The economic convergence of member states lies at the heart of thjavascript:void('Automatique')e initial project to create the eurozone, but it has followed a jagged path over the past twenty years. Convergence is a multifaceted concept that covers not only the criteria stipulated in the Maastricht Treaty but also growth dynamics and income dispersion. In the period before the Great Financial Crisis, nominal convergence was relatively complete, but progress towards real convergence was much more mixed. There are several major obstacles to a sustainable convergence within the European Monetary Union, including the lack of eurozone’s optimality, possibility of currency devaluations and macroeconomic stabilisation mechanisms.
Shareholders in Norddeutsche Landesbank (NordLB) and the German Savings Banks Association (DSGV) have submitted a EUR 3.6 bn restructuring proposal for NordLB to the European authorities for approval. It seems possible that the European Commission will interpret the plan as state aid, given that it draws solely on public resources. If it is judged not compatible with the rules of the internal market, the plan could be rejected, opening the way to NordLB being sold (possibly through a privatisation) or put in resolution
The pass-through of wage growth to prices is stronger and faster when inflation is higher to start with. The low inflation in the Eurozone has slowed down the transmission. The considerable growth slowdown, on the back of adverse foreign demand and uncertainty shocks, impairs this process even more. This raises pressure on the ECB to take action in order to dislodge core inflation, which remains stuck well below its objective
The eurozone’s manufacturing sector has been hard hit by the decline in foreign trade and persistently high uncertainty. Very open internationally, the eurozone is sensitive to global cyclical slowdowns. Internal macroeconomic fundamentals are still solid, and the rally in the services sector is showing resilience. The ECB has taken note of the longer than expected slowdown, and has opted once again for longer-term refinancing operations (TLTRO). Numerous risks still cloud the forecast horizon, which could darken rather quickly if any of these risks were to materialise.
Since the middle of 2018, economic activity has virtually stagnated largely because of a slowdown in world trade. The most recent surveys and hard data confirm that weakness in the manufacturing sector continued in Q1 2019. Spearhead of the economy, the sector can become a source of vulnerability when world markets are less buoyant. However, Germany is able to support domestic demand. In 2019, the government will return to households and businesses a part of last year’s record budget surplus (more than EUR 50 bn).
Business confidence surveys are showing signs of levelling off. Hard data for January and February are rather positive. These factors are consistent with the economy keeping up growing at about 1.2%, which is our growth forecast for 2019. Although this is not very high, it is synonymous with the resilience the French economy is expected to show in an environment marked by uncertainties and downside risks. The main factor behind this resilience is the positive impetus of economic and fiscal policy, notably stimulus measures to boost household purchasing power, and the expected ensuing rebound in household consumption.
The Italian economy entered the third recession in the last ten years. In 2018, value added in the manufacturing sector recorded four consecutive contractions. Domestic demand disappointed, as both households and firms remained extremely cautious. Given the deterioration of the overall scenario, in the 2019 Economic and Financial Document recently approved, the Italian Government has lowered from 1% to 0.2% the GDP growth expected in 2019, with public deficit at 2.4% and the debt to GDP ratio at 132.6%. The structural deficit would worsen by 0.1%, to 1.5%. A progressive ageing of the population makes the scenario even more complicated.
Economic growth rose to 5.1% in 2018, the highest level since the global financial crisis, with few signs of overheating. In 2019-2020, a less favourable cyclical environment in the eurozone and international trade tensions are bound to strain the Polish economy. Even so, domestic demand will remain relatively solid, bolstered by wage growth driven by labour market pressures as well as by the government’s fiscal stimulus measures announced in February in the run up to European elections in May and legislative elections in October. Under these conditions, inflation is likely to accelerate and the twin deficits to widen, albeit without compromising the country’s macroeconomic stability.
In a morose economic environment, Spanish growth stands out as one of the most resilient in the eurozone, and it seems to have entered the year at a very similar pace to the one in H2 2018. The main factors behind this resilience can be found on the household front, where the savings rate has dropped back to the low point of 2008. With only a few days to go before the 28 April general elections, the electoral landscape is still highly fragmented. Regardless of the outcome, the winning party will find it hard to form a sustainable majority coalition.
By opting to leave the European Union (EU) without any exit plan, the United Kingdom has come face to face with an impossible choice. Week after week, the Brexit impasse has revealed the British Parliament’s incapacity to make decision, starting with the ratification of the divorce terms, the fruit of 2-years of negotiations by Prime Minister Theresa May. In the end, the Brexit was simply postponed. First set for 29 March, then 12 April, the deadline for exiting the EU has now been extended to 31 October (a Halloween treat?). This date could be moved forward if the UK finally manages to ratify the withdrawal agreement, which it has rejected time and again. But the most probable scenario is that the UK will extend its participation to the EU, at least for a while…
After contracting in January, the credit impulse picked up very slightly in February 2019. This trend is due almost exclusively to lending to non-financial companies, whereas the credit impulse has remained relatively flat for households since November 2018. Demand is expected to increase in second-quarter 2019 for all loan categories, stimulated by the easing of financing conditions, except for home loans, for which lending conditions are expected to tighten slightly.
The German economic sky seems brightening up as the Pulse indicators are moving towards the northwest quadrant of the chart. However, for the moment, the improvement is largely located outside the country’s large manufacturing sector.
