Wed, Sep 2 2009, 08:52 GMT
by Frank Øland Hansen
A decade ago Euroland exported almost as much to the US as it did to the whole of Asia. This has changed dramatically and today Asia has become almost twice as important as the US as a destination for Euroland exports of goods and services.
China, Japan and the ASEAN (Association of SouthEast Asian Nations) countries are centre stage in the Asian recovery story. Together this group accounts for about 12% of Euroland exports – equivalent to the share of exports that is destined for the US. In addition the Asian country group has a much higher growth potential than the US, so from a trade growth perspective we should focus much more on what is going on in Asia than in the US.
The rise of Asia has been led by China. The share of exports heading for China (including Hong Kong) has doubled within a decade and today more than 6% of Euroland exports are destined for China. India is a rising star too and may soon account for as much Euroland export as Japan, which has seen its share of Euroland exports dwindle for a decade. The prospects for growth in both China and India are very positive and we should expect to see their export share continue to grow for another decade.
Published on Wed, Sep 2 2009, 08:52 GMT
Wed, Aug 26 2009, 09:08 GMT
by Frank Øland Hansen
On August 19, Governing Council member Axel Weber said to the German newspaper Die Zeit that it is too early to withdraw stimulus measures. We fully agree with that, but while some misinterpreted this as meaning that more stimulation was needed we take note that the focus of the ECB now appears to be shifting from whether to implement more stimulus measures to when to begin withdrawing them.
Below we discuss in detail why we believe the ECB will find that the conditions are in place to start hiking next summer and outline what an exit strategy might look like.
Unless inflation is very high (as in July 2008) ECB policy tends to be driven by growth developments. In 1999 the ECB started hiking when PMI new orders were 59 and in 2005 it hiked when they reached 54. PMI new orders are currently at 49.5 and increasing strongly. We anticipate that they could reach 59, or more, in early 2010 and would thus send a strong signal for the ECB to embark on a hiking cycle.
The ECB will have to revise its downbeat staff macroeconomic projections significantly up at the next Governing Council meeting. The ECB currently (June 2009) projects growth to remain negative until mid-2010, but with France and Germany out of recession in Q2 this year and the euro area in positive growth territory in Q3 – a year before the ECB officially expects – it will clearly have to change its view radically. We anticipate strong growth of about 3% q/q annualised in Q3 and Q4 09, driven primarily by the inventory cycle and exports. Thereafter we expect that growth will slow down to around 2% q/q in 2010 and become more broad based.
Published on Wed, Aug 26 2009, 09:08 GMT
Wed, Jul 29 2009, 07:18 GMT
by Frank Øland Hansen
Fiscal stimulus in response to the crisis
As the global recession picked up shortly after the Spanish housing market started correcting (see The Spanish Recession), the Spanish government acted immediately. In 2008 government expenditure rose by 5% of GDP on the back of a massive stimulus. This was partly due to automatic stabilisers kicking in but also due to the government implementing further fiscal stimulus.
The discretionary fiscal stimulus amounted to 3% of GDP being allocated in 2008 and 2% in 2009. The stimulus consisted of measures to offset falling domestic demand through tax breaks for firms, subsidies for employment and further assistance for the unemployed. The government has also secured the banks by raising deposit insurance, improving liquidity and guaranteeing debt issuance. Though all the above-mentioned measures are well timed and have helped Spain to weather the storm, the government has failed to implement overdue reforms to secure the country’s long term potential, such as much needed labour market reform.
Published on Wed, Jul 29 2009, 07:18 GMT
Tue, Jul 28 2009, 08:53 GMT
by Frank Øland Hansen
We don’t expect their balance sheets to deteriorate to an extent that would need much recapitalisation. We therefore anticipate the total amount of recapitalisation for the sector to be small.
Spanish leverage in the private sector has ballooned in recent years. Spanish banks have acquired more assets and increased their liabilities in the process. There is a potential risk of rising non-payments of loans, which could amount to significant losses for the banks. In this section we briefly explain the major risks that the Spanish financial sector is facing domestically and abroad.
Published on Tue, Jul 28 2009, 08:53 GMT
Mon, Jul 27 2009, 10:34 GMT
by Danske Research Team
The Spanish downturn began in the middle of 2007, simultaneously with the financial crisis. Since then unemployment has exploded and economic activity has deteriorated rapidly. We note, though, that the Spanish economic downturn was not caused by the financial crisis, but was magnified and probably emerged faster because of it. The fundamental cause was rather due to years of too high growth and the inevitable slowdown of an overheated Spanish economy, and in particular an overheated Spanish housing market. The domestic housing market actually began cooling before the global crisis emerged.
Published on Mon, Jul 27 2009, 10:34 GMT
Mon, Jul 6 2009, 09:11 GMT
by Allan von Mehren
The dramatic decline in the Irish economy continued into the second quarter of this year, the fifth consecutive quarter of decline. The damage wreaked by this recession has been immense, whether seen through the collapse in house building, the surge in unemployment, the decimation of Government tax revenue, or the sharp decline in consumer demand.
The more positive news is that the pace of decline has eased in the second quarter. A number of indicators of activity, whether soft (consumer confidence, PMI surveys, global economic prospects) or hard (unemployment, tax revenue, retail sales), show continued weakness, although the pace of decline has eased considerably.
The cause of Ireland’s economic decline is evidenced by the sheer scale of the collapse of private sector demand. In 2006, at the height of the boom, the Irish private sector was a net borrower to the tune of EUR10bn. In 2009 the private sector will be a net saver of EUR20bn a year. This represents a withdrawal of EUR30bn from the economy annually because of less spending on housing and consumer goods, and less capital investment by businesses. High Government borrowing is a direct mirror of this saving. While the spreads on Irish Government debt have risen sharply over the past year, the massive level of domestic savings will make the funding of this deficit easier.
The economic recovery will come from two sources. First, foreign demand for Irish produce will pick up as the global economy recovers. The initial signs here are encouraging. While global exports have been in freefall since Christmas, Irish exports have defied gravity. Second, as domestic confidence returns, the enormous rate of private saving will begin to fall. Consumer spending will bottom out this year and begin to grow slowly around the turn of the year. A pick-up in housing activity will take longer, with the residential sector to remain subdued for an extended period.
However, as long as Irish consumers and businesses remain in retrenchment mode, then overly aggressive measures to reduce government borrowing could be counter-productive. The budgetary measures taken in October and April were necessary, as the deficit was heading for 15% and financial market turmoil meant that there was a genuine (if remote) fear that funding could dry up. However, the Government should refrain from further significant taxation increases, although continue to reform the public and local private service sectors.
