economic and financial outlook · 2019-12-12 · final use of domestic output exports of interm....

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December 2019

ECONOMIC AND FINANCIAL OUTLOOKAnton Brender and Florence Pisani

December 2019

1. EMERGING ECONOMIESGrowth has continued to weaken…

0.0

0.1

0.2

0.3

0.4

0.5

Contributions to world GDP growth acceleration between 2019 and 2020

(%)

In October, the IMF has again revised its growth perspectives downwards… mainly for 2019

3 Décembre 2019Source : IMF

IMF GDP growth forecasts(% annual rate)

3.0

3.5

4.0

2016 2017 2018 2019 2020

World

Oct. 18

July 19

Oct. 19

1.5

2.0

2.5

2016 2017 2018 2019 2020

Advanced economies

Oct. 18

July 19

4.0

4.5

5.0

2016 2017 2018 2019 2020

Emerging economies

Oct. 18

July 19

Oct. 19

Oct. 19

Iran

India

Venezuela

Turkey

Brazil

Saudi Arabia

Russia

Mexico

Argentina

Libya

Malaysia

Azerbaijan

Belarus

Rom

ania

Bangladesh

Ghana

Hungary

Pakistan

Poland

China

Global growth should now stabilize

4 December 2019

48

50

52

54

56

14 15 16 17 18 19

48

50

52

54

56

14 15 16 17 18 19

Services

Manufacturing

Developed countries PMIs

Services

Manufacturing

Emerging countries PMIs

Sources: Bloomberg, Refinitiv Datastream

-5

0

5

10

15

10 11 12 13 14 15 16 17 18 192.5

3.0

3.5

4.0

4.5

5.0

5.5

Trade and world growth(% year on year)

World trade (volume)

World GDP growth [R.H.S.]

World composite PMI & GDP growth

49

50

51

52

53

54

55

56

57

14 15 16 17 18 192.5

3.0

3.5

4.0

4.5

World composite PMI

World GDP (% year on year) [R.H.S.]

The manufacturing sector is showing some signs of bottoming

5 December 2019Source: Bloomberg

China

Taiwan

46

48

50

52

54

56

58

13 14 15 16 17 18 19

Manufacturing PMI indices in some emerging countries

Mexico

Brazil

42

46

50

54

58

13 14 15 16 17 18 19

Czech Republic

Poland

42

46

50

54

58

62

13 14 15 16 17 18 19

Turkey

Russia

42

46

50

54

58

13 14 15 16 17 18 19

December 2019

2. TRADE WAR: Towards a truce?

The trade war has slowed world growth… and China has been particularly affected

7 December 2019Source: IMF

IMF estimated impact of trade tensions on real GDP (% deviation from control)

(*) Tariffs implemented until May 2019(i.e. tariffs on aluminum and steel + 25% on $50 billion in imports from China+ 25% on an additional $200 billion with China’s retaliation)

United States

-2.0

-1.5

-1.0

-0.5

0.0

17 18 19 20 21

Reference*

China

-2.0

-1.5

-1.0

-0.5

0.0

17 18 19 20 21

Reference*

(**) Takes into account all the announced tariffs increases until mid-November(i.e. 15% on roughly $300 billion + 5% on $250 billion already tariffed with Chinese retaliation).

Final phase + confidence effects**

Final phase + confidence effects**

The pain inflicted by the contraction of global trade

has hurt more widely opened, manufacturing-oriented economies

8 December 2019Sources: Refinitiv Datastream, Candriam

0

10

20

30

AUS

GBR

CAN

FRA

USA

ESP

ITA

CHE

JPN

DEU

BRA

MEX

RUS

TUR

POL

ROU

HUN

CZE

IND

IDN

CHN

KOR

TWN

Share of manufacturing in value added(%, 2014)

0

20

40

60

80

100

USA

JPN

AUS

GBR

FRA

ITA

CAN

ESP

DEU

CHE

BRA

MEX

TUR

RUS

ROU

POL

CZE

HUN

CHN

IND

IDN

KOR

TW

Share of exports in GDP(%, 2018)

0

20

40

60

80

100

0 5 10 15 20 25 30 35

Share of manufacturing in value added(%, 2014)

Share of exports in GDP

(%, 2018)

Manufacturing and exports weights

Widely opened

economies

Less opened

economies

Manufacturing-oriented economiesService-oriented economies

IND

TURITARUS

AUS

USABRA JPN

IDN

ESP MEX ROUDEU

POL

CHE

CHN

KOR

TWN

CZE

HUN

FRA

CANGBR

A few (relatively small) economies have been badly affected by the curb in manufacturing exports

9 December 2019

-5

0

5

10

15

20

25

30

35

GBR

ESP

FRA

ITA

CHE

USA

CAN

MEX

RUS

ROU

POL

TUR

BRA

IND

AUS

JPN

IDN

CHN

Domestic value added exported by the manufacturing sector (% of each country’s GDP, 2014)

KOR

TWN

HUN

CZE

DEU

Foreign inputs

Dom. inputs,

non manuf.

Dom. inputs, manuf.

Intermediate use of domestic output

Final use of

domestic output

Exports of interm. goods

Exports of final goods

Output

Inputs

Value added

Sources and uses of manufacturing output

Sources: World Input Output Database, Candriam

Domestic value added exported

=

Exports of final and intermediate

manufactured goods

–

Foreign inputs

Chinese authorities have firmly – although discretely! – reacted to US pressures

10 December 2019

WeakerYuan

StrongerYuan

July 6Phase of June 15 tariffs go into effect

April 3US threatens tariffs

June 15Announce of 25% tariffs on $50 bn

July 10USTR announces 10% tariffs on$200 bn

September 17 10% tariffs on $200 bnand 25% announced on January 1

December 1US China tariff truce

February 24Tariff increase on $200 bndelayed (previously scheduled to go into effect on March 1, 2019)

May 5Trump renews tariff threats

May 1025% on $200 bn

August 110% on $300 bn

Sources : Bloomberg, Candriam

6.2

6.4

6.6

6.8

7.0

7.2

Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov

Yuan dollar exchange rate since 2018

2018 2019

0

20

40

60

80ChinaAsia ex China

Share of Asia

Trade integration within the three main manufacturing hubs*

Philippines

Share of Europe

0

20

40

60

80

Euro area UK

Germany

Switzerland

Italy

France

Spain

Emerging Europe

Euro areaOther developed Europe

(*) Weights of each region in the BIS real effective exchange rates in 2014-16 in %.

0

10

20

30

40

50

US Euro area Germany

JapanOther AsiaChina

94 15Memo: Share of Asia in 1994 and 2015

A significant depreciation of the RMB would put pressure on other Asian currencies

and destabilize the current exchange rate’s structure

11 December 2019Sources: BIS, Candriam

Spain

Italy

France

Germany

Switzerland UK

Euro area

Canada

Mexico

United States

Rom

ania

Czech Rep

Hungary

Poland

Turkey

Russia

Saudi Arabia

Brazil

Colom

bia

Peru

Chile

China

India

Japan

Australia

Korea

New Zealand

Malaysia

Singapore

Taiwan

Hong Kong

Thailand

Indonesia

Turkey

Poland

Hungary

Czech Rep

Rom

ania

Australia

Thailand

Singapore

India

Mexico

Canada

United States

Saudi Arabia

Russia

Peru

Colom

bia

Chile

Brazil

Philippines

Taiwan

Indonesia

Malaysia

Japan

Hong Kong

Korea

New Zealand

China

Spain

France

Italy

Germany

Switzerland UK

Euro area

Rom

ania

Poland

Czech Rep

Hungary

Turkey

Russia

Saudi Arabia

Chile

Brazil

Peru

Colom

bia

Hong Kong

Indonesia

Singapore

Thailand

New Zealand

Philippines

Taiwan

Malaysia

Australia

India

Korea

Japan

China

United States

Mexico

Canada

Share of North America

0

20

40

60Mexico

United StatesCanada

December 2019

3. CHINAStrong headwinds… a cautious response!


While the slowdown in headline GDP growth has been from impressive,

the slowdown in the manufacturing sector has been more pronounced

Industrial production(% year on year)

14 15 16 17 18 19 204

6

8

10Smoothed over 2 months

4.7% in October

02 04 06 08 10 12 14 16 18 200

2

4

6

8

10

12

14

16

Real GDP growth(% year on year)

6.0

GDP

4.2

Momentum index(also known as Li Keqiang index)

PMI indices

14 15 16 17 18 1949

50

51

52

53

54

55

56

Manufacturing

Non manufacturing

Manufacturing PMI

14 15 16 17 18 1944

46

48

50

52

54

56New orders

Export orders

14 December 2019Sources: Refinitiv Datastream, Bloomberg, Candriam

With a weakening labor market, household income growth could be affected

Surveyed unemployment rate in urban areas

(%)

4.5

4.8

5.1

5.4

5.7

16 17 18 19

46

48

50

52

54

08 10 12 14 16 18

46

48

50

52

54

08 10 12 14 16 18

PMI employment

Manufacturing sector

Non manufacturing sector

Composite PMI employment

Per capita income and employment

(smoothed over 1 year)

08 10 12 14 16 184

6

8

10

12

14

16

46

48

50

52

54

Urban per capita income(% year on year) [R.H.S.]

