bnp ecoweek 14 25 en

8/10/2019 Bnp Ecoweek 14 25 En

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/// 04 July 2014 /// 14-25

The French economy is supposedly notvery cyclical. Transfers account for morethan one third of GDP, one of the highestproportions in the world. This provides akind of support in times of recession, butalso acts as a brake in a recovery. Duringthe Great Recession of 2009, activityonly decreased by 2.9% compared witha 5% fall in Germany. In 2014, France isanecdotally posting growth, of 0.7%according to INSEE, whereas the trend inGermany is much stronger. However, theautomatic stabilisers effect does not

explain all of this performance gap. Theproperty cycles are completely out ofsynch. The German market is growingstrongly (see chart), driven by anunprecedented influx of foreign workerswhen prices are attractive (prices persquare metre in Berlin are three to fourtimes cheaper than in Paris). In France,where the trend is the reverse, there isnow discussion of easing the Alur lawwhich, by aiming to control rents, hasstrongly discouraged investment in rentalproperty.

Summary

United StatesIn recovery is our trust The acceleration of non-farm pay roll is a

necessary condition but not a sufficient onefor monetary normalisation. Page 2

EurozoneRebounding but not convincingAlthough the ECB is still uncomfortable withthe subdued dynamics of credit and inflation,one should not expect further actions anytime soon.

Page 3

United KingdomThe Bank of England is on the look-outThe Bank of England has adopted macroprudential measures to limit householdsexposure to credit risk. Focus, page 5

JapanTrapped into d eficits?The trade balance has been worsening sincethe Tohoku earthquake and tsunami and thedepreciation of the yen has not reversed thistrend. Focus, page 7

Economic indicators Page 9

Market overview Page 10

Also in

France versus Germany, a milestoneThe French housing market is cor recting, while the German one

skyrockets A lag which partly explains growth gaps.

HOUSING STARTS INDEXES

Cumulated over 12 months, 2005 = 100

Sources Bundesbank and Ministry of ecology:

THE WEEK ON THE MARKETS

Source : Thomson Datastream

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Germany

France

Week 30-6 14 > 3-7-14

CAC 40 4 437 4 490 +1.2 %

S&P 500 1 961 1 985 +1.2 %

Volatility (VIX) 11.3 10.3 -0.9 %

Euribor 3M(%) 0.21 0.21 -0.0 bp

Libor $ 3M (%) 0.23

0.23 -0.3 bp OAT 10y (%) 1.70 1.73 +2.3 bp

Bund 10y (%) 1.26 1.29 +3.1 bp

US Tr. 10y (%) 2.53 2.65 +11.6 bp

Euro vs dollar 1.36 1.36 -0.2 %

Gold (ounce, $) 1 319 1 319 -0.1 %

Oil (Brent, $) 113.5 110.7 -2.5 %

Germany

economic-research.bnpparibas.com


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Alexandra Estiot 4 July 2014 14-25

United States

In recovery is our trust

The recovery has been weak, and even bumpy as ofrecently. The weakness is unsurprisingly part of a post-financial crisis recovery, the bumpiness is due to acombination of slower inventory building and cold winter.

Households spending is crucial for the recoverymomentum. As labour income is the very first source ofrevenues for (most) Americans, job creations is the mainreason why we expect growth to (finally) pick up.

Payrolls growth has been solid lately, but more strengthis needed to close the employment gap, the necessarycondit ion fo r wages to accelerate as Miss Yellen wishes.

The recovery is as weak as bumpy since the US economy emergedfrom the worst recession and financial crisis in three generations.This should have not been a surprise: caused by an excessleveraging, the recession was as deep as prolonged, leading to thebuilding of very large overcapacities. As the process of deleveragingis long and painful, the recovery was limited in momentum. Below-par growth has been the norm, while following normal recessions,above-par performances are usual. Five years after the recession

officially ended, the output gap remains, even if it is impossible foreconomists to agree on its depth. Still, there is no doubt it is verylarge, as confirmed by the very limited inflation and wage growth.

During her latest post-FOMC meeting press brief, Janet Yellen cameback on a very dovish tone, which she probably never intended toabandon, but did when saying, six weeks earlier, that theconsiderable period of time separating the end of QE3 and the firstrate hike would be something on the order of around six months.On 18 June, she made it sure not to be that specific and chose toreemphasise her willingness to witness accelerating wages. Whatwas new was her analysis that even accelerating rate of growth inwages would not necessarily lead to higher inflation, as the

purchasing power of wages has been flat for such a long-time. Sheadded that not witnessing faster wage growth would actually makeher worry about prospects for consumer spending.

This makes a lot of sense. Americans have been suffering hugewealth losses with the crisis, with a very limited rebound afterwards.

Admittedly, as of the end of the first quarter of 2014, households netwealth stood at USD 81,764 bn, up USD 12,863 bn or 18.7% fromthe mid-2007 peak. In real terms, the increase is less impressive, at6.3%, i.e. less than 1% a year. The details, however, tell a darkerstory. Comparing the pre-recession peak from the latest data, itappears that two thirds of the increase in net worth came from newnet physical investment and net acquisition of financial assets.

