Available data point towards 0.5% GDP growth in the euro area in the first quarter.France and Spain today became the first big countries in the euro area to publish GDP growth figures for Q1. French real GDP expanded by 0.3% q-o-q in Q1 2017, down from +0.5% q-o-q in Q4, and lower than what was expected by the consensus.The details were more encouraging than the headline figure. In particular, investment accelerated sharply. Some of the weaknesses in private consumption were explained by temporary factors.Meanwhile, Spanish real GDP expanded by 0.8% q-o-q in Q1, marking an acceleration over the previous quarter.Overall, Euro area GDP (to be published on May 3) is likely to come in at 0.5% q-o-q in Q1, in between estimates based on available soft and hard data.Read More »
Articles by Nadia Gharbi
Strong Flash PMI surveys for April indicate that output growth is accelerating in the euro area.Euro area PMI surveys surprised to the upside in April. The composite flash PMI surged to 56.7 in April from 56.4 in March, above consensus expectations (56.4). Overall, April’s composite PMI is consistent with euro area GDP growth of 0.7% quarter over quarter (q-o-q) in Q2, up from 0.6% in Q1 and higher than our forecasts. Other national surveys and hard data have been more mixed, suggesting that PMI surveys might be overstating the pace of growth to some extent. However, all in all, risks to our 2017 euro area GDP growth forecast of 1.5% are tilted to the upside.The rise in PMI data was broadly based across sectors. Manufacturing PMI rose to 56.8 from 56.2 in March, while the PMI for the services sector increased marginally to 56.2, from 56.0. The breakdown by sub-indices was rather encouraging with most forward-looking components pointing up. Job creation continued its upward trend, boosted by buoyant demand and widespread optimism regarding future activity.At a country level, German composite PMI for April fell from 57.1 in March to 56.3 in April. The decline was mainly driven by the services sector, while manufacturing PMI remained broadly stable. But German PMI is above its Q1 average, which suggests that economic activity in Germany remains pretty strong in Q2.Read More »
The Swiss National Bank left monetary policy unchanged at its latest meeting and forecast that the Swiss economy would grow 1.5% in 2017.At its latest policy meeting on 16 March, the Swiss National Bank (SNB) left the interest rate on sight deposits at a record low of -0.75% and the central bank reiterated its willingness to intervene in the foreign exchange market if needed, “taking the overall currency situation into consideration”, as it had mentioned in its previous press release. The SNB revised slightly up its inflation forecast for 2017 from 0.1% to 0.3% and foresees inflation of 0.4% and 1.1% for 2018 and 2019, respectively. The central bank remains “cautiously optimistic” for 2017 growth outlook, maintaining its forecast for the Swiss economy to grow by 1.5% in 2017.Our baseline scenario is for the interest rate on sight deposits with the SNB to stay at -0.75% in 2017, with a first rate hike coming in March 2018. FX interventions are likely to remain the policy tool of choice to counter any appreciation of the Swiss franc.Our main argument for this forecast is that the SNB is unlikely to pre-empt the ECB in normalising monetary policy. The ECB will most likely announce a tapering of asset purchases starting in Q1 2018. Moreover, the SNB might be keen to keep the current interest rate differential or even let the differential widen more.Read More »
GDP growth picked up in 2016, with the export-orientated manufacturing sector contributing positively in spite of the strong franc. We expect the Swiss growth rate to be broadly similar this year.The Swiss statistical agency (SECO)’s quarterly estimates show a provisional GDP growth rate of 1.3% in 2016 compared with 0.8% in 2015.Two aspects of today’s report are worth mentioning. First, on the expenditure side, both domestic demand components and foreign trade helped to boost Swiss growth in 2016. It was a much better year for exports than 2015, even though the good performance hid significant divergence across sectors. Second, on the production side, the largely export-oriented manufacturing sector, hit hard by the sharp appreciation of the Swiss franc the previous year (the so-called “Frankenshock”), was the main driver of GDP growth in 2016.Switzerland still lags the US and the euro area in terms of GDP growth, but today’s data confirm that the Swiss economy is continuing its modest recovery in spite of the Frankenshock. For 2017, we expect real GDP growth of 1.4%, broadly the same as in 2016. Domestic demand is likely to remain an important economic driver. Private consumption is expected to continue to grow, but with no significant acceleration given the fading effect from lower energy prices and residual challenges in the labour market. Investment prospects are mixed.Read More »