04 06 08 10 12 14 16 18 200

1000

2000

3000


Higher food prices are eroding purchasing power

Contribution to inflation(% year on year)

-1

0

1

2

3

4

13 14 15 16 17 18 19

OtherResidence

Recreation & education

Transportation & communication

Health CareHousehold facilities Clothing

Food

Food prices

Meat pork [R.H.S.]

Food inflation(% year on year)

Retail sales(% year on year, volume)

Sept 2015 :Car sales tax cut

2009 : Various incentives to boost sales

Car sales(thousands, monthly rate)

Car loans from P2P lenders areestimated to have contributed toroughly 10% percent of new carsales in China in 2017.Many peer to peer lendingplatforms have now been closed.

13 14 15 16 17 18 194

6

8

10

12

14

Even if all US pork exports were to go to China,3.0mn tons in pork imports would still be a smallpercentage (~6%) of China’s annual 49mn tonspork consumption and a small share of China’s14.5mn tons pork shortage!12 13 14 15 16 17 18 19

-40

0

40

80

-5

0

5

10

15


Up to now, infrastructure investment growth has ticked up only modestly

but it could gradually accelerate

0

5

10

15

20

Total Manuf.Real

estateInfrastructure

17Q3

18Q3

19Q3

Fixed asset investment(% year on year)

Infrastructure investment growth has ticked upmodestly… while real estate investment growthremains robust

The known quantity of onshore bonds thatfinancing vehicles must repay between thisyear and 2021 was RMB 3.5 trillions (i.e. 3.6GDP points).

LGFVs maturing debt(Yuan trillions)

0.0

0.5

1.0

1.5

2.0

18 19 20 21 22 23 240

1

2

3

4

5

15 16 17 18 192

3

4

5

6

As local governments are more and morefiscally responsible, many become reluctantto incur additional debt liabilities to fund localinfrastructure projects.

Official target deficit [R.H.S.]

Special bond quota

Yuan trillions

% of G

DP

Central government deficit + special bond quota[R.H.S.]

Budget deficit target and special bond issuance quota

Central govt debt

Total credit flow to the economy(% of GDP, annual rate)

Total

0

10

20

30

40

02 04 06 08 10 12 14 16 18


The curbing of shadow banking has been policy driven

Depository corporations claims on…(annual flows, % of GDP)

Households

Non financial corporations

Government

Other financial corporationsOther claims

Total

Depository corporations

-10

0

10

20

30

40

50

60

09 11 13 15 17 19

Bank loans

Corporate bonds & local government special bonds

Local government special bonds

Corporate bonds

-4

-2

0

2

4

6

09 10 11 12 13 14 15 16 17 18 19

Shadow banking

Entrust loans

Trust loans

-4

-2

0

2

4

6

09 10 11 12 13 14 15 16 17 18 19

Bank's acceptance bill


Providing more credit to SMEs remains however a key challenge for authorities

Credit easing- In August 2019, with the Loan Prime Rate reform, PBoC

announced efforts will be made to lower the comprehensivefinancing costs for enterprises. Credit rate and charges will bemade more open and transparent and intermediaries will beurged to cut fees and bring more benefits to the businesses.

- This comes on top of already announced measures:- Increase in re-discount and re-lending facilities for loans

to small and micro enterprises in particular.- Credit enhancement facility to promote corporate bond

financing for private enterprises.- Set up of a new monetary policy tool (TargetedMedium-term Lending Facility) to provide stablefunding to banks, at a slightly lower interest rate…provided they increase their lending to small and privateenterprises.

- To help banks raise their capital ratios, banks’ perpetualbonds are now eligible to PBoC refinancing operationsand can be swapped against PBoC bonds.

- More public guarantees to support credit to SMEs.

The NDRC announced that it has developed a credit rating

system for SMEs recently, opening the door to the introduction

of newly qualified issuers (possibly including real estate

developers).

Small firms

Loan demand climate index(survey, %)

Large firms

12 13 14 15 16 17 18 1950

55

60

65

70

75

80

85

Loan approval index(survey, %)

12 13 14 15 16 17 18 1940

42

44

46

48

50

52

54

Corporate bonds net issuance(billions of Yuan, 12mma)

12 13 14 15 16 17 18 190

1000

2000

3000

4000

Sources: Refinitiv Datastream, IMF, Candriam

Finding creditworthy borrowers is becoming more and more challenging!

December 201919

No effort

50

70

90

110

130

15 16 17 18 19 20 21 22 23 24 25 26

Government debt trajectories(% of GDP)

Gradual reduction in government deficit (0.9 GDP point annual improvement)

Household debt(% of disposable income)

06 08 10 12 14 16 1810

30

50

70

90

Non financial corporations

Private non financial sector debt(% of GDP)

06 08 10 12 14 16 1880

100

120

140

160

180

200

220Private non financial

December 2019

4. UNITED STATESSoft landing… despite turbulences!

The current business cycle is now the longest… since 1854*!

55 60 65 70 75 80 85 90 95 00 05 10 15 20-4

-2

0

2

4

6

8

10

1990 - 2000 2009 - ?

US business cycles(GDP year on year growth rate in %)

21 December 2019Source: Refinitiv Datastream

(*) 1854 is the first year for which the NBER started to date cycles.

Given the length of this recovery, some are still fearing a coming recession

Duration of US recoveries(trough to peak, since 1946)

0

20

40

60

80

100

120

140

The length of US business cycles

Max (1991-2001)

40 quarters

Min(1980-1981)

4 quarters

Average

20 quarters

US business cycles(real GDP cumulated change since peak)

Quarters from peak

% change from

peak

1960

1981

1990

1973

2001

1957

1969

1953

-10

0

10

20

30

40

50

0 4 8 12 16 20 24 28 32 36 40 44

Current

41 quarters

22 December 2019Sources: Federal reserve bank of Minneapolis, Candriam

Current


The yield curve inversion in particular has triggered a recession scare!

12-month ahead recession probability(%)

0

20

40

60

80

100

60 65 70 75 80 85 90 95 00 05 10 15 20

With yield curve slope (10 year minus Fed funds)

With fed funds minus potential GDP

- 5

- 4

- 3

- 2

- 1

0

1

2

3

60 65 70 75 80 85 90 95 00 05 10 15 20

Fed funds less 10 year

Two measures of yield curve slope (%)

(*) Fed funds rate minus potential GDP growth

Tightness of monetary policy*


Growth continues to be supported by consumption,

while equipment investment and exports have significantly decelerated

GDP growth(%)

Year on year

Quarter on quarter, annual rate

-2

-1

0

1

2

3

4

13 14 15 16 17 18 19

Contributions to GDP growth(% year on year)

Government expenditures

Residentialinvestment

Consumption

GDP

-2

-1

0

1

2

3

4

13 14 15 16 17 18 19

GDP

Change in inventories

Equipmentinvestment

Structures

-2

-1

0

1

2

3

4

13 14 15 16 17 18 19

Exports

GDP

Imports Net exports

-2

-1

0

1

2

3

4

13 14 15 16 17 18 19

Monthly indicators are pointing to modest growth

25 December 2019Sources : Refinitiv Datastream, Candriam

06 08 10 12 14 16 18 20-20

-10

0

10

20

30

-20

-15

-10

-5

0

5

10

15

06 08 10 12 14 16 18 2030

35

40

45

50

55

-1.5

-1.0

-0.5

0.0

0.5

1.0

12 13 14 15 16 17 18 19 20-3

0

3

6

9

12

00 02 04 06 08 10 12 14 16 18 200

500

1000

1500

2000

2500

0

20

40

60

80

100

06 08 10 12 14 16 1835

40

45

50

55

60

65

-20

-10

0

10

20

20(*) including intellectual property rights

06 08 10 12 14 16 18 2040

45

50

55

60

65

-2

-1

0

1

2

3

4

5

Equipment investment*(% year on year)

Phila Fed (3mma) [R.H.S.]

Phila Fed survey

Change in inventories(% of GDP)

ISM inventories (3mma) [R.H.S.]


Consumption

Consumption(% change over 3 months, annual rate, nominal)

Core retail sales

NAHB survey and housing startsNAHB survey(current situation)

Housing starts(thousands, -6M, annual rate) [R.H.S.]

Export orders

Exports(% year on year, -3M, volume)

ISM export orders[R.H.S.]

GDP(% change over 2 quarters, annual rate)

ISM composite & GDPISM new orders

[R.H.S.]

26 December 2019 Sources: Refinitiv Datastream, BEA, Candriam

The August revision in national accounts changed significantly the distribution between wages

and profits, making the gap between NIPA profits and S&P companies earnings even wider!

National income

-300

-200

-100

0

100

200

300

14 15 16 17 18 19

National income revision in level($ billion)

Net interest Proprietors' income

Rental income

Corporate profits

Compensation of employees

-300

-200

-100

0

100

200

300

14 15 16 17 18 19

… and a lower profit share !