Published on Mon, Jul 6 2009, 09:11 GMT
Thu, Jun 25 2009, 07:09 GMT
by Steen Bocian
Danske Bank regularly surveys the opinion of Danes on adopting the euro. Our June poll showed that the Yes camp maintained a narrow lead over the No side. However, the Yes lead continued to shrink, as it has done in recent months – so our June poll does not give grounds for concluding that a majority of Danes would be certain to vote in favour of joining the euro at any future referendum. The modest Yes lead represents a return to a more normal situation following the brief Yes rally in November and December last year.
Our June poll showed that 39.9% of Danes polled would definitely vote Yes to Danish EMU participation, while 38.8% were certain No voters. Add to this the 10% of voters who are in doubt, but lean towards voting Yes and the 7.8% who would perhaps vote No – and the Yes camp has a lead of 3.3 percentage points. This is a rather modest lead, and a comparison with the polls we conducted earlier this year shows – as already mentioned – that the lead has shrunk. In any event, many Danes are still in doubt about how to vote.
The temporary momentum of the Yes side in the final months of 2008 reflected the autumn economic agenda being heavily affected by the escalating financial crisis. Due to the turmoil in financial markets, the Danish central bank, Danmarks Nationalbank (DN), had to widen the rate spread to the eurozone a couple of times during October. Meanwhile, the Danish economy slowed sharply, and many Danes began to feel the impact of rising interest payments on their budgets. This stimulated support among Danish voters for joining the euro. However, since then the foreign exchange turmoil has subsided, so opinion polls have more or less returned to normal, with a modest Yes lead that will likely make a future referendum on euro membership a very close run race.
Published on Thu, Jun 25 2009, 07:09 GMT
Wed, May 20 2009, 12:49 GMT
by Steen Bocian
Prime Minister Lars Løkke Rasmussen once again threw the spotlight on the prospects for a Danish referendum on EMU participation early last week, when he said that he aimed to call an EMU vote within the term of the current parliament – i.e. by autumn 2011 – even though he had indicated soon after his inauguration that he might not call a referendum before the next general election.
Danske Bank regularly surveys the opinion of Danes on adopting the euro. Our May poll showed that the Yes camp maintained a narrow lead over the No side. However, the Yes lead has shrunk in recent months, so our May poll does not give grounds for concluding that a majority of the Danes would be sure to vote in favour of joining the euro at any future referendum. The modest Yes lead represents a return to a more normal situation following the brief Yes rally in November and December last year.
Our May poll showed that 40.3% of Danes polled would definitely vote Yes to Danish EMU participation, while 39% were certain No voters. Add to this the 10.4% of voters who are in doubt, but lean toward voting Yes and the 6.2% who would perhaps vote No – and the Yes camp has a lead of 5.4 percentage points. While this is a decent lead, a comparison with the poll we conducted in April shows – as already mentioned – that the lead has shrunk. At any event, many Danes are still in doubt about how to vote.
The temporary momentum of the Yes side in the final months of 2008 reflected the autumn economic agenda being heavily affected by the escalating financial crisis. Due to the turmoil in financial markets, the Danish central bank, Danmarks Nationalbank (DN), had to widen the rate spread to the eurozone several times during October. Meanwhile, the Danish economy slowed sharply, and many Danes began to feel the impact of rising interest payments on their budgets. This stimulated support among Danish voters for joining the euro. However, since then the foreign exchange turmoil has subsided, so opinion polls have more or less returned to normal, with a modest Yes lead that will likely make a future referendum on euro membership a very close run race.
Published on Wed, May 20 2009, 12:49 GMT
Tue, May 12 2009, 15:53 GMT
by Frank Øland Hansen
- The ECB is about to embark on credit easing. Jean-Claude Trichet emphasised that the ECB will not be embarking on quantitative easing. We look at differences/similarities and the implications of this.
- Credit easing aims at affecting the risk spread across assets, whereas quantitative easing aims at affecting the general level of the longer-term interest rate.
- The ECB move should be enough to positively affect the market for eurodenominated covered bonds while the effect on the overall bond market is likely to be muted.
- In the current situation of financial distress, credit easing appears as the appropriate response. We believe that the ECB will cautiously go down the road of credit easing, but not take a single step along the path of quantitative easing.
- Credit easing is not necessarily sterilised. EUR60bn, however, only amounts to about 4% of the Eurosystem’s current balance sheet. The ECB appears to consider sterilisation important for medium- and long-term credibility.
- Trichet also announced that the EIB will get access to central bank liquidity. This move will help to increase investment in vulnerable sectors and regions. It is not targeted at alleviating government budgets and will do little in this respect.
Published on Tue, May 12 2009, 15:53 GMT
Thu, Apr 9 2009, 16:40 GMT
by Danske Research Team
• The Danske Markets Economic Surprise Index (DM ESI) is a quantification of the latest macro data into an index. The index measures how positively or negatively the data has surprised -measuring the difference between actual release and consensus forecast. The index can thus be interpreted as whether the data was better or worse than consensus expected.
• The DM ESI gives a fast overview of surprises in historical and latest macro data. This is a useful input when determining current market drivers. Another use is that the index in some periods leads the market movements.
• The DM ESI so far operates for US growth and price data. It is scheduled for release every week to assist in giving an overview of the weekly surprises in macro data. In the future similar indices will arise in respect of the eurozone.
Published on Thu, Apr 9 2009, 16:40 GMT
Fri, Mar 20 2009, 14:14 GMT
by Stanislava Pravdova, Lars Christensen, Lars Rasmussen
• We have long argued that the large external imbalances in a number of Central and Eastern European economies would ultimately lead to a sharp drop in economic activity and a hard landing in a number of countries in the event of a "sudden stop" to the external funding of the CEE economies. Unfortunately this is what has been happening in these last few months.
• Hence, with the external funding of the CEE economies "drying" up a sharp correction in the external imbalances becomes unavoidable. This correction can happen in two ways - either domestic demand drops sharply and/or the CEE currencies weaken significantly. Both are materialising at the moment.
• The Baltic States were the first CEE economies to experience a sharp drop in economic activity. The imbalances were especially large in these economies and we are now seeing a vast improvement of their current account balance. Most notably the Latvian current account deficit has improved from -25% of GDP at the low point in mid 2007 to -13% of GDP in Q4 2008.
• The external imbalances have also been large in Bulgaria and Romania - in Bulgaria the current account deficit reached -27% of GDP in Q2 2008. However, in these economies correction of the external imbalances has begun to show in the last couple of quarters as the trade balances have improved. Furthermore, the Romanian Leu has weakened considerably in the last months.
• In Poland, Czech Republic and Hungary the external imbalances have not begun to correct yet. The current account deficits have, however, been the smallest in these countries at levels of -3 to -7% of GDP. However, with the significant weakening of the currencies in these countries in the last few months and the declining economic activity we expect an effect on the current account balance in the coming quarters.