Brexit started as a surprise, with the majority Leave vote in the UK referendum on June 23, 2016. In the financial sphere, more specifically, Brexit implies a loss of European passporting rights for the UK and thus less integration between the European Union and the leading financial centre of London. The trade in financial services between the two zones will now have to meet the requirements of two separate sets of regulatory and supervisory authorities, rather than just the requirements of a single regulatory framework as at present. At the very least, this will hold operational uncertainty for some time to come
GDP has been stagnant since the mid-2018, largely because of the falling industrial activity. In March, the manufacturing PMI reached 44.1, pointing to the sharpest contraction in output since mid-2012. However, the tide could be changing. For example, the IFO business climate indicator strengthened in March, following six consecutive months of decline. Nevertheless, confidence in the manufacturing sector remained on a downward trajectory. Industrial orders started the year rather weak, as they came in 3.6% lower in January than in previous month. Nonetheless, they were at about the same level as during the preceding six-month period. Based on past experiences, this stabilisation could announce an imminent turning of the cycle
In 2018, according to preliminary INSEE estimates, France’s fiscal deficit narrowed by 0.3 points compared to 2017, to 2.5% of GDP. This is a good surprise compared to the government’s target of 2.7%. Mandatory levies and public spending both declined slightly as a share of GDP, by 0.2 and 0.4 points, respectively. The public debt ratio levelled off at 98.4% of GDP. Although the ratio has yet to decline, at least it did not increase either, for the first time since 2007. Thanks to the better-than-expected figure for 2018, the temporary slippage of the fiscal deficit above the 3% threshold in 2019 is likely to remain limited.
After last week’s poor flash PMIs, data published this week show a mixed picture. The European Commission’s Economic Sentiment Index continues to decline in a large number of countries and for the eurozone as a whole as well. IFO data for Germany show an improvement in the overall climate though manufacturing continues to go down. INSEE data for France show a stabilisation or even some modest improvement. All in all there are some hopeful signs but it would be premature to conclude that the growth slowdown is about to end. April data will be particularly important.
The latest economic data are globally in line with, or even above, expectations. Some indicators remain at a high level compared to their long-term average. The further and significant deterioration in manufacturing activity draws our attention.
The French economy lost a lot of steam between 2017 and 2018, and the big question is whether it has returned yet above its potential. On the one hand, core inflation has barely increased, suggesting that the output gap is still negative. According to survey data, on the other hand, production capacity and factors are still under strong pressure, which suggests to the contrary a rather advanced position in the cycle. Although it is unclear whether the economy has reached on end-of-cycle phase, it is widely agreed that the external environment has deteriorated and is straining growth. The big fear is that the current slowdown could degenerate into recession in 2019, but we do not think this is the most likely scenario
The Portuguese banking system’s non-performing loan ratio continued to decline, to 11.7% as of Q2 2018 (and 11.3% as of Q3 2018), after peaking at 17.9% as of Q2 2016. This 6.2 percentage points contraction in the NPL ratio is mainly due to a nearly 40% reduction in non-performing loans outstanding amount, compared to a 2.1% decline in total loans outstanding amount. According to the Bank of Portugal’s data, 42% of the decline in the NPL ratio is due to write-offs. Sales and securitisations accounted for 23% of the ratio’s decline. Nearly two thirds of the cleaning up of Portuguese bank balance sheets occurred via the removal of non-performing loans from the banking system
The latest economic indicators all surprised favourably (positive z-score on the x-axis), reinforcing the global picture of a slow but resistant French growth and, consequently, our Q1 growth forecast of 0.3% QoQ.
Denmark, a small, open economy, reported growth of only 1.2% in 2018, the lowest level since 2013. A patent export in first-quarter 2017, however, has sharply distorted Denmark’s GDP growth profile in 2017 and in 2018. GDP growth averaged 1.7% over the past two years, which provides a better picture of Denmark’s relatively strong growth momentum, buoyed by a favourable international environment and the strong growth of domestic demand. Denmark will benefit from a relatively high growth carry-over in 2019. In contrast, it will be hit by slowing growth at its main trading partners in the quarters ahead. Yet the size of the slowdown will depend on the progression of protectionist policies and world trade
The ECB sharply lowered its 2019 growth forecast. Inflation is also expected to be milder over the entire forecast horizon. ECB president Mario Draghi noted that uncertainty was particularly high, but said that the vibrant labour market was supporting economic activity. Key rates would not be raised in 2019. Another round of targeted longer-term refinancing operations (TLTRO), with a maturity of 2 years each, would be launched starting in September 2019 and ending in March 2021.
Negative surprises were in abundance in industry in February. Contrary to expectations, industrial production weakened further in December due to a sharp decline in construction activity. The only hopeful sign was the strong rebound in the car industry (+7%). The forward-looking indicators also surprised on the downside.
In recent years, Germany has posted substantial current account surpluses, well above the level justified by economic fundamentals. This can be attributed to a substantial increase in savings of the government and the corporate sector. Many observers consider Germany’s current account surplus as a threat to the eurozone economy and urge the German authorities to reduce it by boosting wages and investing in infrastructure. These demands have largely been ignored. Supported by model simulations, the German authorities argue that these measures would be detrimental to the German economy, while having hardly any effect on the other eurozone countries. They call for more structural reforms in the European Union, such as a further opening of the services sector.
In the eurozone, money market rates have been holding in negative territory for more than four years. The highest-rated government and corporate bonds are still yielding less than 1%. The distribution of interest rates around the zero lower bound was initially seen as an exceptional crisis adjustment mechanism, but the situation persists. Some expect this exceptional period to finally come to a close once the European Central Bank halts its net securities purchases and possibly begins to raise key rates after summer 2019. For others, the situation has definitively changed: a bit like Japan, the diminution of eurozone interest rates marks the erosion of growth potential and the quasi-elimination of inflation