Revised

Before revision

Household Saving rate(%)

3

5

7

9

11

08 10 12 14 16 18

The upward revision inhousehold income translated intoa higher household saving rate…

Revised

Before revision

60 70 80 90 00 10 2012

16

20

24

NFC operating surplus(% of NFC net domestic product)

Corporate profits(1993 = 100)

90

190

290

390

490

590

690

790

93 95 97 99 01 03 05 07 09 11 13 15 17 19

Operating profits per share of S&P companies

Gap = 45%!

Gap = 50%!

Operatingincome(NIPA basis)

98 00 02 04 06 08 10 12 14 16 18 2050

60

70

80

90

100Household

Memo: private sector debt(% of GDP)

+25

Business(corporate and non corporate)

+8

The rise of corporate debt is a matter of concern,

but low interest rates should prevent it from triggering a recession

27 December 2019Sources: Refinitiv Datastream, Federal Reserve, Candriam

10

15

20

25

30

00 02 04 06 08 10 12 14 16 18

Interest expense ratio (% of business income)

Risky firms*

All firms

(*) Speculative grade firms or unrated

Corporate debt / assets (assets are measured at book value)

All firms

Risky firms*

25

30

35

40

45

00 02 04 06 08 10 12 14 16 18

Leverage of public non financial corporations

Debt and interest payments of non financial corporates

(% of net value added)

80 85 90 95 00 05 10 15 202

3

4

5

6

7

8

9

10

50

60

70

80

90

100

110

120

Total debt

Interest payments[R.H.S.]

The outstanding amount of leveraged loans could however become an issue…

during the next recession!

28 December 2019

0

200

400

600

700

95 99 03 07 11 15 19

CDO

CLOs

CLOs and CDOs($ billion)

of which

US CLOs amount to $600 billionsout of $3500 billions of loans andare rather well distributed acrossdomestic holders.

0

1000

2000

3000

4000

5000

6000

Bonds Bank C&I loans Leveragedloans

Banks

Insurance companies

Mutual funds

Foreign investors, pension funds, and other

CLOs

Other loans

Holders of CLOs($ billion)

Corporate debt of non financial corporates

CLOs are thelargest holder ofleveraged loans

Insurance companies131

Holders of corporate debt($ billion)

Mutual funds97

Depository institutions95Pension funds

58

Other financial org. (incl. BHCs)

55

Non financial org. (incl. households)

55

Funds & other investment vehicles

50

Rest of the world76

Sources: Refinitiv Datastream, Federal Reserve, Candriam

80 85 90 95 00 05 10 15 200

10

20

30

40

50

60

70

Other debt securities

Loans($3500 bn)

Corporate bonds($5600 bn)

(% of net value added)

A contraction of firm’s equipment investment could push the economy closer to recession territory…

but the contraction would have to be a deep one!

29 December 2019Sources: Refinitiv Datastream, BEA, Candriam

Intellectual

property

products

45%

Info.

processing

19%

Industrial

equip.

11%Transport

14%Other

equip.

12%

Share in firms’ investment (2019 Q1)

A 10% fall in equipmentinvestment combined withstagnation of IPP investmentwould subtract 0.6% of finaldemand and 1% from US GDPgrowth.

Share of IPPin business investment ex structures

(%)

65 70 75 80 85 90 95 00 05 10 15 2010

20

30

40

50

-30

-20

-10

0

10

20

30

65 70 75 80 85 90 95 00 05 10 15 20

Equipment investment

Equipment and IPP investment(% year on year)

Intellectual property products


A sharp deceleration of world growth could also push the US economy into recession

-3

-2

-1

0

1

2

3

12 13 14 15 16 17 18 19 20

-3

-2

-1

0

1

2

3

12 13 14 15 16 17 18 19 20

-3

-2

-1

0

1

2

3

12 13 14 15 16 17 18 19 20

-3

-2

-1

0

1

2

3

12 13 14 15 16 17 18 19 20

Exports(% year on year contribution, nominal)

Canada Euro area

Other Europe

China

Other Asia Japan

LatAm

Mexico

14 15 16 17 18 1995

100

105

110

115

120

125Nominal EER

Real EER(CPI deflated)

Dollar effective exchange rate(2014=100)

-5%

US exports and world growth(% year on year)

US exports

98 02 06 10 14 18

0

2

4

6

-15

-10

-5

0

5

10

15

World growth [R.H.S.]

Export orders

Exports (% year on year, 3mma, -3M, volume)

12 13 14 15 16 17 18 1945

50

55

60

-4

-2

0

2

4

6

8

Export orders (ISM) [R.H.S.]


Wages per employee seem to be plateauing

Wages and unemployment rate(1995 - 2019)

ECI wages

(% year on year)

R² = 0.691995-2015

“Non-employment” rate for 25 to 54-year old(%)

2016-2019

19 Q3

0

1

2

3

4

5

3 5 7 9 11Unemployment rate (%)

0

1

2

3

4

5

ECI wages

(% year on year)

Wages and “non-employment” rate(1995 - 2019)

R² = 0.87

1995-2015

2016-2019

19 Q3

18 20 22 24 2606 08 10 12 14 16 181

2

3

4

Total wages

Ex incentive paid

ECI wages - private sector(% year on year)

Unemployment rate

Unemployment and “non-employment” rate(%)

“Non-employment” rate for persons aged

between 25 and 54 [R.H.S.]

18

19

20

21

22

23

24

25

26

94 96 98 00 02 04 06 08 10 12 14 16 18 20

4

5

6

7

8

9

10


But as long as employment growth remains around 1%,

household spending will provide a buffer against recessionary pressures

2.5%

A cut in payroll taxes similar tothe Obama one (from 6.2% to4.2%) would add roughly 1% todisposable income, i.e. 0.7 GDPpoints.

Payroll tax (as a share of compensation, %)

08 10 12 14 16 18 2011

12

13Obama payroll cut

Private sector job creationsand wages

Job creations(change / 3 months, thousands, annual rate)

Average weekly hours worked

Hourly wages(% year on year)

06 08 10 12 14 16 18-800

-600

-400

-200

0

200

400

06 08 10 12 14 16 1833.6

34.0

34.4

34.8

06 08 10 12 14 16 181

2

3

4

Job creations since 2016

1% employment growth ~110 000 NFP per month

16 17 18 19100120140160180200220240

Private sector wages(% year on year)

(*) hourly earnings x hours worked x employment

Calculated wages*

08 10 12 14 16 18-6

-4

-2

0

2

4

6

Consumption deflator

33 December 2019

70%

73% 68%

9%

6% 9%

3%

5%11%

9%

7%

6%

9%

9%6%

0

2

4

6

8

10

12

14

2003 2008 2019 Q2

0

4

8

12

16

03 05 07 09 11 13 15 17 19

Credit cards Student loans

Mortgage loans

Auto loans

Delinquency rate(90 or more days delinquent, %)

Memo : Household debt by type($ trillion)

Mortgage loans

Student loansAuto loans

Credit cardsOther

-80

-40

0

40

80

120

95979901030507091113151719-200

-100

0

100

200

300

01 03 05 07 09 11 13 15 17 19

Credit unionsDepository institutions

Consumer credit by lenders(annual flows, $ billion)

Pools of securitized assets

Finance companies

Total

Government & Sallie Mae

Auto loans(annual flows, $ billion)

Sources: Refinitiv Datastream, FRBNY, Candriam

Household financial health is far from worrying

80 85 90 95 00 05 10 15 2060

80

100

120

140


80 85 90 95 00 05 10 15 2014.5

15.5

16.5

17.5

18.5

Household financial obligation ratio(% of disposable income)


Moreover, the household saving rate is elevated

Net wealth(% of disposable income)

Saving rate

(% of disposable income)

Household wealth and saving rate(1976-2019)

0

2

4

6

8

10

12

14

450 500 550 600 650 700

12 Q1 19 Q2

07 Q4

Household wealth and saving rate(% of disposable income)

Saving rate

60 65 70 75 80 85 90 95 00 05 10 15 20

400

500

600

700

0

2

4

6

8

10

12

14

16Net wealth [R.H.S.]

15 16 17 18 191800

2000

2200

2400

2600

2800

3000

12

14

16

18

20Value of equities held by households($ trillion)

S&P 500 [R.H.S.]

19 Q2

Corporate equities held by households and S&P 500

Sources: Federal Reserve, Candriam

Memo: the concentration of wealth may partly explain this elevated saving rate

Annual increase in financial assets since 2010

(%)

-4

-2

0

2

4

6

8

10

12

Bottom 20 80-99 Top 120-40 40-60 60-80

Average inflation

Percentile

35 December 2019

Share in assets by percentile of income(%)

25

30

35

40

45

89 92 95 98 01 04 07 10 13 16 19

Bottom 80% earners

Financial assets

35

40

45

50

55

89 92 95 98 01 04 07 10 13 16 19

80 to 99% top earners

10

15

20

25

30

89 92 95 98 01 04 07 10 13 16 19

Top 1% earners

Total assets

04 06 08 10 12 14 16 18 2020

40

60

80

100

120

04 06 08 10 12 14 16 18 20-30

-20

-10

0

10

20

30

04 06 08 10 12 14 16 18 2070

80

90

100

110

120

130

00 02 04 06 08 10 12 14 16 18 200

500

1000

1500

2000

2500

0

20

40

60

80

100

12 13 14 15 16 17 18 19 20-20

-10

0

10

20

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5


Falling interest rates have provided only a moderate support to residential investment…

NAHB survey and housing starts

NAHB survey(current situation)

Housing starts(thousands, -6M, annual rate) [R.H.S.]