Published on Fri, Mar 20 2009, 14:14 GMT
Tue, Feb 24 2009, 09:26 GMT
by Frank Øland Hansen
• Euro area banks' losses on loans in Central and Eastern Europe (CEE) will be substantial due to an unfortunate mix of collapsing property prices, economic downturn and exchange rate depreciation.
• Austria is by far the most exposed country, but the government can afford to absorb the losses. Belgium, which is a high debt country with a fiscal budget that's already stretched, is in for smaller losses, but they also have less room for manoeuvre.
• We look at three risk scenarios. A mild scenario, which is comparable to the Swedish banking crisis; a hard scenario, where the hardest hit CEE countries face more substantial looses; and finally an ugly scenario which is more comparable to the Asian crisis. In these scenarios Austrian banks face losses of 3½-11% of GDP, Swedish banks loose 2-6% of GDP and Belgian banks loose1-3½% of GDP.
• Governments in the euro area will not be eager to provide rescue packages aimed at supporting lending in the CEE region. The CEE governments will be much more willing to provide rescue packages or direct loans, but they are less able and will need support from international institutions.
Published on Tue, Feb 24 2009, 09:26 GMT
Mon, Feb 2 2009, 16:12 GMT
by Søren Dijohn
• In a process ignited by the financial downgrading of some European countries by the rating agencies, EMU bond yield spreads have widened recently. The countries that have been downgraded are also those with the largest imbalances and therefore where the largest deterioration in government budgets is anticipated and the perceived risk greatest.
• We present a set of striking correlations indicating that the recent financial downgrading and widening of spreads relative to German bunds relates to economic policy during the period between 2002 and 2007. Therefore, recent financial downgrading appears to be closely connected to lax economic policy and lack of structural improvements in preceding years.
• For some member countries, including Greece, Ireland and Spain in particular, monetary policy rates set to be consistent with conditions in the euro area as a whole were persistently and significantly below that prescribed by a "country-focused" Taylor rule. Large asymmetries have not been offset by a sufficiently tight fiscal policy and/or structural improvements, and have consequently been allowed to have real economic effects, for example, through the booming housing market.
• This is also a lesson for the future. Politicians in all euro countries still have an obligation to run their own country to the best of their ability. They have to secure long run sustainable growth through appropriate fiscal policy and structural improvements. The euro is not a substitute for appropriate and timely policies at national level - there is no free lunch.
Published on Mon, Feb 2 2009, 16:12 GMT
Fri, Dec 19 2008, 14:58 GMT
by Danske Research Team
• ECB has re-widened the rate corridor to 200bp effective on 21 January, reversing its 9 October decision. The move is an attempt to discourage the use of ECB's deposit facility, revive bank lending, and help normalize money markets.
• The move is likely to lead to lower eonia rates and perhaps slightly lower euribor rates. But the effects are likely to be quite small. The widening of the rate corridor also puts pressure on the already hardpressed banking sector.
• We do not expect this initiative to revive bank lending, and are somewhat puzzled by ECB's obsession with the amount on deposit, i.e. ECB would get much better results from proceeding with plans for a clearing house for interbank loans.
Published on Fri, Dec 19 2008, 14:58 GMT
Thu, Dec 18 2008, 17:05 GMT
by Søren Dijohn
• In recent years Euroland exports have been buoyant. The fast growing central and eastern European (CEE) countries have played a pivotal role contributing 3-4 percentage points, or about a third of total Euroland export growth. Accordingly, the importance of these countries for total Euroland exports has doubled over the past 10 years and they currently account for almost 20% of total Euroland exports (excluding trade among the euro countries).
• In recent months it has become evident that growth in the CEE has collapsed. The impact on Euroland exports is immense. We estimate that the collapse in CEE growth drags real Euroland export growth down by 1.5 percentage points in 2009 and about half of that in 2010. Thereby about half of the slowdown in Euroland exports may be ascribed to CEE slowdown, due to the escalation of the financial crisis. However, GDP growth is muted as Euroland imports usually track exports quite narrowly.
• Among the major Euroland countries Germany is affected the most. Being word champion of exports is tough when export markets in general slow down and in particular when the markets that have been a major driver in recent years collapse. In Germany exports amount to nearly half of GDP or almost double the exports to GDP ratio in France, Spain and Italy. In addition, the CEE is the destination for a larger share of total exports in Germany than in the other large Euroland economies.
Published on Thu, Dec 18 2008, 17:05 GMT
Tue, Nov 11 2008, 16:17 GMT
by Frank Øland Hansen
• Danish households have lost around DKK 400bn on the stock market and DKK 170bn on the housing market in just over a year.
• The loss on equities means that private consumption next year will be around DKK 4bn lower than would otherwise have been the case - while in 2010 it will be all of DKK 7.5bn lower. This is the equivalent of shaving half a percent off consumption next year and almost a full percent in 2010.
• Shrinking home equity will dampen consumption growth further, meaning overall consumption will be DKK 6bn (0.75%) lower next year and DKK 11bn (1.4 %) lower in 2010 than it would have been without the downturns in the equity and housing markets.
Published on Tue, Nov 11 2008, 16:17 GMT
Wed, Nov 5 2008, 09:59 GMT
by Søren Dijohn
• The growth outlook has deteriorated markedly throughout Euroland with the effects on public finances profound. Through the so-called automatic stabilisers budget balances are highly sensitive to growth and policymakers in most Euroland countries are currently planning various fiscal policy initiatives in order to stimulate growth and employment.
• We estimate that for the whole of Euroland budget balances will deteriorate sharply from a deficit of 0.6% of GDP in 2007 to a deficit of 2.2% of GDP in 2009. Budgets may even worsen further as the last initiative has not yet been unveiled. In addition, uncertainty surrounds both the size and effect of many of the measures already announced.
• Public finances in France are by no means prepared for the marked slowdown in economic activity which we expect. So far France is the only major country whose deficit is expected to exceed the Maastricht Treaty's 3% of GDP threshold. However, we estimate that 2009 budget deficits in both Spain and Italy are close to the 3% threshold with risks that they may worsen further.
• Financial sector support plans first and foremost affect the debt to GDP ratio. The deficit to GDP ratio is only affected in so far as rising debt implies higher interest payments. The precise scale of the rescue plans depends on developments over coming months. Commitments made so far and the maximum amounts guaranteed result in a very broad deficit ratio range. Based on such commitments we estimate total Euroland debt at 66.75% of GDP in 2009, fairly unchanged over 2007. Assuming implementation of the full amount guaranteed the average debt to GDP ratio would increase to 70% of GDP by end 2009.
