Eurozone | Higher growth and more subdued inflation in · PDF fileHigher growth and more...

October 2017

Eurozone Economic Watch Higher growth and more subdued inflation in

2017-18

Eurozone Economic Watch | October 2017

Eurozone: Higher growth due to strong domestic demand, but

more subdued inflation

2

Our MICA-BBVA model for short-term growth estimates a quarterly GDP figure of around 0.6%

in 3Q17, after the slight upward revision to 2Q17 growth to 0,7% QoQ.

Confidence moderated slightly in October, and seems to be stabilizing. The service sector

lost all the ground recovered in September offsetting the improvement in manufacturing.

Activity data improved in August, after disappointing figures in July, suggesting that the

recovery in the industrial sector and exports remains on track supported by both strong

domestic and global demand, while the impact of the euro seems to be limited so far. Retail

sales softened again in August, suggesting some moderation in consumption, but

employment gains and the positive consumer mood will continue to support it.

We revise upwards GDP growth forecast on account of stronger data and strengthening

domestic drivers to 2.2% in 2017 and 1.8% in 2018 amid high political uncertainty.

Headline inflation is expected to decline by year end driven by the negative base effect of

energy prices along with the appreciation of the euro, while core inflation is likely to remain

fairly stable until the end of the year, after increasing by 0.5pp since end-2016, keeping a

very gradual upward trend onwards.

We revise slightly down our headline inflation forecasts to 1.5% in 2017 and 1.2% in 2018,

but maintain our projections for core inflation (1.1% and 1.4%, respectively).

Economic developments: Robust growth and subdued inflation in

2S17


Incoming data suggest a robust and fairly steady GDP growth in 3Q17

GDP, Contribution by Components (%QoQ, pp)

GDP and MICA forecasts (%QoQ)

GDP growth accelerated to

0.7% QoQ in 2Q17. Domestic

demand is behind the

recovery, strengthening on the

back of investment

As a consequence, imports

accelerated more than exports,

leading to a negative

contribution to growth from

external demand

Our MICA-BBVA model

suggests a stabilization of GDP

growth at 0.6% in 3Q17, but

we cannot discard some further

moderation

Source: Eurostat and BBVA Research

0.7

-2.5

-1.5

-0.5

0.5

1.5

2.5

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

4Q

16

1Q

17

2Q

17

Imports Exports

Change in inventories Gross fixed capital formation

Public consumption Private consumption

Real GDP

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

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

4Q

16

1Q

17

2Q

17

3Q

17

CI 20% CI 40% CI 60% Observed


France and Italy GDP growth remained stable at decent levels in

2Q17, while Germany registered a slight deceleration to 0.6%

GDP, Contribution by components (%QoQ, pp)


In France, GDP grew 0.5%

QoQ in 2Q17 driven by a

strong net exports’ contribution

In contrast, domestic demand

was the main contributor in

Germany (driven by

consumption) and Italy (due to

investment)

Spain’s growth continues

to outperform the region, at

0.9% QoQ, though it is

decelerating

0.6 0.50.3

0.9

-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

16

3Q

16

4Q

16

1Q

17

2Q

17

2Q

16

3Q

16

4Q

16

1Q

17

2Q

17

2Q

16

3Q

16

4Q

16

1Q

17

2Q

17

2Q

16

3Q

16

4Q

16

1Q

17

2Q

17

Ge

rma

ny

Fra

nce

Ita

ly

Spa

in

Germany France Italy Spain Diff. GDP levelrelative to 2008

Private consumption Public consumption Gross fixed capital formation Change in inventories

Exports Imports Real GDP Eurozone GDP


Confidence figures moderated slightly in October due to less optimism

in services

6


PMI and GDP (level, %QoQ)

ESI and GDP (level, %YoY)

In October, confidence levels declined in

services while they increased again in

manufacturing on the back of stronger new

orders, according to PMIs

Confidence among both businesses and

consumers has risen to its highest level

since before crisis, according to the European

Economic Sentiment (ESI)

0.0

0.3

0.6

0.9

1.2

50

52

54

56

58

60

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

Oct-

16

Jan-1

7

Apr-

17

Jul-1

7

Oct-

17

Real GDP (% QoQ) PMI

Manufacturing PMI Services PMI

PMIs level GDP (% QoQ)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

100

102

104

106

108

110

112

114

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

Sep

-16

Dec-1

6

Ma

r-1

7

Jun-1

7

Sep

-17

Real GDP (% YoY) ESI

ESI level GDP (% YoY)


PMI: France surprised to the upside in October while Germany came

below expectations, but still present clear gains over the last quarter

7

PMI (level)