Growth in the euro area outstripped growth in the US last year, while the latest indicators suggest 2017 has gotten off to a strong start. Our GDP forecasts are pushed up mechanically. Euro area real GDP expanded by 0.5% q-o-q in the fourth quarter, marking an acceleration from Q3’s 0.4% gain. The euro area economy grew at an annual average of 1.7% in 2016, compared with 1.9% in 2015. Last year was the first time since 2008 that real GDP growth in the euro area was above that of the US.Today’s GDP report mechanically pushes up our GDP forecast for 2017 from 1.3% to 1.5%. But it is worth mentioning that this does not change our central scenario for the euro area this year, as we are keeping unchanged our forecast for the pace of growth for the rest of the year.As for 2017, the first set of euro area sentiment indicators together with hard data point to a pretty strong first quarter. In particular, January’s composite purchasing manager index from Markit was consistent with GDP growth of 0.5% q-o-q in Q1. The European Commission business indicator also rose strongly in January.Overall, today’s GDP report, including revisions, mechanically pushes up our GDP forecast for 2017 from 1.3% to 1.5%. It is worth mentioning that it does not change our central scenario for the euro area, as we have kept unchanged our forecast for the pace of growth for the rest of the year.Read More »
The latest Bank Lending Survey (BLS) from the ECB, showed that credit standards tightened somewhat in Q4 2016. But the details were much more upbeat than the headline reading.Credit standards on loans to euro area enterprises tightened in Q4 2016 for the first time in three years. The move was essentially driven by developments in the Netherlands. Demand for credit continued to rise across all categories of loans, once again driven by generally low interest rates and M&A activity.Looking ahead, banks expect a net easing of credit standards across all loan categories in Q1 2017.The main takeaway from the Q4 Bank Lending Survey (BLS) report is that the ECB’s expansionary monetary policy is likely to be maintained throughout this year. Given that the BLS is signalling more modest gains in credit flows in the next few months than previously, the risk is that the ECB might need to do more.Read More »
The Swiss economy has proved more resilient than expected to the sudden appreciation of the Swiss franc in January 2015, but negative deposit rates could remain in place through 2017.On 15 January 2015, the Swiss National Bank (SNB) decided to discontinue the minimum exchange rate of CHF1.20 per euro introduced in September 2011. The SNB’s announcement came as a shock for the Swiss economy, and resulted in a sharp appreciation of the Swiss franc. But two years later, the Swiss economy has proven to be more resilient than expected: recession has been avoided and inflation is gradually rising. In summary:Swiss real GDP grew by 0.8% in 2015, may have grown by 1.5% in 2016, and could grow by 1.4% in 2017. Domestic demand has been robust. Exports of goods have performed better than expected, mainly due to the chemical and pharmaceutical industries.The unemployment rate has remained pretty steady, rising from just 3.1% to 3.3%.The franc has strengthened against the euro by 12%, but has remained pretty stable against the US dollar.Swiss headline inflation has remained in negative territory, mainly due to the drop in commodity prices and the sharp appreciation of the franc. But headline inflation is expected to turn positive in 2017 for the first time in five years, averaging 0.4%.Read More »
Nonetheless, the acceleration in headline figures in December masks subdued core inflation. We believe weak core prices will mean the rise in headline inflation will soon stall.Euro area flash HICP inflation rose from 0.6% in November to 1.1% year on year (y-o-y) in December, while core inflation increased slightly to 0.9%, both above consensus expectations. The breakdown by components showed that the main driver of the increase was energy prices.In the next few months, euro area inflation is likely to move higher, driven by energy-base effects. Headline HICP will peak at close to 1.5% y-o-y by the end of Q1 2017 according to our forecasts, using market expectations for oil prices and the currency. We then think price rises will stabilise as core inflation (excluding food and energy) is unlikely to rise significantly above 1% this year. Our 2017 forecasts remain unchanged at an average of 1.3% and 1.1% for headline and core inflation respectively, with risks modestly tilted to the upside in the short term.Overall, despite the sharp rise in headline inflation, the ECB is unlikely to reconsider its monetary policy support as core inflation remains extremely subdued. The latest rise in prices appears in line with its expectations for headline inflation to increase sharply in the early months of 2017 due to energy base effects.Read More »