Published on Wed, Nov 5 2008, 09:59 GMT
Thu, Oct 30 2008, 14:18 GMT
by Frank Øland Hansen
Published on Thu, Oct 30 2008, 14:18 GMT
Mon, Oct 27 2008, 13:56 GMT
by Lars Rasmussen
Published on Mon, Oct 27 2008, 13:56 GMT
Thu, Oct 23 2008, 16:36 GMT
by Lars Christensen
Published on Thu, Oct 23 2008, 16:36 GMT
Thu, Oct 9 2008, 15:19 GMT
by Søren Dijohn
Published on Thu, Oct 9 2008, 15:19 GMT
Wed, Jul 16 2008, 14:03 GMT
by Danske Research Team
Published on Wed, Jul 16 2008, 14:03 GMT
Thu, May 29 2008, 14:32 GMT
by Lars Rasmussen
Published on Thu, May 29 2008, 14:32 GMT
Wed, May 14 2008, 14:29 GMT
by Arne Lohmann Rasmussen
• We have revised our Norwegian inflation forecast higher by 0.2 0.3 percentage points. We now expect core inflation to run at 2.8% in the autumn.
• Our inflation forecast is now approximately 0.5 percentage points higher than the current forecast by Norges Bank. Hence, we now expect Norges Bank to flag a new rate hike in June when the new monetary policy report is released and subsequently hike rates by 25bp to 5.75% in August.
• Given our new rate forecast, we still see upside for NOK rates going forward. Hence, we reiterate our long-held strategies to buy DEC08 NOK 3M FRAs either outright or in a spread against EURIBOR. We also continue to expect a flatter curve 10y2y both outright and in a box against Euroland or Sweden.
• NOK is expected to benefit slightly from a new rate hike from Norges Bank. However, do not expect a big move as the market is already heavily positioned for a stronger NOK.
Published on Wed, May 14 2008, 14:29 GMT
Mon, Apr 21 2008, 11:00 GMT
by Arne Lohmann Rasmussen
Published on Mon, Apr 21 2008, 11:00 GMT
Thu, Feb 7 2008, 14:46 GMT
by Arne Lohmann Rasmussen
Published on Thu, Feb 7 2008, 14:46 GMT
Mon, Jan 7 2008, 11:39 GMT
by Stanislava Pravdova, Lars Christensen, Lars Rasmussen, Violeta Klyviene
Published on Mon, Jan 7 2008, 11:39 GMT
Fri, Jun 15 2007, 10:15 GMT
by Niels-Henrik Sørensen
Published on Fri, Jun 15 2007, 10:15 GMT
Mon, Jun 4 2007, 14:43 GMT
by Arne Lohmann Rasmussen
Published on Mon, Jun 4 2007, 14:43 GMT
Fri, Jun 1 2007, 11:53 GMT
by Niels-Henrik Bjørn
Published on Fri, Jun 1 2007, 11:53 GMT
Mon, May 7 2007, 14:44 GMT
by Arne Lohmann Rasmussen
Published on Mon, May 7 2007, 14:44 GMT
Tue, Apr 17 2007, 16:24 GMT
by Roger Josefsson
Published on Tue, Apr 17 2007, 16:24 GMT
Tue, Apr 17 2007, 16:19 GMT
by Roger Josefsson
Published on Tue, Apr 17 2007, 16:19 GMT
Mon, Apr 2 2007, 16:43 GMT
by Niels-Henrik Bjørn
Published on Mon, Apr 2 2007, 16:43 GMT
Thu, Mar 22 2007, 14:51 GMT
by Thomas Salomonsen, Lars Christensen
Outlook for EU8+2 credit ratings Recently the ratings agency Standard & Poors (S&P) changed its outlook for Latvias sovereign debt to negative from stable, see our Flash Comment Latvia: S&P changes outlook to negative , February 19 2007. The negative ratings action from S&P sparked a mini run on the Latvian lat and wider speculation about the sustainability of the Latvian boom.
Furthermore, the focus on Latvias imbalances and strong credit growth has increased focus on similar problems in other Baltic and Central and Eastern European countries. In our paper Research New Europe: A Warning not to be ignored, February 23 2007, we take a closer look at these concerns and evaluate whic countries in the Baltics and Central and Eastern Europe looks most unbalanced and most likely to face a hard landing in the economy and possibly also financial distress. In this paper we follow this path further and take a closer look at whether these imbalances could lead to possible negative rating action from the three major rating agencies, Standard & Poors, Fitch and Moodys. We focus on the same countries as in our previous research report Estonia, Latvia, Lithuania, Poland, Hungary, the Czech Republic, Slovakia, Slovenia (EU8) and Romania and Bulgaria (EU2). Our analysis starts out by estimating quantitative models based on macro economic and institutional fundamentals for the EU8+2 countries.
Our analysis shows that more countries are likely to face negative rating than positive action. Hence, our analysis indicates that five countries (Estonia, Latvia, Lithuania, Slovakia, Bulgaria and Romania) are likely to face negative rating (either a change of ratings outlook in negative directions and/or downgrades), while only two countries (the Czech Republic and Hungary) are likely to face positive rating action. We expect stable ratings for Slovenia and Poland. Especially Latvia stands out and our analysis clearly shows that the risk of downgrades of Latvia s sovereign debt is substantial.
Furthermore, our analysis shows that ratings of the two EU newcomers, Bulgaria and Romania seem to be a bit too positive given the underlining fundamentals in the two countries and negative news for example lack of progress in EU related reforms and/or a continued rise in the external imbalances in Romania and Bulgaria could lead to negative rating action for the two countries sovereign debt. The outlook is most negative for Romanias ratings and we would expect a downgrade of Romanias sovereign debt rating from at least one of the rating agencies (most likely Fitch).
It should also be noted that Slovakia looks a bit over rated and hence negative news for example postponed euro adoption could trigger negative ratings action. Equally interesting, our analysis indicates that Hungary which for long time have been the prime candidate for ratings downgrades in the region in fact looks under rated. Hence, the ratings of Hungary are in general lower than what our models predict. Therefore, Hungary could in fact face positive rating actions in the coming year, but much will naturally dependent on whether the planned fiscal consolidation has the expected positive impact on public finances and the current account situation. It is striking that our models indicate that the countries, which are most fragile to negative rating actions are to a large extent the same countries that are likely to face a hard landing in the economy and possibly also financial distress. These countries are Estonia, Latvia, Lithuania, Bulgaria, Romania and Slovakia.