Holding gains on assets represent the other third of theimprovement, but it is concentrated in financial assets and especiallycorporate equities. While the outstanding amount of mortgage debt

has been cut by USD 974 bn, net holding gains on real estate assetsis down a cumulative USD 2,566 bn. In short, net worth of those notholding corporate equities remains below the pre-recession peak,even though they worked hard to cut down on their debt.

With such a situation, consumer spending cannot be buoyant. This iseven more so the case that, after some support, fiscal policy turned

restrictive. For sure, the limited increase in prices helped supportingpurchasing power, but revenues are hardly growing when it comesto labour income, that makes up around 57% of total householdsincome. Between 2007 and 2013, real compensation of employeesgrew by a meagre 1%, as the number of employees was down1, andreal hourly earnings up by just 0.5% a year on average (whileproductivity gains in the non-farm business sector averaged 1.3% ayear over the period).

Still, the strength of the labour market report over the last few monthsis undeniable. In June, 288k jobs were created, raising the 3-monthaverage at 272k and the year-on-year reading a notch below2.5 million, i.e. the highest reading since the end of 2005. There are

additional signs that optimism is allowed. The duration ofunemployment spells is going down. On average, they last 33.5weeks in June, as compared with37.1 in February. This improvementis noticeable in broad measures of unemployment. The U6 rate, forinstance, which adds to the usual unemployment readings thenumbers of discourage jobseekers, as well as those marginallyattached to the labour market and those employed part-timebecause of economic reasons, lost 0.6 pp between February andJune. Still, wage inflation remains stable at 2% a year, a pace inplace for four years that the almost 4 pp fall in the unemploymentrate left untouched.

1Non-farm payrolls peaked in January 2008, and reached a trough in February 2010.8.710 millions jobs were destroyed. It took four years to ragin those jobs, as theJanuary 2008 reading was not met again before April 2014.

Philips: if it s flat, is this still a curve?Average hour ly earn ings (y/y, %);Unemployment rate (%, r.h.s.)

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Chart Source: US Bureau of Labour Statistics

2 economic-research.bnpparibas.com


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Clemente De Lucia 4 July 2014 14-25

Eurozone

Rebounding but not convincing

Af ter a disappointing Q1, GDP growth is likely to haverebounded in Q2.

Yet, going forwards the pace of the recovery shouldremain rather modest.

Al though the ECB is st il l uncomfortab le wi th thesubdued dynamics of credit and inflation, one should notexpect further actions any time soon.

Activi ty li kely to rebound in Q2 af ter a disappointing Q1The ongoing gradual recovery of the eurozone was confirmed in thefirst quarter of the year, with GDP rising by 0.2% q/q. Admittedly, itwas a rather modest performance. Investment and consumption inparticular were weaker-than-expected in some countries. Yet, thisweakness was partially due to temporary factors. A milder-than-usualwinter has significantly decreased consumption and production ofenergy. Production in the energy sector fell by more than 4% q/q inQ1 2014, while in the same period of the previous year it was up bymore than 2% q/q. In addition, the implementation of fiscal measures(VAT hike in France) weighed on households purchasingdecisions over the quarter.

This drag on growth probably faded in the second quarter. Surveydata supports indeed the view of a rebound in activity. Both theclosely watched Economic Sentiment Indicator and the CompositePMI for activity have increased in Q2 with respect to the previousquarter. For the time being, hard data are well oriented. As it sharplyrose in April (+0.8% m/m) industrial output probably gained somemomentum in Q2, benefiting largely from the rebound of activity inthe energy sector.

Retail sales started the second quarter in a fairly good shape as well,(+0.4 m/m in April, the forth increase in a row). The rise of consumerconfidence recorded over recent months signals that sales might

have increased further in the rest of the quarter. A quarter-on-quarterretail sales increase of around 0.7% or even higher is on the card (in

April the carry-over was at 0.6% q/q).

Taking all these pieces of information together, what is the mostlikely projection for GDP growth for the second quarter? Our Now-Casting model, which detects the momentum of GDP based onavailable information such as survey data, industrial production andretail sales figures and developments in financial markets, suggeststhat GDP growth might have accelerated in the range of 0.4-0.5% q/q(chart 1).

but the pace of the recovery should remain modestgoing forwardsThis will represent a sharp improvement with respect to the previousquarter. However, to have a clear picture of the underlying trend ofthe recovery it would be wise to analyse the two quarters together.While temporary factors caused a slowdown in the first quarter, theymight have boosted it in the second. This is probably what surveydata have been signalling recently. Both the Composite PMI foractivity and the Economic Sentiment Indicator eased in June. Thesurvey breakdown showed that the more cyclical manufacturingsector is losing momentum. New exports orders from theManufacturing PMI survey have been constantly decreasing sinceNovember 2013 and the orders-to-inventory ratio, a good gauge of

the underlying trend in the manufacturing, sector is easing as well.Recently financial and monetary conditions have become lessaccommodative (see chart 2) due, largely, to the appreciation of theexchange rate (up by 9% in real effective terms since its cyclical lowof summer 2012). This, as well as geopolitical tensions, are weighingon manufacturing output, which is particularly sensitive to externaldemand. Notice that the slowdown in the manufacturing sector is notlimited to some countries but seems a widespread phenomenonacross including Germany which had so far led the recovery.