Single-family residential investment(2004 = 100)

Single-family residential investment

Single-family housing starts

Brokers' commission and existing home sales

(% year on year)

Home improvements

Building materials, garden equip. & supply stores retail salesMortgage interest rate

(%, change over 1 year)

Pending home sales (% year on year, -3M)[R.H.S.]

Interest rates and pending home sales

?

Brokers’ commissions

Existing home sales

Home improvement(2006 = 100)

37 December 2019Sources: Refinitiv Datastream, Urban Institute, Candriam

… in part because credit availability has remained tight

“easy credit” area

“tight credit” area

Home sales and plans to buy a home

1.0

1.5

2.0

2.5

3.0

3.5

80 85 90 95 00 05 10 15 201

2

3

4

5

6

7Home sales per capita(%)

Plans to buy a home in 6 months (% households) [R.H.S.]

0

5

10

15

20

25

98 00 02 04 06 08 10 12 14 16 18

Housing credit availability index*

0

5

10

15

20

25

98 00 02 04 06 08 10 12 14 16 18

0

5

10

15

20

25

98 00 02 04 06 08 10 12 14 16 18

0

5

10

15

20

25

98 00 02 04 06 08 10 12 14 16 18

GSE

FHA, VA

Private-Label(*) The Housing credit availability index (HCAI) indicates thedifficulty of getting a mortgage by measuring lenders’

tolerance for risk. The HCAI separates borrower risk fromproduct risk.A higher HCAI indicates that lenders are willing to toleratedefaults and are taking more risks, making it easier to get aloan.

Housing credit availability indexBorrower risk Product risk

All mortgages

Housing credit availability index

0.2

0.4

0.6

0.8

1.0

1.2

80 85 90 95 00 05 10 15 2035791113151719

“tight credit” area

“easy credit” area

Home sales / plans to buy

Housing credit availability index [R.H.S.]

38 December 2019

President Donald Trump and U.S. congressional leaders alsoreached a deal on federal spending caps, but Democrats andRepublicans still need to agree on appropriation bills in orderto avoid a new shutdown at the end of this year. Until December20, a continuing resolution will fund the federal budget.

Sources: CBO, Candriam

A continuing resolution has been agreed on to avert a shutdown… at least until December 20

Debt ceiling suspension: under the agreement thissummer, the Treasury Department’s borrowingauthority is extended through July 31, 2021.

Change in federal outlays(% of GDP, calendar years)

-0.2

-0.1

0.0

0.1

0.2

0.3

0.4

2018 2019 2020

Outlays

Discretionary spending caps and effective outlays

($ billion, fiscal years)

1244

Continuing resolution

1000

1100

1200

1300

1400

1500

2017 2018 2019 2020 2021

Proposed outlays

Current budget caps

-$125 bln

Newly proposedbudget caps


Barring a confidence shock, growth should gradually decelerate to slightly below 2% in 2020

GDP in the United States

(% annual rate)

Consumption

Investment

- Residential

- Equipment & intellectual property products

- Structures


(contribution)

Government

External balance

(contribution)

- Exports

- Imports

GDP

2017 2018 2019 2020Q3 19

2.6 3.0 2.6 2.2

4.2 4.9 1.7 1.3

3.5 -1.5 -1.7 1.3

4.3 7.0 4.1 1.6

4.7 4.1 -4.1 -0.2

0.0 0.1 0.1 -0.2

0.7 1.7 2.3 1.8

-0.4 -0.4 -0.3 -0.2

3.5 3.0 0.1 2.8

4.7 4.4 1.6 2.9

2.4 2.9 2.3 1.8

2.9

-1.1

5.1

0.0

-12.0

0.2

1.6

-0.2

0.9

1.5

2.1

Q2 19Q1 19Q4 18

1.4 1.1 4.6

3.4 3.4 -1.0

-4.7 -1.0 -3.0

9.2 4.4 2.0

-9.0 4.0 -11.1

0.1 0.5 -1.0

-0.4 2.9 4.8

-0.4 0.8 -0.8

1.5 4.1 -5.7

3.5 -1.5 0.0

1.1 3.1 2.0

GDP(% year on year)

-6

-4

-2

0

2

4

6

98 00 02 04 06 08 10 12 14 16 18 20

The potential rate of growth of the US economy seems now low


96 97 98 99 00 01 02 03 04 050

1

2

3

4

5

6

2.0

1.5

1.0

0.5

0.0

-0.5

-1.0

-1.51996-2005

3.4%

GDP growth (% year on year) [R.H.S.]

GDP growth and change in unemployment rate

1960-1984

60 65 70 75 80-4

-2

0

2

4

6

8

10

4

3

2

1

0

-1

-2

-3

Change in unemployment rate (change over 1Y, %) [Inverted scale]

4%

Implicit potential GDP growth rate

1985-2019

2.3%

Implicit potential GDP growth rate

85 90 95 00 05 10 15

-4

-2

0

2

4

6

4

2

0

-2

2005-2019

~1.5%

06 07 08 09 10 11 12 13 14 15 16 17 18-4-3

-2

-10

12

3

4

4

2

0

-2

19

Demographic effect

The growth of the labor force is more and more constrained


Participation rate(%)

62

64

66

68

90 95 00 05 10 15 20

3.4

Participation rate by age(%, 2019)

16-19 20-24 25-54 55-64 65-740

20

40

60

80

100

>75

Contribution to population growth (% year on year, 2019)

16-19 20-24 25-54 55-64 65-74 >75-0.2

-0.1

0.0

0.1

0.2

0.3

0.4

0.5Annual rate of population growth

(%)

0.0

0.5

1.0

1.5

2.0

55 65 75 85 95 05 15 25 35

15 to 64-year old

-1

0

1

2

3

4

5

55 65 75 85 95 05 15 25 35

65 to 74-year old

3.5%

0.2%96 00 04 08 12 16 20

2

6

10

14

18

Unemployment rate measures(%)

Official unemployment rate (U-3)

+ all marginally attached+ involuntary part time (U-6)

55 60 65 70 75 80 85 90 95 00 05 10 15 202

3

4

5

6

7

2.7

Involuntary part time

of which

Sustaining 1% employment growth in 2020 and 2021 will get harder and harder!


Employment growth(% year on year)

No change in participation rates

-1

0

1

2

14 15 16 17 18 19 20 21

Unemployment rate falling to 3.3%

80

81

82

83

84

85

90 95 00 05 10 15 2030

35

40

45

50

55

90 95 00 05 10 15 2070

72

74

76

78

80

90 95 00 05 10 15 20

Participation rate by age(%)

16-19 20-24 25-54

50

55

60

65

70

10

14

18

2255-64 >64

90 95 00 05 10 15 20 90 95 00 05 10 15 202

3

4

5

6

7

8

90 95 00 05 10 15 20

Unemployment rate (%)

Rising participation

73

74

75

76

77

78

88

89

90

91

92

93Women [R.H.S.]

95 00 05 10 15 20

Men

Unless there is a pick-up in productivity,

the US potential rate of growth will remain below 2% in the coming years


Output per hour & business cycle(%)

06 08 10 12 14 16 18 20

-4

-2

0

2

4

6

8

10

-2

0

2

4

6

1-Y GDP acceleration (%) [R.H.S.]

Output per hour(% year on year)

Productivity(output per hour, 1990=100)

90 95 00 05 10 15 20100

120

140

160

180

200

220

240

Nonfarm business

Manufacturing

Annual productivity gains(nonfarm business output per hour, % )

96 00 04 08 12 160

1

2

3

4

5

Over 5 years

Over 2 years

Labor force: +0.4%

Medium term potential rate of growth

GDP per employee: +1.3%

GDP: +1.7%

Productivity and hiring constraints

85 90 95 00 05 10 15 205

10

15

20

25

30

35

40

0

1

2

3

4

Productivity gains (over 3 years, -14Q)

NFIB – jobs hard to fill (6-month moving average) [R.H.S.]


The Federal reserve should now stay pat for an extended period of time

“‘Who is our bigger enemy,’ Fed Chairman Powell or ChinesePresident Xi?” Donald Trump.