For a complete overview of our forecasts for the ratings for the individual countries, see the table in the end of this report. We expect the rating news in general to be more negative in the coming year compared to what we we have been used to in recent years. There are a number of common factors that are likely to contribute in a negative direction to the ratings of the EU8+2 countries sovereign debt. These factors are:
Published on Thu, Mar 22 2007, 14:51 GMT
Wed, Mar 14 2007, 16:51 GMT
by Tobias Thygesen
The Swiss central bank (SNB) has tightened up monetary policy by 0.25 percentage points a meeting for five consecutive quarters. This has taken the Swiss benchmark policy interest rate up from 0.75% to 2.0%. The rate hikes have more or less been anticipated by market participants, since communications from the SNB have been relatively clear. The SNB has not wavered - as long as the economy has seemed to be on a steady upward path, the bank has pursued a course of taking policy rates up to normal from an exceptionally low level.
The SNB has repeated this message several times over the past few months. In other words, we would be much surprised if the SNB does not tighten up its policy again at its meeting on 15 March - most likely by 25bp.
The Swiss economy is without question in good condition. In 2006, it expanded by 2.7%, beating the growth rates of the previous five years. However, the pace of growth slowed during the latter half of 2006, and especially fourth-quarter growth data, which were released only recently, were a bit disappointing. The economy expanded by 0.5% on the quarter - somewhat less than expected - but note that this is still slightly above the trend growth rate for Switzerland. On top of this, underlying data were not that weak after all. Consumer spending increased at a tidy rate - on top of a couple of quarters of relatively strong growth, and exports also gave a solid performance.
Moreover, after falling for seven months, the leading KOF indicator began to signal stronger economic growth in February. Although it is still too early to say whether the signals from the KOF will hold water, they are an important sign that the economy is no longer losing momentum to the extent seen earlier.
Labour market developments are also giving grounds for optimism. Unemployment keeps surprising positively, employment has increased even more than unemployment has decreased and the number of job vacancies has been rising fast over the past couple of years. Moreover, corporate capacity utilisation is higher than at any time since the Swiss economy overheated in the beginning of the 1990s. The positive development on the labour market means that the upswing is becoming increasingly self-reinforcing, while high capacity utilisation may ensure continued tidy investment growth over the next couple of years.
Add to this that we believe the global economy will remain afloat in the coming years, and there is a lot to indicate that the upswing in the Swiss economy will keep on track in both 2007 and 2008. We expect the economy to expand by 2.2% in 2007 before slowing to 1.7% in 2008. The upswing should continue to be broad based, with growth contributions from consumer spending, investment and net exports.
Since the SNB takes account of the condition of the economy in its overall policy aims, the economic outlook seems to give the go-ahead for further tightening of monetary policy. All else equal, monetary policy should not contribute towards speeding up the pace of growth of an economy that is already growing at a steady rate and whose labour market is tightening. On the other hand, since the economy is not actually booming, the SNB should not tighten up too aggressively
The SNB faces the perhaps enviable problem of no inflationary pressure in the economy. Annual inflation in February was 0.0%, while core inflation was, respectively, 0.3% or 0.5%, depending on the definition used. Further, the outlook for the coming years points to the low level of inflation continuing. We expect inflation to average 0.2% in 2007 and rise to 0.7% in 2008. This rise will come mainly on the back of a fading base effect from declining energy prices in the latter half of 2006.
Our inflation forecast is a little lower than the one presented by the SNB at its latest meeting, in December, when it estimated inflation at 0.4% in 2007 and 0.9% in 2008. However, the SNB will have to revise down its numbers a little, as the first two months of this year show its Q1 forecast to already be 0.3 percentage points above the mark. Moreover, the SNB forecast assumes an un-changed monetary policy rate, while the new fore-cast will be based on a policy rate that is 0.25 percentage points higher than our expectation.
Monetary policy remains accommodative in Switzerland despite the low level of inflation - real interest rates are hovering around the average of the past 15 years. Without further hikes from the SNB, real rates will fall significantly towards the end of 2007, as the fall in energy prices will drop out of the data. Further, if one looks at nominal growth in relation to the current policy rate, then the rate is, in principle, 2 percentage points too low compared to the average of the past 15 years.
Estimated Taylor rates suggest interest rates of around 2.75% at the end of 2007 rising to 3% at the end of 2008. A classic Taylor rule would pre-sent almost the same picture - albeit with the policy rate close to 3.25% at the end of 2008.
The above calculations are, though, built on the important assumptions that the forecasts hold and that the central bank is acting in a world free of uncertainty. But in the real world there is a wealth of uncertainties and hence the central bank, in principle, must make the decisions that, on paper at least, ensure the best possible outcome with the least possible risk to the economy. In other words, monetary policy perhaps ought to be tightened, but the inflation outlook provides the room to delay possible hikes and to monitor economic developments than would otherwise have been the case. Tightening too aggressively could mean that the SNB would risk derailing the upswing.
This point is further underlined by the economy having - despite everything - lost some steam and the fact that it is expected to slow to trend growth in 2008. Remember, as mentioned earlier, this is not a blistering upswing, and there is also the risk of a major slowdown in the global economy occasioned by a hard landing in the USA. The overall risk for economic growth is probably more down-side than upside in the coming years, while inflation is rather unlikely to exceed the official target of 2%.
Generally speaking, there is no doubt that the SNB will tighten monetary policy further from the cur-rent level - initially in the form of a 25bp rate hike at the March meeting. However, how quickly and how far rates will be hiked after this remains un-certain - and depends mostly on how robust the SNB views the upswing to be. As outlined, the economic outlook could, in principle, justify the SNB continuing its gradual normalisation of monetary policy throughout 2007. However, we are inclined to believe the SNB will go on hold for the remainder of the year after another hike in June. Doing so means the SNB will reduce the risk of making a policy mistake whereby the upswing ends up be-coming derailed even though inflation is not a threat. Hence we maintain our call on the SNB, which we also had before the December meeting.
The risk to our SNB call is to the upside. What has shifted our risk perception is not the economic growth and inflation as such; it is the still very aggressive statements emanating from the SNB. Hence, there is a fair chance that the SNB will maintain its mantra of gradually normalising monetary policy in the press statement after the policy meeting. If so, we may adjust our call on the SNB
Recent turmoil in the financial markets provided a brief tailwind for the Swiss franc, with EUR/CHF dipping slightly below 160, although the cross is once more trading close to 162 after calm has returned, for now at least, to the financial markets. The episode clearly illustrates that while the CHF perhaps no longer has the safe haven status it once enjoyed, it is still relatively undervalued and a rise in risk aversion like that just witnessed will typically lead to a stronger CHF. Supporting the effect is that the low cost of borrowing in Switzer-land has meant the CHF being much used as a loan currency, and some of these positions will be closed down in such a situation.
Hence, the short-term prospects for the CHF are rather dependent on whether calm really has re-turned to the financial markets. If not, the CHF could, at least temporarily, be strengthened beyond what we have stated in our forecasts (see FX Crossroads, March 7, for more details).