Admittedly, survey data show that activity in the more domesticallyoriented services sector is improving, suggesting that the recoverymight have become more self-sustained. However, the eurozone still

needs a significant support from the manufacturing sector. Althoughimproving, employment growth remains weak in the eurozone;should the slowdown in the manufacturing sector become more

A growth acceleration in Q2?GDP growth (q/q).Actual, --- Model results

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2006 2008 2010 2012 2014

Chart 1 Source: BNPParibas

The dependent variable of the model is q/q GDP growth. Theexplanatory variables are survey data (principal component analysisof 5 surveys from the European Commission), industrial production,retail sales and the yield curve. All variables are in q/q % changes withhe exception of the yield curve and the principal component analysis ofurvey data which are in first differences (see EcoWeek 14-12 of 28 March014 for more details).



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Clemente De Lucia 4 July 2014 14-25

pronounced, it could alter the recovery of domestic demand. Theunemployment rate was 11.6% in May, stable with respect to theprevious month, but only 0.4pp below its historical high recorded in

summer 2013. The current pace of the recovery does not allowabsorbing shortly excess capacities. Therefore the unemploymentrate is projected to decline only moderately going forwards. Althoughconsumers might take some relief from the decline of inflation, we donot expect consumption to recover sharply going forwards. The slowimprovement of labour market conditions will limit wage growth. Inaddition, households savings have been significantly eroded duringthe crisis and consumers might want to restore them beforesignificantly increasing expenditures. Investment, thanks to the pastimprovement of financial conditions and the ultra-accommodativemonetary policy stance, will probably perform better thanconsumption. Yet, base effects will also play a non-negligible role.Investment fell sharply over the turn of the year 2013 and declined by

almost 3% over the full year of 2013.

To sum up, we expect GDP growth to gain some momentum in Q2.Yet, we continue to expect the pace of the recovery to remain rathermodest over the forecast horizon. The measures adopted by theECB in June are therefore highly welcomed as they aim at boostingcredit, activity and eventually lifting inflation. Both credit and inflationdynamics are indeed highly subdued and a cause of concern. InJune inflation was stable at 0.5% and it is likely to remain well below1% for several months, while credit growth to the private sector kepton falling in May, down by 2% y/y from -1.8% recorded in April (seechart 3).

The ECB is clearly not comfortable with these monetarydevelopments and would like to see activity increasing at faster paceand inflation coming back to more comfortable zone. In July ECBGoverning Council reaffirmed its willingness to embark on furtheractions if needed (seeECB: assessing time,EcoFlash published on03/07/2014). Yet, do not expect any move in the short-term. Togauge the effects on the economy of the Targeted Longer TermRefinancing Operations more time is needed, several quartersaccording to President Draghi. March 2015 will be the right time toassess the effectiveness of the measures, as it is then that firstcredit-conditioned TLTRO will be conducted. This will be the bestway to check whether net credit flows to the private sector (excludinghousing) have increased or not. Should credit have continued to

decline at that time and inflation still be in uncomfortable zone, thenthe ECB might embark on a broader Asset Purchase scheme.

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Manufacturing sector: losing momentum?Financial and Monetary Conditions indicator (i.s.) , Industrial

production (y/y, 3-m m.a.), rhs

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Tighter

Looser

Chart 2 Source: BNPParibasThe Financial and Monetary Conditions Indicator we use is a weightedaverage of the real effective exchange rate of the euro (y/y), equity prices(y/y), money supply growth, real corporate bonds, the TED spread, yieldcurve, real policy rate (deflated by core inflation), real short and long-termrates and credit growth. The weights are proportionally inversed to thevolatility of each component. The index is standardised so that the mean isequal to zero and the standard deviation is equal to 1. Above 1 means

tightening conditions.

Lending weaknessNominal GDP (y/y, lhs).Credit growth to the private sector (y/y)

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Chart 3 Source: Eurostat, ECB

http://economic-research.bnpparibas.com/pdf/en-US/ECB-assessing-time,24480http://economic-research.bnpparibas.com/pdf/en-US/ECB-assessing-time,24480http://economic-research.bnpparibas.com/pdf/en-US/ECB-assessing-time,24480http://economic-research.bnpparibas.com/pdf/en-US/ECB-assessing-time,24480


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Catherine Stephan 4 July 2014 14-25

United Kingdom

The Bank of England is on the look-out

Interest rate rises are expected to be gradual to avoidharming the recovery.

Weak inflationary pressure is allowing the Bank ofEngland to keep monetary policy loose.