45

47

49

51

53

55

57

59

61

Oct-17 Oct-17 Oct-17 Oct-17

1Q17 2Q17 3Q17 4Q17 1Q17 2Q17 3Q17 4Q17 1Q17 2Q17 3Q17 4Q17 1Q17 2Q17 3Q17 4Q17

Germany France Italy Spain

Composite PMI Manufacturing PMI Services PMI

5555


Industrial production surged in August, more in line with signs from

confidence surveys, and suggests that the recovery is on track

8


Industrial production (level, %QoQ)

IP capital, investment in machinery and

equipment and utilization capacity (%QoQ, %)

Industrial production improved strongly

(+1.4% MoM) after a disappointing figure in

July


The increase in production of durables and

capital goods, together with high capacity

utilization, point to a still favourable outlook in

coming months

-0.1

0.3

1.0

0.2

1.2

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

96

98

100

102

104

106

108

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

Oct-

16

Jan-1

7

Apr-

17

Jul-1

7

IP (2012=100) IP (% QoQ)

IP (level)

IP (%) QoQ) 75

77

79

81

83

85

-2

-1

0

1

2

3

4

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

Sep

-16

Dec-1

6

Ma

r-1

7

Jun-1

7

Sep

-17

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

Capacity Utilization (%)

Capacity utilization(%)

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


Industrial output growth was observed in the majority of countries

during 3Q17

9

Industrial production (%QoQ, level)


1.2

0.5

1.8

0.6

6.4

1.7

3.1

0.7

-1.3 94

96

98

100

102

104

106

108

110

112

114

116

118

-2

-1

0

1

2

3

4

5

6

3Q

16

4Q

16

1Q

17

2Q

17

3Q

17

3Q

16

4Q

16

1Q

17

2Q

17

3Q

17

3Q

16

4Q

16

1Q

17

2Q

17

3Q

17

3Q

16

4Q

16

1Q

17

2Q

17

3Q

17

3Q

16

4Q

16

1Q

17

2Q

17

3Q

17

3Q

16

4Q

16

1Q

17

2Q

17

3Q

17

3Q

16

4Q

16

1Q

17

2Q

17

3Q

17

3Q

16

4Q

16

1Q

17

2Q

17

3Q

17

3Q

16

4Q

16

1Q

17

2Q

17

3Q

17

Germany France Italy Spain Portugal Austria Belgium Finland Netherlands

IP (% QoQ) IP (2012=100)

IP (level)

IP (% QoQ)


Foreign trade figures improved in August but still suggest some

moderation for 3Q17

10 Source: Eurostat and BBVA Research

Trade balance (€ bn, %GDP)

Exports contribution by destination (%QoQ, pp)

0.5

0.7

0.80.9

0.80.8

0.70.7

0.0

0.2

0.4

0.6

0.8

1.0

1.2

140

145

150

155

160

165

170

175

180

185

190

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

Aug

-16

Nov-1

6

Fe

b-1

7

Ma

y-17

Aug

-17

Trade balance (€ bn) Exports

Imports Trade balance (%GDP)

Exports, Imports & Trade balance

Trade Balance (% GDP)

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

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

4Q

16

1Q

17

2Q

17

3Q

17

Other EU countries United StatesChina Asia (ex China)LatAm Rest of worldTotal Exports


Retail sales continue to moderate in 3Q17 while consumer confidence

remained stable

11


Retail sales and consumer confidence (%QoQ, pts)

Retail sales and total wage bill (%YoY)

Retail sales dropped further in August (-0.5%

MoM) and showed its second consecutive

monthly decline (-0.3% MoM in July)

Consumption growth continues to be driven

by gains in employment and low inflation

-5

-4

-3

-2

-1

0

1

2

3

4

2Q

07

4Q

07

2Q

08

4Q

08

2Q

09

4Q

09

2Q

10

4Q

10

2Q

11

4Q

11

2Q

12

4Q

12

2Q

13

4Q

13

2Q

14

4Q

14

2Q

15

4Q

15

2Q

16

4Q

16

2Q

17

Employees Real compensation

Total wage bill Retail sales

0.3

0.6

0.9

0.3

1.0

*-0.1

-30

-25

-20

-15

-10

-5

0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

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

Aug

-16

Nov-1

6

Fe

b-1

7

Ma

y-17

Aug

-17

Retail Sales (% QoQ) Consumer Confidence

Retail Sales (% QoQ)

ConsumerConfidence


The unemployment rate remained stable in August, but hides ongoing

improvements in the labor market

12


Unemployment rate by country (%)

Annual unemployment change by gender & age (millions)