Apart from a further rise in global risk aversion, we still do not foresee the CHF strengthening much in the near term. Even if the SNB sticks to its course of gradually tightening monetary policy - and even though the risk to our SNB call is to the upside - the ECB also looks likely to tighten monetary policy in June. And while one more hike from the SNB is more than priced into the fixed income market (3-month forward rate in December trading at x.xx%), the ECB hike is not yet fully priced in. Hence, there is no indication that relative rates will move in the CHF’s favour in the coming months, and so we maintain our expectation that EUR/CHF will remain around 1.62; or 4.60 when it comes to CHF/DKK.
Looking at developments in the CHF in the days either side of SNB meetings, there has been a clear tendency over the past year or more for the CHF to weaken immediately after meetings - per-haps due to market disappointment that the SNB did not signal more aggressive tightening going forward, or some players reckoning on rates rising by 50bp. However, this time around it is difficult to imagine that anyone could have such expectations, and hence we do not believe the pattern will be repeated at the upcoming meeting.
On the other hand, there is some suggestion that the CHF (and expectations on the SNB) will in future be more sensitive to news and data. Expectations on the SNB have, for the past year or more, been pretty fixed and thus have not been influenced by the data coming out a little stronger or weaker than anticipated. Now that a neutral rate is closer at hand, however, uncertainty is greater and the data will mean more for the SNB, for expectations on the SNB and hence for the currency too.
Published on Wed, Mar 14 2007, 16:51 GMT
Tue, Mar 13 2007, 08:57 GMT
by Arne Lohmann Rasmussen
In our opinion the new Inflation Report from Norges Bank, to be published on March 15, will be the most important event in the Norwegian market this spring. It will set the agenda for both the Norwegian FX market and the Norwegian fixed income market for the next three months.
To summarise our view, we expect the following message from the central bank this week:
The message regarding the real economy will probably be that growth has surprised on the upside since the release of the latest Inflation Report, and that the so-called output gap is much higher than expected.
In our view, the Inflation Report will be a wake-up call to the Norwegian fixed income market, which we believe expects too little tightening from the central bank in 2008.
The report is expected to renew market interest in the NOK. We expect EUR/NOK to fall below 790 in three months’ time.
The labour market is the key to understanding Norwegian monetary policy. Unemployment fell markedly during the course of 2006 and is close to previous record lows at 2.8%, and there is little to suggest that demand for labour is set to drop off. In November, Norges Bank expected the LFSunemployment rate to average 3% in 2007. We expect the central bank to revise its 2007 forecast down to 2.5%. Norway has not experienced such a tight labour market since 1986-1987. There is no doubt that Norges bank has been underestimating the strength of the labour market.
According to Statistics Norway’s business tendency survey, many businesses are reporting a shortage of labour as a limiting factor for their output. The same picture was painted by Gallup’s expectations survey at the end of February, with the number of businesses expecting to have more employees in a year’s time, growing from 44.7% in Q4 to 49.8%, and only 5.8% of businesses expecting to have fewer employees. Hence, there are no signs that the accelerating growth in labour demand during 2006 is about to slow down.
Norges Bank is concerned that further growth in demand for labour will trigger a serious wage price spiral. After the latest monetary policy meeting, central bank vice governor, Jarle Bergo, said that the bank was eager to see the so-called TBU-report that was released end February.
The report on wage developments in 2006 revealed a record-high wage overhang into 2007. The report showed that the so-called wage overhang into 2007 will be as high as 2.0%, which is much higher than the 1.2% of the last three years.
The wage overhang shows that wage growth was relatively strong at the end of 2006. If we presume a wage drift of 1.5% in 2007 it means that wage growth is at 3.5% before the central wage round has even started.
Norges Bank will also have access to a fresh report from its regional network, ie, interviews with Norwegian businesses. We are fairly sure that the message here will be that output is in top gear, but that a shortage of labour is an accelerating problem. The stage is therefore set for Norges Bank to follow Statistics Norway’s lead and upgrade its wage growth forecast for 2007 to 5.5% from 5.0%.
Our forecast for the Norwegian economy relative to the forecast put forward by Norges Bank in November differs on one important issue. We expect the above-potential growth period in Norway to continue for longer than the Norges Bank predicts. We do not think, as the central bank does, that growth will slow significantly below potential growth in 2008-2009. We believe that Norges Bank this time will expect above or at least on-trend growth in 2008. Hence, the output gap will not start to fall before 2009.
Furthermore, when the latest set of very strong Q4 06 GDP numbers were released, there was a strong revision to 2004 - 2006 mainland GDPgrowth,. In summary, it means that the aggregated pressure in the Norwegian economy was much higher than expected by the central bank back in November. In economic terms, it means that the output gap has been significantly underestimated. Norges Bank is expected to publish a significantly higher output gap in its new Inflation Report.
Despite the extremely tight labour market, Norwegian inflation has been very stable over the last couple of years. However, if we look at the central bank forecast from November it seems that Norges Bank in general has been expecting a too-benign inflation outlook this winter.
We expect the central bank to present a slightly higher inflation path this time given the tighter labour market. The inflation forecast could very well be very close to our forecast.
But the inflation path itself is not that interesting. What we want to focus on is the rhetoric. We expect the central bank to repeat that monetary policy has now moved away from the risk of inflation being too low to inflation being too high. On this topic see the research paper “Research Norway: From deflation to inflation fears” from February 7.
In the Inflation Report, Norges Bank will present its new interest rate scenario for the next three years and the “strategy interval” for the next four months.
In the November 2006 inflation report, Norges Bank said that it expected the sight deposit rate to be 3.25%-4.25% in the period before the next Inflation Report. So, if we are right in expecting a rate hike at this meeting, interest rates will be 25bp higher than the mid-point of 3.75%. In the new report we expect a strategy interval of 4%-5%. This would indicate two rate hikes at the next three monetary policy meetings. We expect Norges Bank to skip the next meeting in April and raise rates in May and June, bringing the leading policy rate to 4.5%.
Regarding the interest rate baseline scenario we forecast that Norges Bank will publish a slightly steeper baseline, indicating that the sight deposit rate will hit almost 5% at end 2007. In November, the interest rate scenario signalled a sight deposit rate of 4.75% at end 2007. The central bank is expected to signal that interest rates will peak slightly below 5.5% as in November. However, we believe the central bank will signal that this level will be reached one year earlier, during 2008.
Looking at market expectations, it would seem that the market more or less agrees with this view for 2007. But if anything we see a risk that Norges Bank might hike at a quicker pace or more “frontloaded “.
But in our view market rates are definitely still too low for 2008, both relative to the current baseline scenario and that which we expect to be presented on March 15. Hence, if one were to position for a steeper Norwegian money market curve we would recommend concentrating on the 2008 segment of the curve.