“The USA should always be paying the lowest rate. NoInflation! It is only the naïveté of Jay Powell and the FederalReserve that doesn’t allow us to do what other countries arealready doing. A once in a lifetime opportunity that we aremissing because of “Boneheads.” Donald Trump

2019 2020 2021 Longer run1.0

1.5

2.0

2.5

3.0

3.5

2022

Fed funds rate expectations of FOMC members(%, September 2019)

Median

December 52019 End of 2020

(III)

(II)(I)

1.8%

1.6%1.6%

2.0%

2.3%

1.9%2.2%

2.5%

US 10-year interest rate forecasts (Treasuries)

2-year interest rate

5-year interest rate in 5 years



Fed funds rate and market expectations(%)

Dec. 19

June 20Dec. 20

Fed funds

Dec Mar Jun Sep Dec Mar Jun Sep Dec1.0

1.5

2.0

2.5

3.0

Current Fed Funds future

45Sources: Refinitiv Datastream, Candriam

Tensions on the money market have led the Fed to start expanding again its balance sheet

December 2019

0

1000

2000

3000

4000

5000

03 05 07 09 11 13 15 17 190

1000

2000

3000

4000

5000

03 05 07 09 11 13 15 17 19

T-Bills

Federal Reserve balance sheet($ billion)

Agencies

Treasuries

Total debt securities

MBS

Liabilities

Currency in circulation

Reserves

Treasury deposit& reverse repos

Repos

Assets

0

100

200

300

400

500

12 13 14 15 16 17 18 19 20

Reverse repos with dealers

0

100

200

300

400

500

12 13 14 15 16 17 18 19 20

Reverse repos with foreign officials and international accounts

0

100

200

300

400

500

12 13 14 15 16 17 18 19 20

U.S. Treasury general account

100

150

200

250

300

JanFebMar AprMayJun Jul AugSep OctNovDec

693!

Structure of money market interest rates(basis points)

ON RRPIOEREFFR

ON GC REPO

Even if the Fed revises its policy framework,

pushing (and keeping!) the PCE deflator above 2% will be challenging

46 December 2019

06 08 10 12 14 16 18 20-1

0

1

2

3

4

5Shelter

Owners’ equivalent rent

Rents

06 08 10 12 14 16 18 200.5

1.0

1.5

2.0

2.5

3.0

Three measures of core inflation(% year on year)

CPI

PCE deflator*

Trimmed mean CPI

(*) Core market based PCE deflator Memo: PCE weights

Core CPI weights(%)

0 5 10 15 20 25 30 35 40

Alcoholic beverages Apparel

Other goods and services Recreation

Education and communication Medical care

Transportation Housing

Cyclical components

Non cyclical components

Sources: Refinitiv Datastream, Candriam

-1

0

1

2

3

4

06 08 10 12 14 16 18

Core goods

20

Output gap(-12 months)[R.H.S.]

0

1

2

3

4

5

99 01 03 05 07 09 11 13 15 17 19-6

-3

0

3

Core CPI components(% year on year)

Cyclical components


CPI

06 08 10 12 14 16 18 200

2

4

6

PCE

Two measures of medical care services prices


0

2

4

6

15 20 25 30 35 40 45

47

Leisure

Transport

Other

Manufacturing

Education & health

Utilities

Mining

Information

Wholesale trade

Construction

Financial

Professional & bus. serv.

Share in total employment(%)

Low

Middle

High

Job creations(thousands, year on year)

200

400

600

800

1000

1200

13 14 15 16 17 18 19

0

2

4

6

08 10 12 14 16 18

0

2

4

6

08 10 12 14 16 18

0

2

4

6

08 10 12 14 16 18

LowHigh

Hourly earnings(% year on year, 3mma)

Hourly earnings(% year on year, 3mma)

Manufacturing

Education & health

Leisure & hospitality

Retail trade

Financial activities

Professional & business serv.

Middle

0

1

2

3

4

5

08 09 10 11 12 13 14 15 16 17 18 19

Hourly earnings(dollars, August 2019)

Information

Utilities

Construction

Financial activities

Professional & business serv.

Leisure & hospitality

Retail trade

Wholesale

Growth in hourly earnings

(% year on year, August 2019)

Hourly earnings by sector

Bubbles’ size are proportional to shares in private employment


Memo: wage increases are concentrated at the lower and upper ends of the pay scale

Transportation& warehousing

OtherEducation & health

Manuf.

December 2019

Retail trade

0

5

10

15

20 Low(< $20)

High(> $30)

Middle

December 2019

5a. EURO AREAStuck in low gear…


Growth has markedly slowed… especially in Italy and Germany

-2

-1

0

1

2

3

4

10 11 12 13 14 15 16 17 18 19

Euro area real GDP growth (%)

Year on year

Quarter on quarter, annual rate

-1

0

1

2

3

IT DEEuroarea FR AT BE NL PT ES FI GR IE

Real GDP growth by country(% year on year)

Memo : 2017 Q4 / 2016 Q4

2019 Q3 / 2018 Q3


Foreign trade has been a key factor in the recent GDP slowdown

Equipment investment

-2

-1

0

1

2

3

10 11 12 13 14 15 16 17 18 19

GDP


Structures

-2

-1

0

1

2

3

10 11 12 13 14 15 16 17 18 19

GDP

Net exports

-2.5%

Euro area ex Ireland

Euro area ex Ireland

-2

-1

0

1

2

3

17 18 19

-2

-1

0

1

2

3

17 18 19

-0.6%

-1.8%

GDP

-2

-1

0

1

2

3

10 11 12 13 14 15 16 17 18 19

Contribution to euro area GDP growth(% year on year)

Government consumptionResidential investmentPrivate consumption

Contribution to country’s GDP growth(% year on year)

Germany

17 18 19-2

-1

0

1

2

3


The foreign trade contraction has mainly affected Germany,

while an inventory correction has weighed heavily on Italian growth

-2

-1

0

1

2

3

17 18 19

-2

-1

0

1

2

3

17 18 19

France

-2

-1

0

1

2

3

17 18 19

-2

-1

0

1

2

3

17 18 19

Spain

Domestic demand


GDP

-2%

Net exports

GDP

Exports

Imports-2

-1

0

1

2

3

18 1917-2

-1

0

1

2

3

17 18 19

-2

-1

0

1

2

3

17 18 19

Italy

The growth in domestic demand has supported activities not directly related to manufacturing

December 2019Sources: Refinitiv Datastream, Candriam

52

Professional, scientific and technical, administrativeand support

Trade, transportation, accommodation & food serv.

-0.5

0.0

0.5

1.0

05 07 09 11 13 15 17 19

Correlation with manufacturing(%, 5 year rolling correlations, euro area)

Information and communication

Construction

Real estate

-0.5

0.0

0.5

1.0

05 07 09 11 13 15 17 19

Arts, entertainment

Financial and insurance activities-0.5

0.0

0.5

1.0

05 07 09 11 13 15 17 19

GDP

-4

-2

0

2

4

00 03 06 09 12 15 18

GDP

-4

-2

0

2

4

00 03 06 09 12 15 18

Value added by sector for the euro area(% year on year)

GDP

-4

-2

0

2

4

00 03 06 09 12 15 18

GDP

-4

-2

0

2

4

00 03 06 09 12 15 18-15

-10

-5

0

5

10

Public administration, defense, education,health and social activities

Trade, transport and professional

services

Industry [R.H.S.]

Other private services

Despite some softening, the services sector has proved resilient

53 December 2019Source: Bloomberg

Services sector

40

45

50

55

60

07 09 11 13 15 17 19

PMI indices

Euro area


40

45

50

55

60

15 16 17 18 19

Services sector


Germany

40

45

50

55

60

15 16 17 18 19

40

45

50

55

60

15 16 17 18 1940

45

50

55

60

15 16 17 18 19

Services sector


France

Services sector


Italy

Services sector


Spain

54 December 2019

The contraction of German foreign trade has now clearly stopped…

but for exports to significantly support growth, a pick up in world trade is needed!


-1.0

-0.5

0.0

0.5

1.0

18 19

Asia

Middle East& Africa

Non Europe

America

-0.3

0.0

0.3

0.6

18 19

Other Asia

China

Japan

Asia

-0.6

-0.3

0.0

0.3

18 19

United Kingdom

Denmark

SwedenEastern Europe

EU ex euro area

Other Europe

EU ex euro area

Euro area

-1.0

-0.5

0.0

0.5

1.0

18 19

Europe

Total Europe

-2

-1

0

1

2

14 15 16 17 18 19

Net trade contribution to German growth by region or countries(% of GDP, 3-month moving average, nominal)

Europe

America

Asia

Total

Middle East & Africa

World German trade(% year on year, nominal)

06 08 10 12 14 16 18 20-10

0

10

20

Exports

Imports

04 06 08 10 12 14 16 18 20

-10

0

10

20

30

-10

-5

0

5

10

15

20

55 December 2019

German growth seems to stabilize… with fiscal policy providing only a limited support


0

1

2

2019 2020

SpringAutumn

Council of economic experts growth forecast

(%)

Ifo and real GDP growth(% year on year)

06 08 10 12 14 16 18 2085

90

95

100

105

110

115

-2

0

2

4

6GDP growth(% year on year)

IFO expectations in 6 months (+3m) [R.H.S.]

Ifo exports in 3 months [R.H.S.]

Exports(% year on year, volume)

Exports and Ifo export orders

Germany’s fiscal policy is also expansionary and anadditional economic stimulus package is not

necessary. It is instead a matter of allowing theautomatic stabilizers to take effect. The debt brakedoes not rule out new borrowing for this purposeand leaves scope for increasing public investment.Annual Report 2019/20 of the German Council ofEconomic Experts

Equipment investmentand EC survey in Germany

Equipment investment(% year on year)

Perceived demand(EC survey) [R.H.S]

Consumption

Retail sales(3mma) [R.H.S]

Consumption and retail sales(% year on year)

06 08 10 12 14 16 18 20-30

-20

-10

0

10

20

30

-15

-10

-5

0

5

10

15

08 10 12 14 16 18 20-8

-6-4-2

0

24

6

8

-2

-1

0

1

2

3


At the euro area level, consumption is not booming… but continues to grow!