However, house prices con tinue to rise.

The Bank of England has therefore adoptedmacroprudential measures to limit households exposure

to credit risk.

Mark Carney, the governor of the Bank of England (BoE), has caughtfinancial markets on the hop by announcing during a speech at theMansion House on 12 June that monetary conditions could betightened earlier than they had expected. The markets, guided by theBoEs so-far timorous message, had anticipated that policy rateswould rise in the first quarter of 2015. Growth continuing at a strongpace in the second half of 2014 (+3.4% in 2014 by our estimates)should help reduce the output gap and be accompanied by monetarytightening before the end of the year. However, the BoE remainscautious, wanting to initiate policy tightening at the right time. An

early rise in the base rate (currently 0.5%) would hurt investment.Monetary tightening is therefore likely to be very gradual to avoidharming the recovery.

Weak inflationary pressure is allowing the BoE to keep monetarypolicy loose. However, policy has to cope with rising house prices ata time when household indebtedness remains high. The Bank hastherefore opted for macroprudential measures to limit householdsexposure to the risk of rising interest rates or falling income.

Inflationary pressure remains weakThe BoE still has some room for manoeuvre in keeping monetarypolicy loose. Inflation, which probably hit a low in May (1.5% year on

year), should remain below the BoEs 2% target this year. The rise inthe pounds effective exchange rate (+11% between March 2013 andJune 2014) has been still more pronounced since the BoEsannouncement and will limit inflationary pressure. Wage growth(+1.9% y/y in Q1 2014) is likely to accelerate slightly in the secondhalf, while remaining in line with productivity gains. The fallingunemployment rate (hitting 6.6% in April) is, at this stage, unlikely tohave much effect on income formation for at least two reasons.

First, because the labour market is far from at the limit of its capacity.To the contrary, the high proportion of part-time employees wishingto work full-time (17.7% in March) suggests that there is still surpluscapacity.

Second, because some self-employed people, growth in whosenumbers accounts for nearly a third of total job creations since the

beginning of 2012 (and nearly 60% since September 2013), want towork more according to the ONS. Some of these workers wereforced into this position after 2008 for want of paid work, and would

prefer to work more.

Rising house pricesHowever, the BoE will have to watch the trend of house prices andhousehold debt closely. Prices have not yet returned to pre-crisislevels. According to Nationwide, real house prices in the first quarterof 2014 were nearly 20% below their level in the third quarter of2007. Nonetheless, in June, prices had risen by 16% in nominalterms since the beginning of 2013. This rally is the result of a returnof household confidence, an improving economy, probablypurchases being put off during the crisis, and advantageous fundingconditions. The anticipation of further price rises has also probablyattracted some investors.

The price trend since the beginning of 2013 is a matter of concerngiven the high level of household indebtedness, nearly 80% of whichconsists of mortgage borrowing (141% of gross disposable income inQ1 2014). The corollary of rising house prices is increasedhousehold vulnerability. The ratio of house prices to income (5 inMay) is much higher than between the mid-1990s and 2004.

According to figures published by the FCA (Financial ConductAuthority), the proportion of new mortgages to borrowers with a loanto income multiple more than 4.5 is higher than at the end of 2007 (at9.8% in Q1 2014 compared with 8.5% in Q1 2013, see chart).

Vulnerable householdsloan to income4.5 (in %);house prices/earning* (RHS)

Chart Sources: BoE, Halifax

*Ratio of standard average house prices to average income of male employeesworking full-time



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Catherine Stephan 4 July 2014 14-25

Macroprudential measures to limit households exposureto credit riskNew regulations governing mortgage lending demanded by the FCA

(Financial Conduct Authority1) came into force on 26 April 2014.Borrowers must in particular provide evidence of income. The BoEhas also opted for macroprudential measures to ensure thathouseholds are able to cope with any reduction in income orincrease in interest rates. The Bank is afraid that too early a baserate rise would hurt households, the bulk of whose mortgages are atvariable rates (nearly 64% in Q1 2014), as well as corporateinvestment. The BoE has had more latitude to achieve this sinceChancellor of the Exchequer George Osborne announced, also on12 June, that it could now force banks to follow its recommendationson the ratio of mortgage debt to income or to the value of a property.The FPC (Financial Policy Committee2) subsequently announced anumber of recommendations with the publication of the quarterly

Financial Stability report on 26 June:

- Banks will not be able to advance more than 15% of their newmortgage loans to customers borrowing more than 4.5 times theirincome3. This rule will also apply to households using the Help toBuy scheme, which has probably encouraged the rise in the loan tovalue ratio.

- Lending institutions will also have to carry out interest rate stresstests to ensure that borrowers can afford their mortgagecommitments for the first five years of their loan should bank rate riseby three percentage points compared with the prevailing rate atorigination.