A ‘No’ vote in the 4 December referendum would be seen as a negative by investors in Italy, adding to the challenges the country must face.The 4 December referendum on senate reform is the next big event on the European political calendar, coming just ahead of the next ECB and Fed policy meetings on 8 December and 14 December, respectively.We believe a ‘Yes’ vote would boost government confidence and marginally help Italian securities, but is unlikely to represent a significant game changer for Italy and for the euro zone as a whole. By contrast, a ‘No’ vote would add to the current political uncertainty and could hurt an already fragile and modest recovery.Italian sovereign bonds have come under increasing stress. The spread between 10-year Italian government bonds and their Spanish equivalents is now close to their highest level since 2011. Should the referendum be rejected, spreads are likely to widen even more. However, the ECB could be expected to provide a sufficient backstop to avoid any stress spiralling into a systemic crisis. Moreover, Italy benefits from a relatively stable base of domestic investors.There is also the risk that Italy’s sovereign debt rating will be downgraded (both DBRS and Fitch have their ratings of Italy’s debt on negative outlook).Read More »
3Q GDP growth in the euro area met expectations. The play off between strong business indicators and weak-ish credit dynamics means we maintain our full-year growth forecast of 1.5% in 2016.Euro area real GDP expanded at a quarter-on-quarter (q-o-q) rate of 0.3% in Q2 (1.4% q-o-q annualised, 1.6% year on year), in line with expectations and our own forecast. This comes after GDP growth of 0.3% q-o-q in Q2 and 0.5% q-o-q in Q1.Looking ahead, risks to our scenario for the euro area economy seem to be broadly balanced, if not tilted to the upside in the short term. On the positive side, euro area sentiment indicators have been coming in above expectations. In particular, Markit’s composite purchasing manager index for October was consistent with a GDP growth figure of 0.4-0.5% q-o-q in Q4 , which is above our own forecast. The European Commission business indicator rose strongly in October, well above expectations. In Germany, the October IFO survey of business sentiment reached its highest level since April 2014.On the negative side, credit data have been disappointing. Our measure of the credit impulse in the euro area has weakened significantly, suggesting that domestic demand is at risk of slowing down in the coming quarters. Of itself, this poses some downside risk to our GDP forecasts.Read More »
Markit Flash PMI surveys for October were above consensus and there was a considerable improvement in sentiment in Germany, possibly pointing to stronger Q4 GDP figures.
Euro area business surveys just released show a solid start to the fourth quarter. More importantly still, these forward-looking indicators suggested that growth is likely to gain momentum in the months ahead, in particular in Germany. The good performance of the German manufacturing sector suggests that external demand might be less a drag than in previous quarters, with respondents to the survey mentioning strengthening demand from Asia and the US.According to Markit’s preliminary estimates, the euro area composite purchasing managers’ index (PMI) increased from 52.6 in September to 53.7 in October, much stronger than expected by consensus. This reading was the highest since December 2015. The October composite PMI surveys are consistent with a euro area GDP growth rate of about 0.4% quarter on quarter in Q4, slightly above our forecast of 0.3%. At this stage, we are maintaining our full-year euro area GDP growth forecasts of 1.5% for 2016 and 1.3% for 2017.Meanwhile, inflationary pressures in the euro area are showing signs of picking up, with both output and input prices surging in October. Our price-pressure index strengthened for the eighth month in a row, reaching its highest level since July 2015.Read More »
There is a risk that government will not be able to serve full term, but markets are now becoming more focused on the Italian referendum in December.