06 08 10 12 14 16 18 20-15

-10

-5

0

5

-2

-1

0

1

2

3

Consumption andfinancial situation

Consumption(% year on year, in real terms)

Financial situationnext 12 months[R.H.S.]

06 08 10 12 14 16 18 20

-4

-2

0

2

4

Consumption and retail sales(% year on year, in real terms)

Consumption

Retail sales

Employment

Wages

Wages(% year on year)

Wages per employee

-3

0

3

6

03 05 07 09 11 13 15 17 19

Real income and consumption(% year on year, in real terms)

Consumption

Disposable income

-2

-1

0

1

2

3

03 05 07 09 11 13 15 17 1906 08 10 12 14 16 18 2070

80

90

100

110

120

Car sales(2006 = 100)

Euro area

6mma


The deceleration in growth has weighed on employment

14 15 16 17 18 19 20-1

0

1

2Italy % yoy

14 15 16 17 18 19 200.0

0.5

1.0

1.5

2.0

% qoq, ar

% yoy

Belgium

06 08 10 12 14 16 18 20-3

-2

-1

0

1

2

3

Employment(% quarter on quarter annual rate)

14 15 16 17 18 19 200.0

0.5

1.0

1.5

2.0

14 15 16 17 18 19 20-2

0

2

4

Employment growth

Netherlands

% qoq, ar

% yoy

Germany

% qoq, ar

% yoy

06 08 10 12 14 16 18 202

4

6

8

10

12

14

06 08 10 12 14 16 18 200

5

10

15

20

25

30

Unemployment rate(%)

Italy

Belgium

GermanyNetherlands

Spain

Greece

Portugal

Euro area

France

Euro area


Household confidence is still solid, but has eroded recently in some countries

-40

-30

-20

-10

0

10

13 14 15 16 17 18 19-40

-30

-20

-10

0

10

13 14 15 16 17 18 19-40

-30

-20

-10

0

10

13 14 15 16 17 18 19

-40

-30

-20

-10

0

10

13 14 15 16 17 18 19-40

-30

-20

-10

0

10

13 14 15 16 17 18 19

Germany France

Italy Spain

Belgium

Consumer confidence

Consumer confidence (next 12 months)

Financial situation

SavingsUnemployment

General economic situation

-30

-20

-10

0

10

13 14 15 16 17 18 19

Euro area


The recent rise in the Spanish household saving rate is puzzling

France

Germany

Spain

Italy

Belgium

02 04 06 08 10 12 14 16 18 200

5

10

15

20

Household saving rate(% of disposable income)

Euro area

02 04 06 08 10 12 14 16 18 2011

12

13

14

15

Disposable income and consumption(% year on year)

2015 16 17 18 190

2

4

6

Disposable income

Consumption

Euro area

15 16 17 18 19 200

2

4

6

15 16 17 18 19 200

2

4

6

Consumption

Consumption

Disposable income Disposable income

15 16 17 18 19 200

2

4

6Consumption

15 16 17 18 19 200

2

4

6

Consumption

Disposable income Disposable income

FranceGermany

SpainItaly

With low interest rates, the construction sector is providing some offset to downward pressures

December 2019Sources: Refinitiv Datastream, Candriam

60

0

2

4

6

8

Construction

(Share in GDP, %)

10

12

Residential

5.4

Non

residential

4.9

Equipment

6.5

IPP

4.1

Equipment and IPP

Total investment in the Euro area(public and private investment)

00 02 04 06 08 10 12 14 16 18 20-6

-4

-2

0

2

4

6

-15

-10

-5

0

5

10Total investment

(% year on year)

GDP [R.H.S.]

Construction investment(% year on year)

04 06 08 10 12 14 16 18-40

-30

-20

-10

0

10

-12

-9

-6

-3

0

3

6

9

12

Investmentin construction(% year on year)

EC survey [R.H.S.]

04 06 08 10 12 14 16 18 20-80

-60

-40

-20

0

20

40France Germany

SpainItaly

Construction confidence(3-month moving average)

Belgium

Perceived demand is pointing to some growth in equipment investment


(*) Including intellectual property rights

Equipment investment*(% year on year, volume)

Equipment investment and perceived demand

06 08 10 12 14 16 18 20

-30

-20

-10

0

10

20

30

-15

-10

-5

0

5

10

15

Germany

(**) Composite indicator: 0.7 x industry production trend+ 0.3 x services recent evolution in demand

Perceived demand**[R.H.S.]


06 08 10 12 14 16 18 20

-40

-30

-20

-10

0

10

20

-10

-5

0

5

10

France, Italy and Spain

Perceived demand**[R.H.S.]

-10

France

06 08 10 12 14 16 18

-40-30-20-1001020

-5

0

5

10 Perceived demand**[R.H.S.]


Italy

06 08 10 12 14 16 18

-40

-30

-20

-10

0

10

-15

-10

-5

0

5

10

Spain

06 08 10 12 14 16 18-40

-30

-20

-10

0

10

-15

-10

-5

0

5

10

15

Fiscal impulse in 2020(% of GDP)

0.0

0.2

0.4

0.6

0.8

Fiscal policy will provide a moderate support to growth in 2020

62 December 2019Sources: Refinitiv Datastream, European Commission, Candriam

Government balance targets as announced in SCP(% of GDP)

-12

-10

-8

-6

-4

-2

0

2

09 10 11 12 13 14 15 16 17 18 19 20 21 22

France

EC forecasts

Euro area

DE BE IT ES FRNL

-12

-10

-8

-6

-4

-2

0

2

09 10 11 12 13 14 15 16 17 18 19 20 21 22

Italy

Germany

-12

-10

-8

-6

-4

-2

0

2

09 10 11 12 13 14 15 16 17 18 19 20 21 22

-12

-10

-8

-6

-4

-2

0

2

09 10 11 12 13 14 15 16 17 18 19 20 21 22

Spain

10

1112

13 14 15 1617

1819 2020 draft

SCP (draft)


All in all, GDP growth should hover around 1% in 2020

GDP(% year on year)

Unemployment rate(%)

GDP growth in the euro area

(% annual rate) 19Q3 20202016 2017 2018 201919Q218Q4 19Q1

- Exports

- Imports

GDP

Consumption

Investment

- Residential

- Equipment

& property rights

- Structures


(contribution)

Government

External balance

(contribution)

-6

-4

-2

0

2

4

01 03 05 07 09 11 13 15 17 19

7

9

11

13

01 03 05 07 09 11 13 15 17 19

2.0

1.2

2.3

1.0

0.5

-0.4

1.6

-0.3

1.7

2.6

0.9

1.4

2.2

1.5

3.2

0.6

0.1

1.3

-0.3

2.6

3.5

1.2

3.9 4.3 4.1 3.1

5.0 4.8 4.0 3.4

5.1 4.6 4.9 2.9

0.2 2.9 2.6 3.3

0.1 0.2 0.0 -0.4

1.9 1.3 1.1 1.6

-0.4 0.4 0.1 0.0

2.9 5.8 3.3 2.5

4.1 5.5 3.5 2.8

1.9 2.7 1.9 1.2

1.9 1.8 1.4 1.30.9

2.7

0.4

5.8

-1.7

-0.2

2.0

-0.5

0.6

1.8

0.7

1.5

1.5

5.6

-3.0

7.8

-0.9

1.7

1.2

3.5

1.1

1.8

1.5

6.7

4.2

8.2

5.8

-0.9

1.7

-0.2

3.8

4.7

1.4

The euro area is still far from full employment and inflation will remain low

64 December 2019Sources: Refinitiv Datastream, Eurostat, Candriam

Inflation(%, annual average)

0

1

2

3

12 13 14 15 16 17 18 19 20

1.21.4

70

75

80

85

90

95

00 03 06 09 12 15 18

Spain

Italy

FranceBelgium

Portugal

Employment rate Men 25 to 54-year old

(%)

Germany

78

80

82

84

86

88

90

00 03 06 09 12 15 18

Euro areaex Germany

04 06 08 10 12 14 16 18 20-1

0

1

2

3

Total

Core inflation(% year on year, 3mma)

Goods

Services

-1

0

1

2

3

04 06 08 10 12 14 16 18 20

Germany

Core inflation by country(% year on year, 3mma, ex tax effects)

Italy

Spain

France

Belgium

June

ECB forecasts

Core inflation and ECB forecasts(% year on year)

0.0

0.5

1.0

1.5

2.0

2.5

04 06 08 10 12 14 16 18 20

September

65 December 2019

Against this background, the ECB has turned even more accommodative

Sources: Refinitiv Datastream, ECB, Candriam

MFIs deposits at national central banks

0

500

1 000

1 500

2 000

2 500

06 08 10 12 14 16 18 20

Spain

Germany

Belgium

Italy

France

Euro area

Netherlands

LuxembourgFinland

(% of each country MFIs’ assets)

… with a “tiering” system

0

2

4

6

8

10

12

14

FI LX DENLBEFRAT ES IT PT IE GR

(€ billion)Italian MFIs borrowing from & reserves at the Bank of Italy

(€ billion)

Borrowing

(*) Current account deposits & marginal deposit facility

Reserves*

0

100

200

300

06 08 10 12 14 16 18 20

Negative interest rates for longer…

16 17 18 19-0.6

-0.3

0.0

0.3

0.6

0.9 3 month interest rate expected in December 2020

3-month Euribor

3-month Euribor andshort term rate expectations

(%)

“We expect the key ECB interest rates toremain at their present or lower levels untilwe have seen the inflation outlookrobustly converge to a level sufficientlyclose to, but below, 2%.”ECB introductory statement, October 24

Deposit facility

66 December 2019

New TLTROs and a new APP have been put in place

Sources : ECB, Candriam

Outstanding by country

TLTROsMaturity(€ billion)

% of country’s MFIs liabilities [R.H.S.]

