1. society
2. work
3. unemployment

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