After 10 months of political impasse, Spain is set to have a new government at the end of this week. The decision by the Socialist party (PSOE) to abstain in the second parliament investiture vote clears the way for a minority government to be formed under prime minister Mariano Rajoy and thus avoids the need for a third general election in a year.The centre-right Partido Popular will most likely be alone in the minority government as Ciudadanos and other parties have been indicating that they do not wish to be part of it. This could mean the government that emerges this week struggles with further economic reforms, and even with the passage of the 2017 budget. After rescinding fines this year due for non-respect of the European Growth and Stability Programme, the European Commission has demanded that Spain undertake effective action and fiscal consolidation measures equivalent to 0.5% of GDP for 2017 and 2018. Furthermore, the unresolved issue of Catalonian independence will be again in the spotlight next year and will be difficult to address. For these reasons, the equilibrium remains fragile and the government might not last a full four-year term.Read More »
Macroview SNB likely to keep negative deposit rate until end of ECB’s asset buying programme, and focus on forex intervention to control upward pressure on franc. The Swiss National Bank (SNB) decided on September 15 to maintain its interest rate on sight deposits unchanged at -0.75%.In its quarterly monetary policy assessment, the SNB highlighted once again the Swiss franc’s overvaluation and reiterated its willingness to intervene on the foreign exchange market if needed.The central bank revised down its forecasts for inflation in Switzerland in 2017 (from 0.3% to 0.2%) and 2018 (from 0.9% to 0.6%), owing to global economic uncertainties. Its inflation forecast for 2016 remained unchanged at -0.4%. Following better-than-expected growth in the second quarter, and upward revisions for GDP in prior quarters, the SNB now expects real growth of approximately 1.5% this year in Switzerland (in line with Pictet Wealth Management’s own expectation), compared to an earlier forecast of 1%-1.5%. Our baseline scenario is for the interest rate on sight deposits with the SNB to remain at -0.75% until the end of the European Central Bank’s quantitative easing programme, or at least until appreciation pressures on the Swiss franc start to fade.Read More »
Stronger-than-forecast growth means the central bank is unlikely to alter monetary policy this month
Switzerland: Real GDP Growth
Swiss real GDP growth data surprised on the upside in Q2, expanding by 0.6% q-o-q (and 2.5% q-o-q annualised). In addition, growth in the three previous quarters was revised significantly higher. As a result, our GDP growth forecast for growth in Switzerland rises mechanically from 0.9% to 1.5% for 2016.
GDP breakdown by expenditure component was less upbeat than the headline number and underlying growth dynamics remain broadly weak. (For example, household spending stagnated during the second quarter, fixed investment fell and export performance was patchy).
Nevertheless, even accounting for some weakening in growth in Switzerland in the second half, the carryover effect from the latest GDP numbers means that Swiss growth should average 1.3% this year, even if the economy is flat for the rest of the year.
We expect activity in Switzerland to weaken slightly in the second half of 2016, but the latest GDP figures mechanically push our GDP growth forecast up from 0.9% to 1.5% for 2016.
The better-than-expected GDP growth figures are unlikely to alter current Swiss National Bank (SNB) monetary policy.
Macroview Stronger-than-forecast growth means the central bank is unlikely to alter monetary policy this month Swiss real GDP growth data surprised on the upside in Q2, expanding by 0.6% q-o-q (and 2.5% q-o-q annualised). In addition, growth in the three previous quarters was revised significantly higher. As a result, our GDP growth forecast for growth in Switzerland rises mechanically from 0.9% to 1.5% for 2016.GDP breakdown by expenditure component was less upbeat than the headline number and underlying growth dynamics remain broadly weak. (For example, household spending stagnated during the second quarter, fixed investment fell and export performance was patchy).Nevertheless, even accounting for some weakening in growth in Switzerland in the second half, the carryover effect from the latest GDP numbers means that Swiss growth should average 1.3% this year, even if the economy is flat for the rest of the year.We expect activity in Switzerland to weaken slightly in the second half of 2016, but the latest GDP figures mechanically push our GDP growth forecast up from 0.9% to 1.5% for 2016.The better-than-expected GDP growth figures are unlikely to alter current Swiss National Bank (SNB) monetary policy. At its next policy meeting, scheduled for September 15, the SNB is likely to maintain its interest rate on sight deposits at -0.Read More »
