eurozone - bbva research · eurozone watch │ december 2016 2 key messages: gaining some momentum...

EUROZONE ECONOMIC WATCH

DECEMBER 2016

EUROZONE WATCH │ DECEMBER 2016

2

Key messages: gaining some momentum by year-end, though we

remain cautious on the outlook for the coming months

• Improving confidence in 4Q16 across the board proved the eurozone resilience after political events

since the summer, while leading components suggest a slightly more optimistic outlook for coming

months supported by increasing export orders and the depreciation of the euro.

• Although hard data are mixed so far, the strength of consumption remains on track, but concerns about

the weakness of investment have not been dispelled. Nonetheless, beyond data volatility up to

October, positive underlying signs are taking root.

• Our MICA-BBVA model, with still limited data, estimates quarterly GDP growth in the eurozone to

gain some momentum to 0.4/0.5% QoQ in 4Q16, after growth of 0.3% in the previous two quarters.

• Inflation is picking up as expected, given the energy prices’ base effects, but core measures remain

subdued. We continue to expect headline inflation to increase in coming months (to around 1% YoY in

December), but to remain clearly below the ECB target in the medium-run.

• The ECB extended QE up to the end of 2017, but lowered monthly asset purchases (from €80 to

€60bn) and included lower maturity assets in the purchase program.

• We remain cautious and maintain our GDP growth projections for the eurozone at 1.6% in 2016

(though it could be 1.7%) and 1.5% in 2017.

• Risks remain tilted to the downside and are mostly political, both at national and regional level, but

derive also from financial sector fragilities and public debt sustainability in some countries.


ECONOMIC DEVELOPMENTS

GDP growth accelerates slightly in 4Q16…

3

GDP, CONTRIBUTION BY COMPONENTS

(%QoQ, pp)

GDP AND MICA FORECASTS

(%QoQ)

• GDP growth stable in 3Q16, (0.3%

QoQ) thanks to stronger consumption

and despite low investment and a

negative contribution from net exports

Source: Eurostat and BBVA Research

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

3Q

10

4Q

10

1Q

11

2Q

11

3Q

11

4Q

11

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14

2Q

14

3Q

14

4Q

14

1Q

15

2Q

15

3Q

15

4Q

15

1Q

16

2Q

16

3Q

16

4Q

16

CI 20% CI 40% CI 60% Observed

• Domestic demand continues to

support growth thanks to the strength of

the labor market and favorable policies,

while some tailwinds blow again

(improving global demand and euro

depreciation)

• Early indicators, still scarce, suggest

that the economy could be gaining

traction in 4Q as the eurozone has

shown resilience to increased

uncertainty

0.45

-1.5

-0.5

0.5

1.5

2.5

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14

2Q

14

3Q

14

4Q

14

1Q

15

2Q

15

3Q

15

4Q

15

1Q

16

2Q

16

3Q

16

4Q

16

Imports ExportsChange in inventories Gross fixed capital formationPublic consumption Private consumptionReal GDP



… underpinned by an acceleration in Germany and France by year

end, while growth could slow in Italy

4

GDP, CONTRIBUTION BY COMPONENTS

(%QoQ, pp)

0.4 0.3 0.2

0.8

-10-8-6-4-20246810

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

4Q

15

1Q

16

2Q

16

3Q

16

4Q

16 (

f)

4Q

15

1Q

16

2Q

16

3Q

16

4Q

16 (

f)

4Q

15

1Q

16

2Q

16

3Q

16

4Q

16 (

f)

4Q

15

1Q

16

2Q

16

3Q

16

4Q

16 (

f)

Germ

any

Fra

nce

Ita

ly

Spain

Germany France Italy Spain DifferenceGDP levelrelative to

2008

Private consumption Public consumptionGross fixed capital formation Change in inventoriesExports ImportsReal GDP Eurozone GDP

• Data for 4Q16 point to a GDP growth

acceleration in Germany (BBVAe:

0.4% QoQ after 0.2% QoQ) on the

back of improved net exports, and

France (BBVAe: 0.3% QoQ after

0.2% QoQ)

• In contrast, Italy growth could slow

again in 4Q16 (BBVAe: 0.2% QoQ

after 0.3% QoQ in 3Q16)

• Spain continues to outperform

GDP growth in the region (BBVAe:

0.8% QoQ) driven by both private

consumption and external demand




Confidence improved in 4Q across sectors, showing resilience to

political uncertainty

5 Source: Eurostat and BBVA Research

PMI AND GDP

(index, %QoQ) ESI AND GDP

(index, %QoQ)