€ billion

New refinancing operations…

0

200

400

600

800

Nov-19 Nov-20 Nov-21 Nov-22

2.1

2.22.3

2.43.1

0

50

100

150

200

250

IT ES FRDE NLBE PT ATGR FI LX IE0

1

2

3

4

5

6

7

“The Governing Council decided to restart net purchases under its assetpurchase program (APP) at a monthly pace of €20 billion as from 1November… for as long as necessary to reinforce the accommodativeimpact of our policy rates, and to end shortly before we start raising the keyECB interest rates.”Monetary policy decision of September 12 2019

Eurosystem holdings (€ billion)

Eligible assets (€ billion)Eurosystem holdings as a % of eligible assetsEurosystem purchase limitEstimated space

Eurosystem purchase limit

Estimated space (€ billion)

Current

programs

Possible

change

ECB parameters

of its asset purchase program Sovereign Supra.

1 860 230 26 261 177

7 900 515 150 680 950

24% 45% 17% 38% 19%

33% 50% 70% 70% 70%0 28 -- -- --

50% 70%

960 131

PSPPABSPP CBPP3 CSPP

… and a new APP


ECB’s policy is supporting households borrowing…

December 2019

Household debt service(% of disposable income)

00 02 04 06 08 10 12 14 16 18 202

4

6

8

10

12

Italy

Germany Spain

France

Belgium

00 02 04 06 08 10 12 14 16 1820

40

60

80

100

120

140


Italy

GermanySpain

France

Belgium

04 06 08 10 12 14 16 18 20-5

0

5

10

15

20

France

Germany

Spain

Italy

By country(% year on year, adjusted for securitization)

Belgium

04 06 08 10 12 14 16 18 201

2

3

4

5

6

7

FranceGermany

Spain

Italy

Interest rates on loans for house purchase(%, new loans)

Belgium

Loans to households

04 06 08 10 12 14 16 18 20-2

0

2

4

6

8

10

12Loans

Disposable income

Euro area(% over 3 months, annual rate)


… and to some extent lending to firms

December 2019

Interest rates on loans to nonfinancial corporations(%, floating rate, < €1million, new loans)

04 06 08 10 12 14 16 18 20-5

0

5

10

15

20Loans

GDP

00 02 04 06 08 10 12 14 16 1840

60

80

100

120

140

160

04 06 08 10 12 14 16 18 20-10

0

10

20

30

00 02 04 06 08 10 12 14 16 18 200

20

40

60

80

Loans to non financial corporationsEuro area

(% over 3 months, annual rate)By country

(% year on year, adjusted for securitization)

Non financial corporations debt(% of GDP)

Non financial corporations debt service(% of income)

Italy

Germany

Spain

France

Italy

Germany

Spain

France

10 11 12 13 14 15 16 17 18 191

2

3

4

5

6

FranceGermany

Spain

Italy

Belgium

France

Germany

Spain

Italy

Belgium

Belgium

Belgium

69 December 2019Sources: Refinitiv Datastream, Federal reserve bank of Dallas, Candriam

The ECB policy has however secondary effects… in particular on the housing market

Spain

Italy

France

Belgium

Netherlands

Germany

Residential property prices(2003 = 100, nominal)

80

100

120

140

160

180

200

03 05 07 09 11 13 15 17 19

Residential property prices and income(1991 = 100)

Germany Italy Spain

Belgium Netherlands France

0

50

100

150

200

250

300

350

75 80 85 90 95 00 05 10 150

50

100

150

200

250

300

350

75 80 85 90 95 00 05 10 150

50

100

150

200

250

300

350

75 80 85 90 95 00 05 10 15

0

50

100

150

200

250

300

350

75 80 85 90 95 00 05 10 150

50

100

150

200

250

300

350

75 80 85 90 95 00 05 10 150

50

100

150

200

250

300

350

75 80 85 90 95 00 05 10 15

Residential property prices Disposable income per household


N.B. Gauging the degree of over-valuation is no easy task!

Over-valuation

Under-valuation

(%)Germany

-20

-10

0

10

20

07 08 09 10 11 1213 14 15 16 17 18

France

-10

0

10

20

30

07 08 09 10 11 1213 14 15 16 17 18

Belgium

-10

0

10

20

30

07 08 09 10 11 12 13 14 15 16 17 18

Italy

-20

-10

0

10

20

07 08 09 10 11 1213 14 15 16 17 18

Spain

-20

-10

0

10

20

30

40

50

07 08 09 10 11 1213 14 15 16 17 18

Netherlands

-20

-10

0

10

20

30

07 08 09 10 11 12 13 14 15 16 17 18

ECB residential property prices under / over valuation

Euro area

-10

-5

0

5

10

15

20

07 08 09 10 11 12 13 14 15 16 17 18

Model based over-/under-valuation


The ECB policy is also affecting banks’ interest margins

Deposits*

Apparent interest margin on outstanding amounts(%)

0

1

2

3

4

5

6

03 05 07 09 11 13 15 17 19

Loans*

Euro area

(*) Weighted average rates on outstanding amounts.

Italy Spain

Germany France

0

1

2

3

4

5

6

03 05 07 09 11 13 15 17 190

1

2

3

4

5

6

03 05 07 09 11 13 15 17 19

0

1

2

3

4

5

6

03 05 07 09 11 13 15 17 190

1

2

3

4

5

6

03 05 07 09 11 13 15 17 19

Loans* Loans*

Deposits* Deposits*

Loans*

Deposits*

Loans*

Deposits*

Margin

Margin

Margin Margin

Margin (loans minus deposit rates)

72 December 2019

With an ultra accommodative monetary policy, long term rates will remain low…

until there are clear signs of a sustained re-acceleration of activity


(III)

(II)

(I)

December 52019

0.1%

-0.3%

-0.1%

0.4%

Euro swap rates forecasts




10-year interest rate 0.6%

End of 2020

0.0%

0.5%

0.9%

06 08 10 12 14 16 18 20-3

0

3

6

9Portugal

FranceGermany

Spain

Italy

Belgium

10-year sovereign rates(%)

17 18 190

100

200

300

400

500

France

Spain

ItalyPortugal

10-year sovereign spread with Germany(basis points)

Belgium

73 December 2019

Sources : Refinitiv Datastream, Candriam

Memo: bond market equilibrium

Governments

-200

0

200

400

600

00 02 04 06 08 10 12 14 16 18

Net suppliers of debt securities(€ billion, moving average over 4Q, annual rate)

Net buyers of debt securities(€ billion, moving average over 4Q, annual rate)

-200

0

200

400

600

00 02 04 06 08 10 12 14 16 18

Other financial institutions(invest. funds, financial vehicles,…)

Banks

-200

0

200

400

600

00 02 04 06 08 10 12 14 16 18

-200

0

200

400

600

00 02 04 06 08 10 12 14 16 18

Banks

-200

0

200

400

600

00 02 04 06 08 10 12 14 16 18

Non financial corp.

-200

0

200

400

600

00 02 04 06 08 10 12 14 16 18

Rest of the world

-200

0

200

400

600

00 02 04 06 08 10 12 14 16 18

-200

0

200

400

600

00 02 04 06 08 10 12 14 16 18

Other financial institutions(invest. funds, financial vehicles…)

Insurance corp. &pension funds

-200

0

200

400

600

00 02 04 06 08 10 12 14 16 18

Non financial agents

-200

0

200

400

600

00 02 04 06 08 10 12 14 16 18

Rest of the world

ECB

-200

0

200

400

600

00 02 04 06 08 10 12 14 16 18

74 December 2019Sources: Refinitiv Datastream, OECD, Candriam

Italy

Spain

France

Belgium

Share of euro area countries’ GDP used to satisfy

US demand of motor vehicles (%, 2015)

0.0

0.2

0.4

0.6

0.8

Austria

Slovenia

Portugal

Estonia

Netherlands

Finland

Lithuania

Luxembourg

Malta

Latvia

Greece

Ireland

Cyprus

Germany

Since mid-November, the threat of US tariffs on autos has seriously diminished

Slovakia

German value added by sector(% of total value added, 2016)

1.5

1.7

1.7

2.0

3.5

0 1 2 3 4 5

Coke and refined petroleum products

Textiles, wearing apparel, leather and related products

Other transport equipment

Repair and installation of machinery and equipment

Non-metallic mineral products

Basic metals

Furniture; jewellery, toys…

Basic pharmaceutical products

Wood, paper…

Rubber & plastic

Computer & electronics

Electrical equipt

Food & beverage

Chemicals

Fabricated metal prod.