Spain will try to break its nine-month political stalemate this week. Two months after the second round of general elections in Spain on 26 June, no government has been formed. Mariano Rajoy, the Popular Party (PP) leader and caretaker prime minister has been nominated by the king to head the government. The investiture debate will start on August 30, with a confidence vote on August 31. If unsuccessful, a second vote will be held on September 2, with a lower threshold for success (simple majority).Given recent statements by political leaders, the chances that Rajoy will garner enough support to win the first or the second confidence vote in Congress are very low. If no PM is elected within two months of the first confidence vote, parliament will be dissolved and new general elections will be called.The main development since the 26 June elections has been the political shift by the liberal Cuidadanos. The party proposed a six point plan to the PP as its condition to support Rajoy at the investiture debate. The PP accepted, and on 28 August both parties agreed on a policy plan in exchange for Cuidadanos’ support in the coming investiture vote.Nevertheless, the support of Cuidadanos (32 seats) and the regional CC (1 seat), will only give Rajoy 170 votes. He will need six more for an absolute majority in the first round.Read More »
Euro area bank credit flows were pretty strong in July, despite concerns about the impact of the 23 June Brexit referendum and banks’ health. In July, bank credit to euro area non-financial corporations (NFCs) accelerated, to EUR 12bn (adjusted for sales and securitisations) compared with a rise of EUR 8bn in June and EUR 10bn in May. Lending to NFCs seems to be stable, and on a gentle upward trend. On a country-by-country basis, core countries led the increase on loans to NFCs adjusted for sales and securitisations. In particular, France saw a decent pace of increase in July (+EUR 5.9bn), followed by Germany (+EUR 1.8bn). The increase in Spain was more moderate (+EUR 0.6bn), while Italy saw a decline (-EUR 2.6bn). Credit to households increased as well (+EUR 9bn), although at a slower pace than in the previous month (+EUR 16bn).Meanwhile, the annual rate of expansion of broad money supply (M3) decreased to 4.8% y-o-y in July, from 5.0% in June. Annual growth of the narrow aggregate M1, which includes currency in circulation and overnight deposits, decreased as well, from 8.7% y-o-y in June to 8.4% in July. The annual growth rate of bank loans to the private sector (adjusted for sales and securitisations) increased to 1.7% y-o-y in July, from 1.5% in June. Broken down by sector (see Chart 2), growth in loans to households remained unchanged at 1.Read More »
Yesterday’s flash purchasing managers index (PMI) surveys showed again a rather resilient picture for the euro area after the UK vote to leave the EU. The euro area composite ‘flash’ PMI index posted a marginal increase from 53.2 in July to 53.3 in August, slightly above consensus expectations (53.1) and reaching a seven month high. The sector breakdown showed that the services sector index increased from 52.9 in July to 53.1 in August, above consensus expectations (52.8). By contrast, the manufacturing PMI fell marginally (-0.2 to 51.8).Looking at the breakdown by sub-indices, the main culprit for weak manufacturing activity was new orders and employment falling on the month. The output index remained unchanged. As for services sectors, despite the increase in the headline index, service providers provided a sign of caution—new business rose, but business expectations fell.Overall, the average (July and August) PMI for Q3 (53.3) is slightly higher than in Q2 (53.1). Thus, the euro area composite PMI looks consistent with GDP growth of around 0.3% q-o-q in Q3, the same pace as in Q2. As a result, we see no reason to change our forecast at this stage and are maintaining our forecast for euro area GDP growth of 1.5% this year.Read More »
Growth in the euro area fell to 0.3% in the second quarter from 0.6% in the first. Nevertheless, leading indicators point to post-Brexit resilience and we are leaving our full-year forecast unchanged Euro area real GDP expanded by 0.3% quarter-on-quarter (q-o-q) in the second quarter (1.2% q-o-q annualised, 1.6% year-on-year), in line with expectations and our forecast. This compares with GDP growth of 0.6% q-o-q in the first quarter.According to preliminary estimates by country, growth in Spain slowed only slightly in the second quarter, whereas French growth slowed more than expected. Even though a slowdown in French economic activity was expected after a strong first quarter, the details were disappointing. One-off factors such as strikes in May and June skewed Q2 GDP data to the downside, but the latest indicators , such as PMI data, are suggesting the French economy is proving relatively resilient. Once again, Spain posted impressive GDP growth in the second quarter, in spite of an enduring political impasse. The Spanish economy grew by 0.7% q-o-q in Q2 (+2.8% q-o-q annualised; 3.1% y-o-y), in line with expectations and only slightly slower than the previous quarter (0.8% q-o-q). Overall, we forecast the Spanish economy to register 2.8% growth this year, well above growth for the euro area as a whole.Read More »