The jobless rate remained stable at 9.1% in

August, while the decline over the last year of

0.8pp is mostly driven by Spain and to a lesser

extent by Germany

The unemployment fall continues and is

observed mostly among the experienced

population

0

5

10

15

20

Aug-16 Jul-17 Aug-17

Eurozone Germany France Italy Spain

-1.8

-1.6

-1.4

-1.2

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

Aug

-14

Oct-

14

Dec-1

4

Fe

b-1

5

Apr-

15

Jun-1

5

Aug

-15

Oct-

15

Dec-1

5

Fe

b-1

6

Apr-

16

Jun-1

6

Aug

-16

Oct-

16

Dec-1

6

Fe

b-1

7

Apr-

17

Jun-1

7

Aug

-17

Women 25-74Y Men 25-74Y Men < 25Y

Women < 25Y Total


Both headline and core inflation kept steady in September

13


Inflation and contribution of components (%YoY, pp)

Core and trimmed-mean inflation (%YoY)

Beyond the volatility of certain components of

inflation in previous months, both the core (1.3%

YoY) and the headline (+1.5% YoY) measures

remained unchanged in September

Headline inflation is expected to moderate to

around 1% in coming months due to energy

prices, while core inflation should increase

only very gradually

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

Se

p-1

5

No

v-1

5

Ja

n-1

6

Ma

r-1

6

Ma

y-1

6

Ju

l-1

6

Se

p-1

6

No

v-1

6

Ja

n-1

7

Ma

r-1

7

Ma

y-1

7

Ju

l-1

7

Se

p-1

7

Services Non-energy industrial goods

Processed Food Energy

Unprocessed Food HICP (% y/y)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Aug

-05

Aug

-06

Aug

-07

Aug

-08

Aug

-09

Aug

-10

Aug

-11

Aug

-12

Aug

-13

Aug

-14

Aug

-15

Aug

-16

Aug

-17

Trimmed mean inflation Core inflation


Inflation measures remain subdued across countries during September

14

Headline and core inflation (%YoY)

September HICP showed some mixed signals across countries: increase in France (1.1% after 1.0%

YoY), stable in Germany (1.8% after 1.8% YoY), while declines in Italy (1.3% after 1.4% YoY) and Spain

(1.8% after 2.0% YoY). This was also reflected in core measures: unchanged in Germany and France,

but declining by to 1% YoY in Italy and by 0.4pp to 1.2% in Spain.


0.4 0.3

0.0

-0.3

0.6

1.0

1.8

0.4

0.1 0.0

-0.2

1.0

0.50.5

0.70.8

1.5

2.0

0.80.6

0.7

0.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

1Q

17

2Q

17

3Q

17

1Q

17

2Q

17

3Q

17

1Q

17

2Q

17

3Q

17

1Q

17

2Q

17

3Q

17

1Q

17

2Q

17

3Q

17

1Q

17

2Q

17

3Q

17

1Q

17

2Q

17

3Q

17

1Q

17

2Q

17

3Q

17

1Q

17

2Q

17

3Q

17

1Q

17

2Q

17

3Q

17

1Q

17

2Q

17

3Q

17

Germany France Italy Spain Portugal Austria Belgium Finland Netherlands Greece Ireland

Headline Inflation (% YoY) Core Inflation (% YoY) Headline Inflation 2016 Core Inflation 2016

Updated forecasts: Higher growth due to strong domestic

demand, but more subdued inflation


Growth drivers for the Eurozone

16

2 Robust and steady

global growth

Robust global trade

continue to support the EZ

recovery

More appreciated euro

Limited effect so far, but it could

weigh on exports and push

inflation slightly down

Solid consumption

and investment

Benefiting from strong

confidence, improving labour

market and financial conditions

Ongoing adjusting

imbalances

Both public and private sectors,

with heterogeneity across

countries

Supportive

economic policies

More gradual ECB’s exit and

slightly expansionary fiscal

stance

High political

uncertainty

Brexit, Italy populism,

Spain, a less pro-

European Germany


Eurozone: higher growth thanks to the strength of domestic demand

GDP GROWTH AND FORECAST (%)

MAIN MACROECONOMIC INDICATORS (% YoY, %GDP)

2015 2016 2017 (f) 2018 (f)