Limited effectsIt is still too early to measure the real effects of the provisionsintroduced in April by the FCA. These may have held back mortgageapprovals, which in May fell to their lowest level since June 2013(61,707). Some potential borrowers may no longer be eligible.However, the decrease in loan approvals may also just be aconsequence of the time required by lending institutions toimplement these measures. If that were the case, the decline wouldbe temporary. It may also be the result of a decline in supply, withsellers choosing to withdraw their property from the market pendingfurther price rises.

These measures and the FPCs new recommendations are likely tohave only limited short-term effects. The mortgage to income ratiohas not yet reached the threshold set by the FPC. In particular, theyare likely to help avoid excessive risk-taking by credit institutions andlimit loans to the most vulnerable households.

These macroprudential measures are unlikely to have much effect onhouse prices in the short term. Prices are even likely to continue

1The FCA is an independent body responsible for consumer protection and marketmonitoring, and aims to ensure healthy competition between financial serviceproviders. Board members are appointed by the Treasury.2The BoEs Financial Policy Committee (FPC) is an independent body responsible for

prudential regulation and supervision of financial market infrastructure, with the task oflimiting systemic risk. It helps the BoE to ensure financial stability.3This recommendation applies to all institutions which lend more than GBP 100 millionper year.

rising. Mortgage lending to households, which has increasedrelatively little (+1.3% year on year in May) still has room for growthdespite the adoption of prudential measures. These increases

compare with a growth rate of about 11% in 2006 and 2007. Anumber of purchases are probably supported by substantial buyersfunds, particularly in London. The British market is also sufferingfrom inadequate housing supply. The government wants to simplifyand accelerate the process of obtaining planning permission4.However, the measures aimed at increasing the supply of housing,which is structurally low compared with population growth, willprobably only have an effect in the medium term and not offersufficient space. Specific constraints in terms of the environment andaccompanying limits to buildable space are likely to continue holdingback supply.

4This will no longer be provided by local authorities.



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Raymond van der Putten 4 July 2014 14-25

Japan

Trapped into deficits ?

The trade balance has been worsening since theTohoku earthquake and tsunami.

The depreciation of the yen has not reversed this trend,as most exporters are pricing to the market.

The main cause is the shifting o f production tooverseas.

Structural reforms shou ld aim at making Japan moreattractive as production base.

After the Tohoku earthquake and tsunami on 11 March 2011, theJapanese trade balance started to show substantial deficits (seeChart 1). In 2013, the trade deficit amounted to JPY 11.5 trillion(2.4% of GDP) compared with a surplus of JPY 6.6 trillion in 2010.The worsening of the trade balance was partly attributed to theappreciation of the yen during the period August 2007 October2012. It was generally believed that the depreciation of the yen frommid-November onwards, would lead to an improvement in themedium term due to a J-curve effect. However, this did not happen.

For 2014, the trade deficit could further widen to JPY 12.5 trillion. It isan indication that the exchange rate is not the primary cause for theworsening trade performance.

Trade balance in the red since Tohoku earthquakeThe Bank of Japan produces two export price indices, one expressedin yen and the other expressed in contract currency (see Chart 2).The yen-index is rather volatile, and mainly influenced by theexchange rate movements. By contrast, the contract currency indexhas been more or less stable. This is an indication that Japaneseexporters have maintained their prices in overseas markets, despiteexchange rate fluctuations. This is called pricing to the market. Thisis true for the appreciation phase of yen as well as the depreciation

phase. Hence, the fear of dumping expressed by some neighbouringcountries after the sharp weakening of the yen from November 2013onwards has proven to be groundless.

During the yen appreciation in the period August 2007 October2012, this pricing policy resulted in the shrinking of profit margins andthe implementation of cost cutting plans. Manufacturers started tooffshore activities, mainly to other Asian countries. Moreover,Japanese workers were willing to moderate wage demands or eventake pay cuts to maintain their jobs.

Up to March 2011, the policy was very successful in maintainingJapanese share in world trade (see Chart 3). The situation changed

drastically after the Tohoku earthquake. In the immediate aftermathof the disaster, supply chains were disrupted because plants for

crucial parts had been damaged or destroyed.1The effect was felt

worldwide. It resulted in a collapse in Japanese exports and a sharpworsening of the trade balance. Besides, firms had to importproducts that local producers were unable to deliver.

Even though supply chains were relatively quickly restored, industrialproduction has not yet returned to levels seen before the earthquake.The reason is that manufacturers stepped up the offshoring ofproduction sites. First, they started to pay more attention to thevulnerability of the supply chains and looked for production sites lessprone to natural disasters. Second, the stoppage of the nuclearpower stations resulted in higher electricity prices and in some areaseven power shortages. This made Japan less attractive for producingenergy-intensive goods. Lastly, the inflexible Japanese labour market

1See Raymond Van der Putten, Japan: One year after theTohoku earthquake, BNPParibas Conjoncture, March 2012.

The trade balance has been worseningTrade balance (trillion yen, seasonally adjuste, annualised)

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Chart 1 Source: Bank of Japan

Exporters price to the marketsExport price, contract currency basis idem, yen basis

- - Nominal effective exchange rate (RHS)2010=100

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Raymond van der Putten 4 July 2014 14-25

put Japanese producers at a disadvantage vis--vis their Asiancompetitors.