The flash PMI for the euro area was better than expected in July, although some sub-indexes pointed ahead to a deceleration in the rate of expansion. PMI data indicate a contraction of activity in the UK. Today’s flash PMI surveys for the euro area were more resilient than expected. The euro area composite PMI index eased only marginally in July, from 53.1 to 52.9, according to Markit’s flash estimates. However, some forward-looking indicators point to weaker developments ahead. In the manufacturing sector, the sub-index of new orders fell and there was a sharp drop in business expectations in the services PMI report.The main news was that the improvement in PMI data for Germany and France contrasted with the rest of the euro area. Markit mentioned that for the euro area overall “surveys signalled the weakest rise in activity since December 2014 as growth rates fell in both manufacturing and services”. But in Germany, composite PMI rose to 55.3 in July, its highest level this year, while in France the composite PMI also rose above consensus expectations (to 50.0). Overall, the German PMI report points to solid GDP growth in the current quarter, but we think GDP growth in France is likely to slow markedly in Q2-Q3 following a strong rebound in Q1 (+0.Read More »
But in the medium to long term, Swiss growth will depend on the terms of the UK’s exit from the EU While it is outside the EU, Switzerland is not immune to external shocks such as Brexit. The transmission channels are multiple (direct trade exposure, financial markets, confidence effect, political agenda…). That said, while the Swiss economy is mainly an export economy, its exposure to the UK is limited. Exports of goods to the UK represent 6% of total Swiss exports, for example, and half of the exports to the UK are pharmaceutical and chemical products, which, according to our estimates, could be relatively insensitive to sterling decline. Instead, the main risks for the Swiss economy come from a potential slowdown in the euro area and/or a sharp appreciation of the Swiss franc against the euro.Following the Brexit vote, we revised downward our GDP growth forecast for the euro area this year from 1.8% to 1.5%. But while additional downside risks from Brexit cannot be ruled out, we are leaving our already cautious scenario for the Swiss economy unchanged. Our 2016 GDP growth forecast for Switzerland is maintained at 0.9%, although with additional downside risks depending on the outcome of negotiations between the Confederation and the EU (over the free movement of labour) and between the EU and the UK.Read More »
The re-run of the Spanish general elections produced a fragmented parliament again, but a minority government could take shape. In Europe, Greece, Portugal and Italy remain political flash points. Read full report hereAfter an inconclusive vote in the December general election and the subsequent failure of Spain’s political parties to reach an agreement to form a government, Spaniards returned to the polls on 26 June. Once again, the results produced a fragmented parliament, but traditional parties ─ the centre-right Popular Party (PP) and the Socialist party (PSOE) ─ performed better than expected.Yet no party achieved an overall majority of seats in parliament, leading to discussions on forming a coalition government. These discussions are likely to be tense. The most likely scenario at this stage is that Mariano Rajoy stays on as caretaker prime minister but then steps down in exchange for a commitment by the PSOE to abstain when the Cortes meets to approve a new prime minister. This compromise would allow the formation of a PP-led minority government. However, new elections cannot be ruled out this year (even though this is not our baseline scenario). Divergences between parties are significant, and on top of the fraught political situation at national level, Catalonia remains an important source of tensions.Read More »
Macroview No change in base rates, but currency intervention on the cards as franc continues to strengthen Read full report hereThe Swiss National Bank (SNB) decided to leave its monetary policy unchanged at its quarterly meeting on 16 June. The main messages were unchanged from its March meeting. The target range for the three-month Libor was kept between -1.25% and -0.25%; the interest rate on sight deposits with the SNB was maintained at a record low of -0.75% and the SNB reiterated its willingness to intervene on the foreign exchange market to deal with short-term appreciation of the Swiss franc.As a safe haven currency, the Swiss franc is experiencing some renewed upward pressure ahead of the UK referendum on EU membership, reaching a 2016 high against the euro in mid-June. Appreciation of the Swiss economy could hurt the currently feeble recovery of the economy. At this stage, foreign exchange market interventions appear the SNB’s policy tool of choice to deal with Swiss franc appreciation. An interest rate cut would be an option only if the Swiss franc appreciates substantially.Provided “Brexit” does not occur, our baseline scenario is for the interest rate on sight deposits with the SNB to remain at -0.75% until the end of the ECB’s quantitative easing (QE) programme, or at least until appreciation pressures on the Swiss franc start to fade.Read More »