Real GDP 2.0 1.8 2.2 1.8

Private consumption 1.8 2.0 1.8 1.7

Public consumption 1.3 1.7 1.3 1.3

Investment 3.0 4.5 4.0 3.7

Domestic demand (cont. pp) 1.9 2.3 2.1 2.0

Exports 6.1 3.3 4.7 2.9

Imports 6.5 4.7 4.7 3.5

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

Current account (% GDP) 3.2 3.3 3.2 3.0

Budget balance (% GDP) -2.1 -1.5 -1.2 -1.1

HICP (avg. %YoY) 0.0 0.2 1.5 1.2

Stronger consumption and investment, while

the negative effect of euro appreciation seems to

be limited

Lower inflation due to a stronger euro, but core

inflation is still expected to increase gradually

Easing tailwinds in coming quarters (higher oil

prices, stronger euro, stable global growth) underpin

our forecast of a slight growth moderation next

year


17

1.4

1.91.8

2.2

1.8

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

2014 2015 2016 2017 2018

Current Previous


More resilient consumption in 2017-18

18


Eurozone: private consumption and real labour income (% YoY)

Eurozone: unemployment rate and contributions (%, pp)

Despite still moderate wage growth, lower

prices…

… add to the better performance of the labour

market

-2

-1

0

1

2

3

4

5

-2

-1

0

1

2

3

4

1Q

00

1Q

01

1Q

02

1Q

03

1Q

04

1Q

05

1Q

06

1Q

07

1Q

08

1Q

09

1Q

10

1Q

11

1Q

12

1Q

13

1Q

14

1Q

15

1Q

16

1Q

17

1Q

18

Private consumption HH disposable income (RHS)

-2

0

2

4

6

8

10

12

14

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Unemp. rate (t-1) Employment

Labour force Unemp. rate


Broad-based investment recovery on track: strong upward trend in

equipment and construction after the completion of adjustment

19 Source: Eurostat and BBVA Research

Eurozone: investment by country (1Q18=100)

50

60

70

80

90

100

110

120

1Q

08

1Q

09

1Q

10

1Q

11

1Q

12

1Q

13

1Q

14

1Q

15

1Q

16

1Q

17

2Q

08

2Q

09

2Q

10

2Q

11

2Q

12

2Q

13

2Q

14

2Q

15

2Q

16

2Q

17

3Q

08

3Q

09

3Q

10

3Q

11

3Q

12

3Q

13

3Q

14

3Q

15

3Q

16

4Q

08

4Q

09

4Q

10

4Q

11

4Q

12

4Q

13

4Q

14

4Q

15

4Q

16

1Q

08

1Q

09

1Q

10

1Q

11

1Q

12

1Q

13

1Q

14

1Q

15

1Q

16

1Q

17

Eurozone Germany France Italy Spain

Total Construction M&E


20

A more gradual ECB’s exit strategy: tapering in 2018, but no refi rate

hike until mid-2019

Source: Fed, ECB and BBVA Research

FED AND ECB INTEREST RATE (pb)

• The ECB is not in a hurry and normalization is

expected to be orderly and prudent. The taper plan will

be unveiled at October meeting. Key elements:

o Retaining enough flexibility to respond to

economic develpments, mainly core inflation

o The recalibration of QE is expected to give

priority to longer extension (until Sep2018) with

a greater reduction in the monthly pace of asset

purchases (EUR from 60bn to 20-25bn) in order to

anchor interest rates expectations

o Reinforcing forward guidance (interest rate at

present level until “well past” the purchases).

• All in all, QE tapering to start in January 2018 and to

end over by 3Q18. We now expect the first refi rate hike

in June 2019

0.0

0.5

1.0

1.5

2.0

2.5

Jan-

15

Apr

-15

Jul-1

5

Oct

-15

Jan-

16

Apr

-16

Jul-1

6

Oct

-16

Jan-

17

Apr

-17

Jul-1

7

Oct

-17

Jan-

18

Apr

-18

Jul-1

8

Oct

-18

Fed ECB

October 2017

Eurozone Economic Watch

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 not been independently verified by BBVA. Therefore, BBVA offers

no warranty, either express or implicit, regarding its accuracy, integrity or correctness.

Estimations this document may contain have been undertaken according to generally accepted methodologies and should

be considered as forecasts or projections. Results obtained in the past, either positive or negative, are no guarantee of

future performance.

This document and its contents are subject to changes without prior notice depending on variables such as the economic

context or market fluctuations. BBVA is not responsible for updating these contents or for giving notice of such changes.

BBVA accepts no liability for any loss, direct or indirect, that may result from the use of this document or its contents.

This document and its contents do not constitute an offer, invitation or solicitation to purchase, divest or enter into any

interest in financial assets or instruments. Neither shall this document nor its contents form the basis of any contract,

commitment or decision of any kind.

In regard to investment in financial assets related to economic variables this document may cover, readers should be

aware that under no circumstances should they base their investment decisions in the information contained in this

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