In addition, trade between Japan and China was harmed by thedispute between the two countries about several uninhabited islandsin the East China Sea. The conflict intensified when Japanpurchased the islands from their private owners in September 2012,leading to a sharp fall in Japanese exports to China.

On the import side, the Tohoku earthquake and tsunami alsoresulted in a substantial increase in imports of mineral fuels such asoil and LNG. Following the nuclear disaster at the Fukushima Daiichiplant, all the nuclear facilities were progressively closed either fordamage repair or periodical maintenance. The prefectures havebeen reluctant to give permission for restarting the reactors. For itselectricity production, Japan had to switch from nuclear power to

conventional thermal power plants. This led to a sharp deteriorationof the deficit in the trade of mineral fuels, which widened between2010 and 2013 by JPY 10 trillion (2 points of GDP).

Lastly, in recent years, the terms of trade have gradually worsenedbetween manufactured goods and primary commodities. This hasalso contributed to the deterioration of the Japanese trade balance.

The third arrow

The deterioration of the trade balance can be reversed by stemmingthe exodus of manufacturing. For this, Japan has to become moreattractive as production base. The so-called growth strategy, the

third arrow of Abenomics, is a good starting point.2 The strategyincludes the development of overseas markets. One of the aims is toincrease the share of trade covered by free trade agreements to 70%by 2018 from 19%. This will be done by promoting economicpartnerships with the EU and the US, the latter as part of the TransPacific Partnership (TPP). Moreover, the support system foroverseas development of SMEs will be strengthened. Unfortunately,the strategy has met with opposition, in particular from the powerfulagriculture lobby.

In addition, the government should improve labour market flexibility.This would enable Japanese manufacturers to remain competitive inworld markets without shifting production overseas.

2See Raymond Van der Putten, Japan: Three arrows to end deflation, BNP ParibasConjoncture, September 2013.

Losing market share2005=100

World imports exc. Japan

Japanese exports

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95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

Lehman Brothers

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Chart 3 Source: CPB



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OECD Team 04 July 2014 14-25


To watch from 7 to 11 July 2014

Monday 07 July 2014 GERMANY: Industrial output (May)

Following a small rise in April (+0.2% m/m), industrial output is likely to have increased slightly in May in line with surveyshigh level.

Tuesday 08 July 2014 UNITED KINGDOM: Industrial production (May)

In April, industrial output rose for the third month in a row (+0.3% m/m). Activity should slightly increase in May according to survey datarecently released.

Thursday 10 July 2014 JAPAN: Machinery orders (May)

Core machinery orders are expected to have increased in May by 1% m/m. Looking through the monthly volatility; demand for capitalgoods is strengthening supported by favourable financial conditions and tax measures.

UNITED KINGDOM: BoE meetingThe BoE should maintain its official rate at 0.5% and the amount of asset purchases at GBP 375 billion. It is likely to maintain anaccommodative monetary policy until the end of the year despite robust GDP growth.

FRANCE: Industrial production (May)After a fragile rebound in April, production is likely to post another smal l gain in May. A more significant rise is possible, boosted by energylike May retail sales, but it is not supported by the very mixed business confidence surveys.

FRANCE: Consumer prices (June)Consumer prices are expected to increase by 0.1% m/m in June. Headline inflation would slightly decelerate in year-on-year terms, by 0.1pp, to 0.6%. It could still surprise on the upside because of seasonal factors but, fundamentally, strong downward pressures are at play.


10/13

OECD Team - Statistics 04 July 2014 14-25

Markets overview

The essentialsWeek 30-6 14 > 3-7-14 CAC 40 4 437 4 490 +1.2 %

S&P 500 1 961 1 985 +1.2 %

Volatility (VIX) 11.3 10.3 -0.9 %

Euribor 3M(%) 0.21 0.21 -0.0 bp

Libor $ 3M (%) 0.23 0.23 -0.3 bp

OAT 10y (%) 1.70 1.73 +2.3 bp

Bund 10y (%) 1.26 1.29 +3.1 bp

US Tr. 10y (%) 2.53 2.65 +11.6 bp

Euro vs dollar 1.36 1.36 -0.2 %

Gold (ounce, $) 1 319 1 319 -0.1 %

Oil (Brent, $) 113.5 110.7 -2.5 %

10 y bond yield,OAT vs Bund Euro-dol lar CAC 40

1.73

1.29

1.00

1.50

2.00

2.50

3.00

3.50

.