Macroview Although there were positive components in the Q1 GDP report, we are reducing our full-year growth forecast for Switzerland to 0.9% this year Read full report hereGrowth estimates from SECO (the Swiss economic affairs secretariat) released on June 1 suggest that real GDP in Switzerland expanded by 0.1% q-o-q (0.3% q-o-q annualised, 0.7% y-o-y) in Q1, lower than consensus expectations of 0.3% and Q4 2015 growth of 0.4%.But the GDP components were more encouraging than what the headline growth would suggest. GDP growth was primarily supported by private consumption , which increased by a strong 0.7% q-o-q in Q1, while much of the weakness was due to a drop in government spending and inventories. Overall, GDP growth is likely to gather pace in the next quarters, according to latest economic indicators (PMI data and the Swiss KOF barometer). Nevertheless, although we are leaving our forecasts for the quarterly pace of growth for the rest of the year unchanged, today’s Q1 figure mechanically pushes down our GDP forecast for 2016 as a whole from 1.1% to 0.9%.Although exports increased quite sharply in Q1, the Swiss franc is still strongly overvalued and continues to weigh on export dynamics. But healthy growth in the euro area, Switzerland’s main trading partner, has partly helped to compensate for the strength of the Swiss franc.Read More »
The deal should help Greek banks and bonds, but major questions on Greek debt relief were postponed and Greece’s economy remains in the doldrums
Read full report here
In the early hours of May 25, the Eurogroup, made up of euro area finance ministers, reached an agreement on Greece. The agreement will see the disbursement of the second tranche of loans (EUR 10.3bn) as part of Greece’s third bailout programme. In addition, a road map was drawn up that opens the way to debt relief after the bailout programme ends in 2018, conditional on its successful implementation. Although some hurdles remain, the Eurogroup thus managed to halt their wrangling over Greece ahead of next month’s UK referendum on continued membership of the European Union and fresh legislative elections in Spain.
The terms remain vague regarding eventual debt relief and there were no precise details on the size of the measures or quantification of its effect on Greek financing needs and debt. But the May 25 agreement contains the firmest pledge yet to debt relief and at least some measures were agreed to improve the sustainability of Greek debt.
By agreeing provisionally to continue its involvement in Greece’s bailout programme, the IMF has made a major concession, given its previous statements.
We continue to forecast a gradual pick-up in the pace of economic expansion from 1.5% in 2015 to 1.8% in 2016, largely led by domestic demand.
Read the full report here
According to Markit’s preliminary estimates, the euro area composite PMI decreased slightly from 53.1 in March to 53.0 in April. Nevertheless, the employment component improved in both the manufacturing and services sectors. Looking at forward-looking components, the manufacturing new export orders and new business indices were also up.
Overall, in terms of real activity, April’s composite PMI suggests that the pace of economic growth in Q2 was marginally weaker than the average seen in Q1, and is consistent with real GDP in the euro area rising at a quarterly rate of around 0.3% quarter-over-quarter in Q2, slightly below our forecast. However, Q1 figures to be published on April 29, could still surprise on the upside given the latest underlying data.
Looking at price dynamics, deflationary forces moderated somewhat in April. The input prices index rose above 50 for the first time in three months, possibly reflecting the recent increase in oil prices, while the output prices index also rose slightly. Our simple gauge of (dis)inflationary pressures reached a four month high. But there is still a long way to go before inflation reaches a satisfactory level.Read More »
Headline inflation was negative for the second consecutive month in March, but core inflation rose above consensus. We expect underlying inflation dynamics will remain subdued this year and it will take time to judge the effectiveness of the ECB’s latest easing measures.
According to Eurostat’s preliminary estimate, the euro area harmonised index of consumer prices (HICP) inflation rose to -0.08% y-o-y in March from -0.15% y-o-y in February, in line with consensus expectations. The March reading was the second negative print in a row. A positive surprise came from estimated core inflation (excluding energy, food, alcohol and tobacco), which rose from 0.83% y-o-y in February to 1.03% y-o-y in March, above consensus expectations (0.9%) and completely reversing its previous monthly decline.
