The European Parliament and Council have reached a political agreement on common minimum loss coverage for non-performing exposures. In the future, new exposures that become non-performing will have to be fully covered by provisions no later than nine years after their classification as such. The minimum coverage levels will apply at the earliest from two years after an exposure has been classified as non-performing. Compared to the calendar initially proposed, the compromise therefore allows an additional period before minimum coverage levels begin to be applied. Similarly, the calendar for full coverage of non-performing exposures has been extended
The European Commission now expects 1.3% growth for the eurozone this year, down from 1.9% in its previous forecast. This downward adjustment doesn’t come as a surprise, considering the declining trend of several survey indicators. The recent performance of these indicators in tracking GDP growth is mixed, which makes the assessment of the current growth momentum challenging.
Most economic data remain low regarding their long-term average. Following three months of decline, the PMI services stabilized in January (51.2) and surprised on the upside. Economic growth in the Eurozone remained stable at 0.2% q/q in Q4 2018, reflecting divergent developments. In particular, Italy slipped into recession in late 2018 while French growth was resilient. Core inflation, still well below ECB’s medium-term inflation target, was above expectations.
Annual flows of household savings into cash and deposits on the one hand (primarily sight deposits, passbook savings accounts and homebuyer savings plans), and life insurance products on the other are evolving in opposite directions. In an environment of low opportunity cost of holding banking deposits, nets flows towards savings deposits have surpassed those towards life insurance and retirement savings since third-quarter 2016. They have begun to come together again since the second half of 2017: the net collection of life insurance products has increased slightly while inflows of savings deposits have eased. Unit-linked contracts are the exclusive beneficiary of this trend and their gross inflow1 reached in 2018 its highest level since 2000
According to the INSEE first estimate, French real GDP rose by 0.3% q/q in Q4 2018. This figure is not a strong one but this is still relatively good news as growth was slightly above expectations (surprising on the upside for the first time in 2018) and slightly above Eurozone growth (for the second quarter in a row).
After an eventful first twenty years, the eurozone is moving into a new phase of uncertainty. Growth has slowed markedly, and economic indicators have deteriorated. With temporary shocks and structural drags on growth, 2019 brings numerous risks. Against this background, and faced with underlying inflation that remains too low, the European Central Bank (ECB) is taking a cautious approach to this new year.
Economic growth has slowed markedly since the second quarter of 2018 and business surveys indicate that it is unlikely to change in the coming months. The exporting manufacturing sector is much affected by the slowdown in world trade. In the coming quarters, the domestic economy is likely to become the major engine behind growth thanks to an expansionary fiscal policy. More fiscal stimulus could be expected if the economy would slow further. This would also shore up the chances of the coalition parties at the next federal election set for 2021.
2019 is getting off to a less strong start, with economic activity having taken a hit from the ‘gilets jaunes’ protest movement. The collapse in consumer confidence has been abrupt and the global environment looks less certain. Against this background, fiscal policy is being loosened: the new plan to support the purchasing power of lower income households, announced in response to December’s demonstrations, should help consumer spending to catch up, at least in part. It comes alongside measures already introduced in the 2018 budget to support consumers and companies. French growth is therefore likely to show signs of resistance.
At the end of 2018, Italy and the European Commission agreed on a new 2019 Budget Law, avoiding an Excessive Deficit Procedure. The 2019 public deficit has been lowered to 2% of GDP from 2.4% previously planned, and real GDP growth has been revised downward to 1% from +1.5%. This is still a challenging scenario as overall conditions in the Italian economy worsened in H2 2018. In Q3, GDP fell by 0.1% as investment, both private and public, significantly declined. After the downturn in September, exports in Italy recorded a +9.6% y/y increase in October, while they stagnated in November bringing the value of the sales abroad to 427 billion euros in the first eleven months of the year.
The current slowdown is in keeping with the European economic cycle. Prospects are still looking relatively good, and Spain’s expected growth rate is among the highest of the big eurozone countries. Unemployment is falling rapidly but it is still massive, especially long-term unemployment. Prime Minister Pedro Sanchez just presented his 2019 budget proposal to Parliament, but he is not sure it will pass. In any case, the deficit most likely slipped significantly below 3% of GDP in 2018, and Spain is preparing to exit the excessive deficit procedure that was launched 10 years ago.
Hungary’s macroeconomic situation provides a good illustration of how Central Europe is flourishing economically, but has jettisoned some of the principles of liberal democracy, which is the crucible of the European Union. Hungary’s real GDP growth is estimated at an average of 4.5% in 2018, the highest level since 2004 and higher than its long-term potential. Endogenous and exogenous factors announce a downturn in the economic cycle in the quarters ahead. Yet there is nothing alarming about the expected deterioration in macroeconomic fundamentals in the short to medium term.
On 15 January 2019, UK MPs rejected the proposed Brexit agreement reached by EU Heads of State two months earlier. With 432 of the 634 votes going against the deal, this result has significantly weakened Prime Minister Theresa May in future discussions with the EU and with Members of Parliament. Today almost anything looks possible, starting with a delay in the official date of the UK’s departure, currently scheduled for 29 March.
Hungary’s Prime Minister Victor Orban, who intends to lead a eurosceptic, sovereigntist and anti-immigration front in European elections next May, can boast of a favourable macroeconomic situation. Economic growth continued to accelerate in 2018 thanks to a mix of expansionist economic policies, European structural funds and an upturn in domestic lending. GDP growth is estimated at an average of 4.5% in 2018, the highest level since 2004 and above its long-term potential. It is expected to slow in 2019. The “Orban model” is striking a fragile balance between interventionism and pro-business measures. A small open economy, Hungary is highly integrated in European and global supply chains and then is dependent on the global business cycle
Market reaction suggests that the parliamentary vote, with a wide majority, against the Brexit deal which had been negotiated with Europe, has reduced the likelihood of a no-deal Brexit. Whether this feeling of relief lasts will depend on how the discussions on possible outcomes evolve. The economic headwind which comes with this prolonged uncertainty, for the UK but also for the companies in the EU which trade with the UK, will not go away soon.
For Germany, 2019 started with a hangover. Most indicators that we follow are below their long-term average and all surprised on the downside. In particular, the export-oriented manufacturing sector has been badly affected.
The European parliamentary elections in May 2019 will mark the start of a major process of renewal for European institutions. After Brexit, the European parliament will have only 705 seats, from 751 at present. Aggregating national polls can help produce projections for the make-up of the new parliament, although naturally these need to be treated with some caution. According to current projection by Poll of Polls, a weakening position for the dominant conservative and social-democrat groupings may be on a sufficient scale to prevent the PPE and S&D alliances from taking a majority in the European parliament. The liberal/centrist ALDE group, if its rising poll numbers feed through into the ballot boxes, hopes therefore to become a supportive force able to forge compromises