2011 2012 2013 201403 Jul

1.36

1.20

1.25

1.30

1.35

1.40

1.45

1.50

2011 2012 2013 201403 Jul

2 700

3 000

3 300

3 600

3 900

4 200

4 500

4 8004 490

2011 2012 2013 201403 Jul

Bunds OAT

Money & Bond MarketsInterest Rates

ECB 0.15 0.25 at 01/01 0.15 at 11/06

Eonia 0.03 0.69 at 31/03 0.01 at 19/06

Euribor 3M 0.21 0.35 at 29/04 0.21 at 02/07

Euribor 12M 0.49 0.62 at 29/04 0.49 at 25/06

$ FED 0.25 0.25 at 01/01 0.25 at 01/01

Libor 3M 0.23 0.25 at 01/01 0.22 at 01/05

Libor 12M 0.55 0.59 at 07/01 0.53 at 06/06

BoA 0.50 0.50 at 01/01 0.50 at 01/01

Libor 3M 0.56 0.56 at 16/06 0.52 at 30/01

Libor 12M 1.06 1.06 at 03/07 0.88 at 10/02At 3-7-14

highest 14 lowest 14

Yield (%)

AVG 5-7y 1.28 2.04 at 01/01 1.15 at 26/06

Bund 2y 0.02 0.22 at 21/03 0.02 at 03/07

Bund 10y 1.29 1.95 at 02/01 1.24 at 26/06

OAT 10y 1.73 2.57 at 01/01 1.68 at 26/06

Corp. BBB 2.09 2.82 at 02/01 2.02 at 26/06

$ Treas. 2y 0.52 0.52 at 03/07 0.30 at 26/02

Treas. 10y 2.65 3.01 at 01/01 2.44 at 28/05

Corp. BBB 3.47 3.91 at 08/01 3.34 at 28/05

Treas. 2y 1.09 1.10 at 02/07 0.44 at 13/03

Treas. 10y 2.88 3.04 at 02/01 2.53 at 15/05At 3-7-14


10y bond yield & sp reads

5.98% Greece 469 pb

3.60% Portugal 230 pb

2.86% Italy 156 pb

2.79% Spain 149 pb

2.36% Ireland 106 pb

1.73% France 43 pb

1.72% Belgium 42 pb

1.59% Austria 29 pb

1.52% Netherland22 pb1.46% Finland 17 pb

1.29% Germany

CommoditiesSpot price in dollars 2014()

Oil, Brent 111 104 at 02/04 +0.6%

Gold (ounce) 1 319 1 208 at 01/01 +10.5%

Metals, LMEX 3 280 2 920 at 20/03 +4.3%

Copper (ton) 7 186 6 439 at 13/03 -1.4%

CRB Foods 447 364 at 02/01 +24.0%

wheat (ton) 220 212 at 29/01 -5.2%

Corn (ton) 158 157 at 08/01 +0.4%

At 3-7-14 Variations

lowest 14

Oil (Brent, $) Gold (Ounce, $) CRB Foods

90

95

100

105

110

115

120

125

130

111

2011 2012 2013 201403 Jul

1 100

1 200

1 300

1 400

1 500

1 600

1 700

1 800

1 900

1 319

2011 2012 2013 201403 Jul

360

380

400

420

440

460

480

500

520

447

2011 2012 2013 201403 Jul

Exchange Rates Equity indices1 =

USD 1.36 1.39 at 06/05 1.35 at 31/01 -1.2%

GBP 0.79 0.84 at 18/03 0.79 at 03/07 -4.6%

CHF 1.22 1.24 at 07/01 1.21 at 03/03 -0.8%

JPY 139.09 144.83 at 01/01 136.88 at 03/02 -4.0%

AUD 1.45 1.57 at 24/01 1.44 at 12/06 -5.6%

CNY 8.46 8.68 at 07/05 8.17 at 31/01 +1.4%

BRL 3.03 3.33 at 29/01 3.00 at 27/06 -6.8%

RUB 46.63 51.04 at 14/03 45.07 at 07/01 +3.0%

INR 81.42 86.47 at 27/01 79.55 at 23/05 -4.5%



Index 2014 2014()

CAC 40 4 490 4 595 at 10/06 4 108 at 03/02 +4.5% +4.5%

S&P500 1 985 1 985 at 03/07 1 742 at 03/02 +7.4% +8.8%

DAX 10 029 10 029 at 03/07 9 018 at 13/03 +5.0% +5.0%

Nikkei 15 348 16 291 at 01/01 13 910 at 14/04 -5.8% -1.9%

China* 63 63 at 01/01 56 at 20/03 -1.0% +0.3%

India* 501 503 at 02/07 385 at 04/02 +19.0% +24.6%

Brazil* 2 397 2 460 at 19/06 1 916 at 03/02 +2.0% +9.4%Russia* 751 787 at 01/01 591 at 14/03 -1.2% -3.3%



* MSCI Indices



11/13

4 July 201414-25


Most recent articlesJUNE

27 June14-24

Overview Non parallel trajectoriesThe week in the USThe week in the EurozoneEmerging markets : persisting downside risks on the road to recovery

20 June 14-23 Overview Southern Europe : catch-up timeThe week in the USThe week in the Eurozone

13 June 14-22 Overview To be in or out?The week in the Eurozone

6 June 14-21 Overview

Focus

The ECB plays hardThe week in the USThe week in the EurozoneUK: growth comes to aid of public finances

MAY 30 May 14-20 Overview

Focus 1Focus 2Focus 3

Cloudy spell clearing ?The week in the USThe week in the EurozoneEuropean elections, somewhat more than a harmless warningItalian banks : cost of risk remains the driving factorIndia : what to expect from the new government ?