Strong rebound in services prices
Looking at the available HICP breakdown, March’s increase was mainly driven by the rebound in services prices (+0.4% m-o-m). This followed a fall in services prices in February, mainly due to erratic factors such as package holidays. In March, services inflation rebounded strongly from 0.94% y-o-y to 1.34% y-o-y, a five-month high. Nevertheless, part of the rise might also reflect the increase in some leisure sectors due to an early Easter.
Meanwhile, non-energy industrial goods inflation fell, from 0.70% y-o-y in February to 0.
Strong money-supply growth in February enables us to maintain our forecast for euro area real GDP growth unchanged at 1.8% in 2016.
Euro area bank credit flows increased again in February, in line with other indicators such as the ECB’s Bank Lending Survey (see the chart below) and quite remarkably given the challenging financial context in February. We continue to believe that the credit cycle has legs. Moreover, we expect the ECB’s new Targeted Long Term Refinancing Operations (TLTRO II) to lower bank funding costs and support bank lending. As a result, we maintain our forecast for euro area real GDP growth unchanged at 1.8% for 2016.
The detail of the February M3 report revealed that the annual rate of expansion in the euro area money supply (M3) was stable at 5.0% y-o-y in February, in line with consensus expectations, and averaged 4.9% in the three months from December to February. Meanwhile, growth of the narrow aggregate M1, which includes currency in circulation and overnight deposits, decelerated slightly from 10.5% y-o-y to 10.3% y-o-y, its slowest rate since March 2015.
Looking at the breakdown of loans within M3, the pace of credit expansion to private sector remains subdued by historical standards but is gradually recovering. The annual growth rate of loans to the private sector (adjusted for sales and securitisations) edged up to 0.
Hard activity data for the euro area have improved since January, but downside risks still dominate despite the ECB’s support. At the very least, monetary policy looks set to remain exceptionally accommodative for an extended period of time.
Euro area business surveys (PMIs and IFO) showed renewed signs of life in March after the drops seen in the first two months of the year. Surveys also highlighted the contrasting trend between the manufacturing sector, dented by a subdued external environment, and the services sector.
Flash PMIs above consensus expectations
According to Markit’s preliminary estimates, the euro area composite PMI increased from 53.0 in February to 53.7 in March, better than consensus expectations (53.0). The upturn in March was mainly led by the services PMI (+0.7 to 54.0), while manufacturing PMI (+0.2 to 51.4) rebounded only slightly. The breakdown by sub-indices showed encouraging signs for services, with the business expectations index climbing (+1.4 to 64.4) to reach the second-highest level seen in the past 11 months. Forward-looking indices for manufacturing showed more subdued dynamics, with new orders barely improving from the one-year low seen in February.
Overall, in terms of real activity, the average composite PMI is consistent with real GDP rising at a quarter-on-quarter (q-o-q) rate of around 0.3% in Q1, slightly below our forecast.Read More »
At its quarterly policy assessment, the Swiss National Bank (SNB) decided to leave its monetary policy unchanged. The SNB could afford not to cut its reference rate after last week’s ECB stimulus failed to have much impact on the Swiss franc versus the euro.
The target range for the 3-month Libor was kept between -1.25% and -0.25%; the interest rate on sight deposits with the SNB was maintained at a record low of -0.75%; and the SNB reiterated its willingness to intervene on the foreign exchange market to deal with short-term appreciation of the Swiss franc.
The SNB also revised down its conditional inflation forecast owing to the decrease in the oil price. For the current year, inflation is forecast at -0.8%, a 0.3 percentage point decrease from December’s assessment. For 2017, the SNB predicts an inflation rate of 0.1% (previously 0.3%) and 0.9% for 2018. Regarding growth, the SNB expects a slower recovery, and it is predicting GDP growth between 1%-1.5%, instead of around 1.5% as previously.
Overall, today’s statement contained no major surprises. The SNB could afford not to cut the reference rate after last week’s ECB package failed to have much impact on the Swiss franc versus the euro. In particular, the fact that the ECB did not signal more rate cuts reduced the downwards pressure on the euro.