Machinery and equipment

23.4

4.7Motor vehicles, trailers and semi-trailers

Germany

95 98 01 04 07 10 13 16 1910

15

20

25

France

Spain

Italy

Manufacturing share in value added(%)

Belgium

If there are new shocks, fiscal policy could be used…

provided EU members accept to be more complacent with the existing rules!


Fiscal space(% of country GDP)

-3

-2

-1

0

1

2

3

4

5

DE

Debt brake

FR IT ES BE NL

No more effort

No more effort

(*) Stability and Convergence Program

SCP*

SCP*

1/20 rule

1/20 rule

Debt brake

Debt brake

Germany(% of GDP)

Government primary balance

Government debt

20

40

60

80

100

95 00 05 10 15 20 25 30 35

-6

-4

-2

0

2

4

95 00 05 10 15 20 25 30 35

“We need more expansion, more investment. Europe can’t be the onlyzone not to do so. I think that’s also why the debate about the 3% ofnational budgets and the 1% for the European budget, belongs in thepast century.”Emmanuel Macron, The Economist

04 06 08 10 12 14 16 18-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

France

Germany

Spain

Italy

Government net investment(% of country GDP)

Belgium

Netherlands


More euro area integration / risk sharing will only take place in a distant future… at best!

Olaf Scholz just published pre-conditions to an EU bank depositreinsurance

1/ Having common insolvency and resolution proceduresfor banks (we already have common resolution rules for large,systemically relevant banks but smaller banks fall under thedifferent national insolvency laws).2/ Reducing the number of non-performing loans and tacklingthe risks associated with sovereign debt. Sovereign bonds arenot a risk-free investment and should not be treated assuch.3/ In the case of a bank failure, a three-tier mechanism wouldapply. First, the resources of the national deposit guaranteescheme would be used. Second, where national capacities havebeen exhausted, a European deposit insurance fund,administered by the Single Resolution Board, would providelimited additional liquidity through repayable loans. Third, whereadditional financing may be necessary, the relevant memberstate would step in. A limited loss coverage component for the

European deposit insurance fund could be considered, once all

the elements of the banking union have been fully implemented.

4/ Having a uniform taxation of banks in the EU.

98 00 02 04 06 08 10 12 14 16 18 200

2

4

6

8

10

12

14

France

Germany

Spain

Italy

Public debt held by banks(% of banks’ assets)The path towards a banking union is likely to be long!

Not only is the initial size of the euro area budgetary instrument forconvergence and competitiveness (BICC) embryonic*, but the idea of acounter-cyclical mechanism to help a country in crisis is far from initialambitions: at best 20% of this Budget could be used to deal with a country'semergency situation (most will be allocated according to population andGDP per capita)... with a 25% co-financing of the country which couldpossibly be reduced by half in case of "serious economic circumstances".

(*) It is widely expected that the instrument will draw on funds assigned to the Reform Delivery Tool in theCommission proposal for the 2021-2027 EU budgetary package. The RDT should have an envelope of €25billion, of which €17 billion would be allocated to the 19 euro area countries over the period.

The path towards a euro budget is proving difficult!

5b. Higher trend productivity would help meet some of the coming challenges…

December 2019


Without a productivity revival, growth perspectives for the euro area look bleak

Long term real GDP growth(change over 10 years in %, annual rate)

Productivity(GDP per person employed)

Population aged 25 to 69-year old-1

0

2

4

6

70 78 86 94 02 10 18 26 34

Euro area

GDP

Average overthe next 10 years

0.5

Italy

-1

0

2

4

6

70 78 86 94 02 10 18 26 34

GDP

FranceGermany

-1

0

2

4

6

70 78 86 94 02 10 18 26 34-1

0

2

4

6

70 78 86 94 02 10 18 26 34

GDPGDP

0.91.3

2019-29

-1

0

2

4

6

70 78 86 94 02 10 18 26 34

Spain

1.2

GDP

GDP Oxford economics forecast

1.1

GDP with no productivity revival

79 December 2019Sources: European Commission, Refinitiv Datastream, Candriam

Higher trend productivity would loosen the constraints

aging imposes on the rise of living standards (I)…

Euro area

ChinaUnited States

10

20

30

40

50

60

50 60 70 80 90 00 10 20 30 40

Euro area countries

Germany

Belgium

France

10

20

30

40

50

60

50 60 70 80 90 00 10 20 30 40

Italy

Spain

0

10

20

30

40

50

60

50 60 70 80 90 00 10 20 30 40

Old-age dependency ratios(%)

JapanSelected countries

�� ~

�� 1 � ��

Long term GDP per capita growth trends (% annual rate, real)

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

DE FR IT ES BE

2025-35

87-97

09-19

97-07


Higher trend productivity would loosen the constraints

aging imposes on the rise of living standards (II)…

Factors contributing to long term GDP per capita growth trends(change over 10 years in %, annual rate)

Productivity(GDP per person employed)

Unemployment rate

Participation rate

Old-age dependencyYoung-age dependency

GDP per capita

-2

-1

0

1

2

3

90 95 00 05 10 15 20 25 30 35-2

-1

0

1

2

3

90 95 00 05 10 15 20 25 30 35-2

-1

0

1

2

3

90 95 00 05 10 15 20 25 30 35

-2

-1

0

1

2

3

90 95 00 05 10 15 20 25 30 35-2

-1

0

1

2

3

90 95 00 05 10 15 20 25 30 35-2

-1

0

1

2

3

90 95 00 05 10 15 20 25 30 35

-2

-1

0

1

2

3

90 95 00 05 10 15 20 25 30 35-2

-1

0

1

2

3

90 95 00 05 10 15 20 25 30 35-2

-1

0

1

2

3

90 95 00 05 10 15 20 25 30 35

France Italy Spain

-2

-1

0

1

2

3

90 95 00 05 10 15 20 25 30 35

-2

-1

0

1

2

3

90 95 00 05 10 15 20 25 30 35

-2

-1

0

1

2

3

90 95 00 05 10 15 20 25 30 35

Germany

… and would help stabilize debt to GDP ratios!


-6

-4

-2

0

2

4

95 00 05 10 15 20 25 30 35-6

-4

-2

0

2

4

95 00 05 10 15 20 25 30 35

Government primary balance(% of GDP)

Germany France

-2

0

2

4

6

8

95 00 05 10 15 20 25 30 35

Italy

Stable balance

-6

-4

-2

0

2

4

95 00 05 10 15 20 25 30 35

Spain

Aging related rise in government expenditures

(% of GDP over 2020-40)

-1

0

1

2

3

4

IT NL BEDE IE ES AT PT FI FRGR

Pension expenditure

Other With aging

40

60

80

100

120

95 00 05 10 15 20 25 30 3520

40

60

80

100

95 00 05 10 15 20 25 30 35

Government debt(% of GDP)

Germany France

70

90

110

130

150

95 00 05 10 15 20 25 30 35

Italy

30

50

70

90

110

95 00 05 10 15 20 25 30 35

Spain

Stable balance

With agingWith aging & 1% higher growth

Higher productivity would also give Europe more margins of maneuver

to meet environmental challenges

82 December 2019

Current status of the control variables for seven of the planetary boundaries

Beyond zone of uncertainty (high risk)

In zone of uncertainty (increasing risk)

Below boundary (safe)

Boundary not yet quantified

This chart was taken from ‘Planetary Boundaries: Guiding Human Development on a Changing Planet’, Science magazine, February 2015.

December 2019

5

6. UNITED KINGDOMNot yet out…


Despite more support being provided by public consumption, growth is weakening

(*) Confederation of British Industry

GDP(% year on year)

CBI survey(volume of expected output)[R.H.S.]

Contributions to GDP growth(% year on year)

-2

-1

0

1

2

3

4

13 14 15 16 17 18 19

-2

-1

0

1

2

3

4

13 14 15 16 17 18 19-2

-1

0

1

2

3

4

13 14 15 16 17 18 19

Equipmentinvestment

GDP

Net exports

GDP


Invest. in structures

GDP

Government expenditures

Residentialinvestment

Consumption

GDP growth and CBI survey*

04 06 08 10 12 14 16 18 20-60

-40

-20

0

20

40

-8

-6

-4

-2

0

2

4

6


The effect of lingering uncertainty is more and more visible

-20

-10

0

10

13 14 15 16 17 18 19

Consumer confidence

Consumer confidence

Financial situation

SavingsUnemployment

General economic situation

Brexit referendum

Equipment investment and perceived demand

08 10 12 14 16 18-60

-40

-20

0

20

40

-30

-20

-10

0

10

20

Equipment investment(% year on year)

Perceived demand(EC survey)[R.H.S.]

Brexit referendum

08 10 12 14 16 18 20-15

-10

-5

0

5

10

15

-80

-60

-40

-20

0

20

40

60

Export order book(change over 1 year)

Export orders(smoothed over 2 months)

Exports (% year on year, volume)[R.H.S.]

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economic and financial outlook · 2019-12-12 · final use of domestic output exports of interm....

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