23 May 14-19 Overview

Focus 1Focus 2

Elections timeThe week in the USThe week in the EurozoneFrance: Richer but not more dynamicBelgium: Challenges surrounding the elections

16 May 14-18 Overview German engine faces headwinds

The week in the USThe week in the EurozoneEuropean elections : a new deal ?Russian banks : bumpy road ahead

2 May 14-17 Overview Can the ECB wait ?The week in the USFiscal federalism, an ally in implementing reforms ?How important are inflation expectations ?

APRIL 25 April 14-16 Overview European mixThe week in the USThe week in the EurozoneCan the ECB do anything about the strong euro ?

18 April14-15

Overview The IMF judges carefully the recoveryThe week in the USThe week in the EurozoneNetherlands : Recovery at a slow pace

11 April 14-14 Overview

Focus

The Greek comebackThe week in the USThe week in the EurozoneGreece : Back on feet

4 April 14-13 Overview The transatlantic droveThe week in the USThe week in the EurozoneJapan : Abenomics shifts investors preferencesUK : A stubborn current account deficit


12/13

Jean-Luc PROUTAT +33.(0)1.58.16.73.32 [email protected]

Head

Alexandra ESTIOT +33.(0)1.58.16.81.69 [email protected] HeadGlobalisation, United States, Canada

Hlne BAUDCHON +33.(0)1.58.16.03.63 [email protected], Belgium, Luxembourg

Frdrique CERISIER +33.(0)1.43.16.95.52 [email protected] financeEuropean institutions

Clemente De LUCIA +33.(0)1.42.98.27.62 [email protected] zone, Italy - Monetary issues - Economic modeling

Thibault MERCIER +33.(0)1.57.43.02.91 [email protected], Portugal, Greece, Ireland

Caroline NEWHOUSE +33.(0)1.43.16.95.50 [email protected], Austria -Supervision of publications

Catherine STEPHAN +33.(0)1.55.77.71.89 [email protected] Kingdom, Switzerland, Nordic CountriesLabour market

Raymond VAN DER PUTTEN +33.(0)1.42.98.53.99 [email protected], Australia, Netherlands - EnvironmentPensions

Caroline WURTZ +33 (0)1.42.98.07.28 [email protected] questions

Laurent QUIGNON +33.(0)1.42.98.56.54 [email protected]

Delphine CAVALIER +33.(0)1.43.16.95.41 [email protected]

Cline CHOULET +33.(0)1.43.16.95.54 [email protected]

Laurent NAHMIAS +33.(0)1.42.98.44.24 [email protected]

Franois FAURE +33.(0)1 42 98 79 82 [email protected]

Christine PELTIER +33.(0)1.42.98.56.27 [email protected] Head - Methodology, China, Vietnam

Stphane ALBY +33.(0)1.42.98.02.04 [email protected], French-speaking countries

Sylvain BELLEFONTAINE +33.(0)1.42.98.26.77 [email protected] America - Methodology, Turkey

Pascal DEVAUX +33.(0)1.43.16.95.51 [email protected] EastScoring

Hlne DROUOT +33.(0)1.42.98.33.00 [email protected]

Jean-Loc GUIEZE +33.(0)1.42.98.43.86 [email protected], English and Portuguese speaking countries

Valentin LETHIELLEUX +33 (0)1.42.98.48.45 [email protected] America

Johanna MELKA +33.(0)1.58.16.05.84 [email protected] Flows

Ekaterina MOLODOVA +33.(0)1.42.98.48.45 [email protected] and other CIS countries

Alexandre VINCENT +33.(0)1.43.16.95.44 [email protected] and Eastern Europe

Alexandra WENTZINGER +33 (0)1 55 77 80 60 [email protected], Brazil

EMERGING ECONOMIES AND COUNTRY RISK

OECD COUNTRIES

Michel BERNARDINI +33.(0)1.42.98.05.71 [email protected] Relations Officer

ECONOMIC RESEARCH DEPARTMENT

Tarik RHARRAB +33.(0)1.43.16.95.56 [email protected]

BANKING ECONOMICS
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]


13/13

CONJONCTURE

Structural or in the news flow, two issues analysed in depth

EMERGING

Analyses and forecasts for a selection of emerging economies

PERSPECTIVES

Analyses and forecasts for the main countries, emerging or

developed

ECOFLASH

Data releases, major economic events. Our detailed views

ECOWEEK

Weekly economic news and much more

ECOTV

In this monthly webTV, our economists make sense of economic

news

ECOTV WEEK

What is the main event this week? The answer is in your two

minutes of economy

You can read and watch our analyses

on Eco news, our iPad and Android application

http://economic-research.bnpparibas.com

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