f)

2017

(f)

Activity

Real GDP (% QoQ) 0.7 1.2 1.5 1.4



Investment -0.4 0.9 3.2 2.2


Exports 3.4 6.0 2.5 3.4

Imports 4.8 6.4 4.0 3.7

Net exports (cont. pp) -0.5 -0.3 -0.5 -0.2

Current account (% GDP) -0.9 0.0 -0.5 -0.2


HICP, % average 0.6 0.1 0.2 1.4

France: weaker internal demand due to the worsening of domestic factors and uncertainty in Europe

The deterioration of domestic factors,

especially the worsening of the labour

market, will be reflected in a moderation of

private consumption

In a difficult political environment which

also affects confidence and investment

decisions…

… which will be intensified after the Brexit

shock



2014 2015

2016

(f)

2017

(f)

Activity

Real GDP (% QoQ) -0.3 0.6 1.0 1.1


Public consumption -1.0 -0.7 0.8 0.3

Investment -3.3 0.6 1.8 2.0

Internal demand (cont. pp) -0.3 1.0 1.2 0.9

Exports 2.9 4.1 0.5 2.7

Imports 3.0 5.8 1.2 2.3

Net exports (cont. pp) 0.0 -0.3 -0.2 0.2



HICP, % average 0.2 0.1 0.0 1.3

Italy: political issues and those of the banking sector are added to uncertainty in Europe

Growth continues supported by public

consumption, but the investment and

exports data earlier this year suggest that

the weak recovery is failing to gain traction

Political crisis and problems in the banking

sector will weigh even more on domestic

demand

It is difficult to see the external sector

taking over



2014 2015

2016

(f)

2017

(f)

Activity

Real GDP (% QoQ) 1.4 3.2 3.1 2.3



Investment 3.5 6.4 3.9 3.5


Exports 5.1 5.4 3.8 4.4

Imports 6.4 7.5 4.9 4.5

Net exports (cont. pp) -0.2 -0.5 -0.2 0.1



HICP, % average -0.2 -0.5 -0.3 1.7

Spain: an improved forecast for 2016 GDP growth, and a downward revision in 2017

Incoming data confirm an upward bias to

GDP growth forecasts in 2016: • Domestic demand explains the recovery

• M&E growth is a resilient component

Tailwinds, exchange rate and oil price, still

support growth, but less so. Exports remain

resilient, but EMU demand will slow

Downward risks: strong fiscal consolidation

and Brexit

Political risks continue



23

Subdued but stable core inflation since mid 2013. Headline

inflation very low due to oil prices

Eurozone: Inflation (% YoY) and contribution of components (% pp)

Eurozone: inflation (% YoY)


-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Ju

l-1

2

Se

p-1

2

No

v-1

2

Ja

n-1

3

Ma

r-1

3

Ma

y-1

3

Ju

l-1

3

Se

p-1

3

No

v-1

3

Ja

n-1

4

Ma

r-1

4

Ma

y-1

4

Ju

l-1

4

Sep-1

4

No

v-1

4

Ja

n-1

5

Ma

r-1

5

Ma

y-1

5

Ju

l-1

5

Se

p-1

5

No

v-1

5

Ja

n-1

6

Ma

r-1

6

Ma

y-1

6

Ju

l-1

6 (

f)

Services Non-energy industrial goodsProcessed Food EnergyUnprocessed Food Core ComponentsHICP (% y/y)

-1

0

1

2

3

4

Jun-0

4

Jun-0

5

Jun-0

6

Jun-0

7

Jun-0

8

Jun-0

9

Jun-1

0

Jun-1

1

Jun-1

2

Jun-1

3

Jun-1

4

Jun-1

5

Jun-1

6

Trimmed mean inflation Core inflation


Higher oil prices should drive inflation up by year end and

early 2017, but below 2%

24

Eurozone: inflation forecasts (% YoY) Eurozone: inflation forecasts (% annual)

-0.5

0.0

0.5

1.0

1.5

2.0

1Q

15

2Q

15

3Q

15

4Q

15

1Q

16

2Q

16

3Q

16

4Q

16

1Q

17

2Q

17

3Q

17

4Q

17

Apr'16 Jul'16

0.2

0.8

1.4

1.3

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

Headline Core Headline Core

2016 2017

Apr'16 Jul'16



Section 3

Risks

Eurozone Watch August 2016 P

rob

ab

ilit

y i

n t

he s

ho

rt t

erm

Severity

Brexit,

European

institutional

crisis, Italy,

Greece…

EM

vulnerability

(corporate

indebtedness)

US’s intense

slowdown

intensified by

“Trump effect”

China’s

financial crisis

Global risks: rotation towards DM; risk of slowdown in the US and risks about Europe have risen

26 Source: BBVA Research


Europe: increasing risks, especially political and geopolitical issues

• Italy is the country to watch. Constitutional referendum: if Renzi loses, he might step

down (as promised) and early elections may bring an anti-euro party

• Other elections: the Netherlands, France and Germany over 2017, with radical parties

on the up

• Equilibrium between avoiding contagion and punishing the UK too much

• France and the periphery interested in a harsh position

• Germany in principle more ready to cede ground

• Germany more ready to reinforce the EU rather than the EZ

• EU ready for more integration in less controversial issues: security, immigration,

external borders. These are EU issues, not EZ ones

• Germany refuses to mutualize debt before legacy problems are solved

• If the situation deteriorates significantly, there would be advances towards more

integration in the eurozone (common deposit guarantee, common treasury, fiscal union)

• Italy: problems in the banking sector

• Greece: unresolved problems, although lower risks

• Refugee crisis intensified if relations with Turkey deteriorate

Potential political contagion from Brexit

Negotiation strategy UK-EU

Prospects of pro-integration reaction

Other risks in Europe

Risks after Brexit


Disclaimer

This document has been prepared by BBVA Research Department, it is provided for information purposes only and expresses data, opinions or

estimations regarding the date of issue of the report, prepared by BBVA or obtained from or based on sources we consider to be reliable, and have

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