If Norges Bank presents a baseline scenario according to our expectations, it will still be marginally lower than our forecast for the sight deposit rate.
Below we list our expectations regarding future monetary policy changes from Norges Bank.
Published on Tue, Mar 13 2007, 08:57 GMT
Thu, Nov 30 2006, 11:37 GMT
by Lars Rasmussen
Rebounding after the 1998 crisis
The Russian economy has made significant progress since the financial crisis in August 1998. The crisis led to the collapse of the banking sector, falling GDP, a massive rise in unemployment, and a strong jump in inflation as a result of the government default on debt and the devaluation of the rouble. After the crisis in 1998, initial growth fundamentally reflected large spare production capacity, and considerable terms-of-trade improvement on the back of the devaluation of the rouble (RUB).
Recent years’ growth driven by private demand
Economic growth has been strong in recent years with yearly growth rates above 6% in real GDP since 2000 and above 7% y/y in Q2 2006.
Growth has been supported by strong domestic demand - mainly stemming from private consumption, but also from investments. Public consumption has had a slightly positive effect on growth in recent years, while net exports have contributed negatively to real growth since 2001. The latter fact is at first glance surprising as Russia is a large net exporter of both oil and natural gas. This illustrates the hefty demands for import goods.
The increase in the natural gas and oil price since 2002 has played an important role for the private sector, as it has lifted private and public exports earnings.
As energy related earnings went up, the economy enjoyed higher income, increased wages, and falling unemployment. Since 2000, real wages have been rising yearly around 10%, and the unemployment rate has been halved to 6.6% in October 2006 since beginning of 2002. This has boosted private consumption.
Higher incomes have spilled over to higher credit lending to the private sector and domestic credit as a share of GDP has now risen to 25%.
Growth in bank lending to private households has accelerated since 2002 and is currently growing over 80% y/y, whereas bank lending to the corporate sector is growing more modestly at 30-40% y/y.
Booming imports and a stagnating export sector
Positive development in energy prices has boosted the export sector. The composition of Russian exports shows that the share of nominal exports related to the oil or gas sector has gone up from 40% in early 1999 to around 65% in mid 2006.
Given the relative high importance of energy-related products in exports, net-exports growth is closely related to the oil price. Evidently, the rise in energy prices has provided Russia with a huge windfall gain.
The large and increasing surplus in net-exports only tells a part of the Russian trade story. Adjusted for prices, a different story appears. Looking at exports and imports in real terms - measured in volumes - net-export balance is, in fact, deteriorating - explained by increased demands for imported goods. In fact, real imports have been growing at 20% y/y over the past 4-5 years. In the same period, real exports have only been growing only around 10% y/y and the tendency has clearly been negative in 2005 - where exports only grew by 5.3% y/y in Q3.
Low investments behind drop in exports growth
Low real growth rates in exports are due to low in-vestments in the energy sector. The chart below shows a substantial growth pick-up in oil production after the 1998 crisis - where growth rates initially were facilitated by the sizeable spare production capacity - has flattened out and has even been falling this year.
Growth rates in oil production peaked in 2003-04 - going over 10% y/y, but have since then been declining rapidly due to rising scarcity in production capacity. Gas production is still growing, currently around 3-5% y/y, but the International Energy Agency (IEA) has stated its concerns over the possibilities of increasing gas production further with-out substantial increases in investment levels.
Another reason is the decreased competitiveness of the Russian industrial sector on the back of a strong real appreciation in the rouble showing signs of Dutch disease symptoms, which we shall discuss more in detail in our forthcoming paper.
There are two dominating suppliers in the Russian oil and gas industry - Lukoil and Gazprom. Gazprom - 50% owned by the Russian state - provides 90% of Russian gas supplies and controls 16% of the world's gas reserves. Lukoil is the biggest oil producer in Russia, supplying roughly 20% of Russian oil. Both companies are running low on excess capacity due to years of underinvestment in future production and infrastructure. Scarcity in production capacity, due to underinvestment, is a general issue for other major players in the Russian energy oil and gas market. According to its latest oil report (Nov. 2006), the IEA projects that Russian oil sup-ply growth will be negative throughout 2006.
Investment levels are not only low in the energy sector, but also in the rest of the economy. Comparing Russia with a broad class of countries, we see that Russian investment as a share of GDP in 2005 is at levels with richer Western European countries and way below peer income countries like Baltic States and most of the Central- and Eastern European countries. China stands out with yearly investments as a share of GDP well above 40%.
Although there has been some pick-up in investment in production capacity in 2006, as the chart below indicates, the impact from low investment has led to a doubling of the average age of the capital stock since 1990.
Combining this with low excess capacity in the production sector and low storage capacities in the oil and gas sector, there is a very high demand for new investments in order to bring labour productivity and competitiveness up, and thereby enhance potential GDP growth over the medium term.
Inflation has been reduced, but still seen high
After the very high inflation in 1998, price growth is now more stable. Producer prices are currently growing at single digit numbers for the first time since 2002, and the consumer price is looking to grow by 9% y/y this year.
Continuing the road towards even lower inflation has a high priority in the government and the central bank. This is good news for Russia, as it will increase competitiveness in export sectors not related to the energy industry.
Corruption and red tape are main concerns
We believe investments are weak due to an unsatisfying investor climate infected by corruption, red tape, and national intervention in the energy and banking sector as a concern to potential domestic as well as foreign investors.
In 2003 CEO of Yukos, Mikhail Khodorkovsky was imprisoned and Yukos was charged with tax evasion for an amount of over US$7 billion, which led to the breakdown of the company. Speculation as to whether the government’s actions against Khodorkovsky and Yukos were in retaliation for Khodorkovsky's support of political groups that oppose the government's policies has been a major concern for many foreign investors.
The impact was a sharp downturn in FDI inflow to Russia as foreign investors became more reluctant to move into Russia. In fact FDI inflow as a share of total investments dropped from 11% in 2003 to 5% in 2004, as a more or less direct impact from the Yukos case.
Another issue which especially concerns foreign investors is the Russian state’s growing role in the energy sector. This was lately seen from the Kremlin’s determination to increase pressures on foreign oil companies involved in Sakhalin-I and Sakhalin-II projects, and on its decision that Gazprom should develop the world's largest offshore gas field, Shtokman, without any foreign energy companies as partners. In fact, there is widespread criticism of Russia’s tendency to use its energy re-sources as a security policy instrument. This was lately exemplified when Russia came to an agreement on natural gas prices with the Ukraine and Georgia respectively. The Ukraine secured its gas delivery at half the price of Georgia’s deal.
Earlier this year, an annual survey was taken of 155 foreign corporate investors for The Foreign In-vestment Advisory Council (FIAC) - an organisation established in 1994 to improve the business climate in Russia. The survey shows that investors are deeply concerned over issues such as corruption and administrative barriers. 80% of participants in the survey mention corruption among the biggest disincentives to investment. About the same number mention administrative barriers. Al-most two-thirds of current foreign investors believe their company has been affected by corruption in Russia - especially involving tax authorities. Transparency International publishes annually a survey on corruption across 150 countries.
Unlike the Ukraine, which has fought corruption with some success since 2000, and the Baltic States, which have been even more successful, there has, according to the survey, been no real progress in fighting corruption in Russia since 1998. In 2006, Russia was placed 121st in the survey out of 163 countries. The same level as Rwanda.
On top of widespread corruption among tax-authorities, traffic-police, courts, judicial authorities, custom officials etc., and on top of significant administrative barriers, the latest relapse in the democratic development is extremely concerning. This includes the killing of central banker deputy Kozlov, who led the fight against corruption in the banking sector, and the killing of Anna Politkovskaya, known for her opposition to the Che-chen conflict and Putin administration.
The tendency is clearly negative in terms of democratic development. According to surveys from Transparency International Russia has not moved towards being a more free and democratic country in the last decade. Looking at sub-components in the index has worsened mainly on the back of less free banking sector - where the two state owned banks Sberbank and Vneshtorgbank are the dominant players in the banking sector - reduced protection of intellectual property rights and an un-even implementation of new laws. In fact many foreign investors have experienced problems in executing court rulings, and in obtaining satisfaction from contractual agreements.
According to the FIAC survey, many investors still see the Russian market as a big potential, on the back of the size of the Russian market and the country’s impressive economic growth that has improved the average Russian’s purchasing power against a background of increasing wages and falling unemployment. The survey further suggests that foreign investors see a slight improvement of the investment climate in 2006 compared to 2005, and the majority expects this to improve even more in the coming years. In this light, it is a positive step for Russia that it can now step into the final stage of entry talks with the WTO’s 149 members, as a membership could force a reform process in Russia.
Challenges for growth
We believe that the economy could be up for 5-7% y/y growth over the next years, being around 5% if the oil price weakens from current levels around 7% if the oil price heads over USD 65 per.
To sustain high growth in the longer term, Russia will be to speed up pace in investment growth, and reduce its exposure to the energy sector.
To lift investments, the Russian authorities will have to speed up the structural reform process in order to invoke transparency and create a fair playing field. This could be on issues such as the respective roles of the state and private capital in the development of key sectors of the economy, particularly in natural resources. It involves a sincere effort towards fighting corruption at all levels.
This will help the business climate and improve investor sentiment, so that in the longer term Russia will have a more diversified productive sector, reducing the economy’s dependence on oil and its exposure to the fluctuating energy prices.
It is important to stress that unemployment is falling and is now under 6.6%. Population growth in Russia is negative (700.000 a year) and the labour force is projected to start declining from 2010 on-wards. This will enhance the need to bring up labour productivity via bringing up the technological level of capital stock, together with a top priority to further increase educational levels.
It is encouraging that Russia is now approaching WTO membership as it will commit politicians to bringing copyright laws and enforcement systems into line with WTO rules on intellectual property. But do not expect any miracles, this is a long process.
Published on Thu, Nov 30 2006, 11:37 GMT
Fri, Nov 10 2006, 11:12 GMT
by Niels-Henrik Bjørn
Negative export impulses absorbed
The slowing of global industry has so far not damaged Euroland industry in any significant way.
While the momentum in exports has slowed significantly throughout 2006, the overall manufacturing sector in Euroland has proved more robust. Exports is usually the main driver of the momentum in the overall manufacturing sector in Euroland, but not this time.
In the chart below the tight correlation between exports growth and the manufacturing sector is obvious. While the strong manufacturing sector in Euroland may be due to lagged effects from strong exports in 2005, there is also another explanation.
The domestic recovery in Euroland, and in particular, Germany, has been cooking for some time, and it now seems to off set much of the weakness observed in global industry. In the chart below this is evident when looking at domestic capital orders in Germany, which is growing at its strongest pace since following the re-unification.
While we since last summer have been optimistic on the chances that the domestic economy could finally get started in Germany, we have been surprised to see the kind of dynamics witnessed during this summer and autumn.
Thus, in spite of slowing exports momentum, the domestic investment recovery in Germany has kept the overall industry on fire this autumn. In the chart below we have estimated Euroland industrial production on exports and German domestic capital orders. These two variables describe most of the dynamics in total industrial production. From the contributions, also shown in the chart, it is clear to see that domestic capital orders are contributing strongly to industrial production at the moment.
This means that Euroland will post decent GDP growth in Q3. And in Germany the economy will even maintain the strong speed from H1-2006. We expect GDP growth in Germany in Q3 of around 0.7%q/q. The investment recovery in German is simply making Euroland more robust.
This situation looks a lot like 1998, where Euroland industrial production kept up momentum in spite of global slowing. At the time we also saw a couple of excellent quarters from the domestic investment recovery in Germany, before it stagnated late 1998.
In all circumstances, the activity in Euroland continues to grow decently. Given the likely VAT impulse to ifo current conditions over the next couple of months, the impression of a continued recovery will prevail.
Looking into 2007
When looking into 2007 we still see downward risks in H1-2007. The global industry is still on a downward trend, although probably at a lower pace than over the past 3-6 months. In addition, the lagged effects from the euro strengthening early this year will be feeding through making Euroland manufacturing lose some of its momentum compared to global manufacturing, see chart below.
Unless domestic capital orders continue to explode we will thus see some slowing of manufacturing in Euroland during H1 2006. However, we remain of the view that global and Euroland industry will reaccelerate during H2-2007, see also our research paper: Business confidence heading down from 31. May 2006.
Implications for ECB
The more robust growth picture indicates that the ECB will not pause in hiking rates during 2007. In stead of hiking twice in H2-2007 as we have originally expected, we now expect a rate hike in March next year. Whether the ECB will hike rates again in Q2 remains an open question to us, but we still believe the ECB will end its hiking campaign at 4.0% by end 2007.
Published on Fri, Nov 10 2006, 11:12 GMT
Mon, Oct 30 2006, 09:34 GMT
by Niels-Henrik Bjørn
Published on Mon, Oct 30 2006, 09:34 GMT
Tue, Sep 26 2006, 15:10 GMT
by Rene Kallestrup, Lars Christensen
Published on Tue, Sep 26 2006, 15:10 GMT
Thu, Aug 17 2006, 09:49 GMT
by Niels-Henrik Bjørn
Published on Thu, Aug 17 2006, 09:49 GMT
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