• Confidence data so far continue to show the

economy's resilience to increasing uncertainty since the

summer, with manufacturing increasing strongly driven by

expectations on global demand and a weaker euro

-0.6

-0.3

0.0

0.3

0.6

0.9

46

48

50

52

54

56

Jun-1

3

Sep

-13

Dec-1

3

Ma

r-1

4

Jun-1

4

Sep

-14

Dec-1

4

Ma

r-1

5

Jun-1

5

Sep

-15

Dec-1

5

Ma

r-1

6

Jun-1

6

Sep

-16

Dec-1

6

Real GDP (% QoQ) PMI

Manufacturing PMI Services PMI

PMIs level

GDP (% QoQ)

-3

-2

-1

0

1

2

88

92

96

100

104

108

Ma

y-13

Aug

-13

Nov-1

3

Fe

b-1

4

Ma

y-14

Aug

-14

Nov-1

4

Fe

b-1

5

Ma

y-15

Aug

-15

Nov-1

5

Fe

b-1

6

Ma

y-16

Aug

-16

Nov-1

6

Real GDP (% YoY) ESI

ESI level

GDP (% YoY)

• But we remain cautious as political events in coming

months could end up weighing on confidence



Manufacturing and services’ PMIs improved in all core countries in

4Q, although German services slowed in December

6

PMI

(level)


44

46

48

50

52

54

56

58

44

46

48

50

52

54

56

58

Oct-16 Nov-16 Dec-16 Oct-16 Nov-16 Dec-16 Oct-16 Nov-16 Oct-16 Nov-16

1Q16 2Q16 3Q16 4Q16 1Q16 2Q16 3Q16 4Q16 1Q16 2Q16 3Q16 4Q16 1Q16 2Q16 3Q16 4Q16

Germany France Italy Spain

PMI Composite PMI Manufacturing PMI Services

55



Stable industrial output in October, though capital goods’ production

accelerated at the beginning of 4Q …

7 *October with respect to three previous months


INDUSTRIAL PRODUCTION

(%QoQ, pp)

IP CAPITAL, INVESTMENT IN MACHINERY AND EQUIPMENT

AND UTILIZATION CAPACITY

(%QoQ, %)

• Industrial production dropped 0.1% MoM in October

after falling by 0.9% MoM in September, remaining flat

with respect to 3Q16 (0.4% QoQ)


0.8

-0.2

0.4

*0.0

-1.0

-0.5

0.0

0.5

1.0

1.5

97

98

99

100

101

102

103

104

Jul-1

2

Oct-

12

Jan-1

3

Apr-

13

Jul-1

3

Oct-

13

Jan-1

4

Apr-

14

Jul-1

4

Oct-

14

Jan-1

5

Apr-

15

Jul-1

5

Oct-

15

Jan-1

6

Apr-

16

Jul-1

6

Oct-

16

IP (2012=100) IP (% QoQ)

IP (level)

IP (% QoQ)78

79

80

81

82

83

84

-4

-3

-2

-1

0

1

2

3

4

Apr-

12

Jul-1

2

Oct-

12

Jan-1

3

Apr-

13

Jul-1

3

Oct-

13

Jan-1

4

Apr-

14

Jul-1

4

Oct-

14

Jan-1

5

Apr-

15

Jul-1

5

Oct-

15

Jan-1

6

Apr-

16

Jul-1

6

Oct-

16

Investment M&E (% QoQ) IP Capital (% QoQ)

Capacity Utilization (%)

Capacity utilization(%)

Inv. M&E, IP capital (% QoQ)

• Strong production of capital and durable consumer

goods along with high capacity utilization suggest some

recovery in equipment and machinery investment over

4Q16



… which should foster investment towards year-end after a break in

3Q

8

GROSS FIXED CAPITAL FORMATION, CONTRIBUTION BY COMPONENT

(%QoQ, pp)

• Mixed figures of Machinery and

Equipment (M&E) in core countries,

with a lower decline and an

acceleration in Germany and Italy

during 3Q …

• … while a deceleration and

weakening of M&E in Spain and

France was observed

• Construction accelerates in

Germany and France, while falls in

Italy during 3Q


-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

3Q

15

4Q

15

1Q

16

2Q

16

3Q

16

3Q

15

4Q

15

1Q

16

2Q

16

3Q

16

3Q

15

4Q

15

1Q

16

2Q

16

3Q

16

3Q

15

4Q

15

1Q

16

2Q

16

3Q

16

3Q

15

4Q

15

1Q

16

2Q

16

3Q

16

Eurozone Germany France Italy Spain

Intellectual Property Cultivated Biological Assets

Machinery, Equipment & Weapons Systems Construction

GFCF



Flat industrial output in core countries during 4Q with the exception of

France, but confidence suggests an improvement in coming months

9

INDUSTRIAL PRODUCTION

(%QoQ, pp)

*4Q16 calculated using October data


0.0

-0.4

0.0 0.1

1.1

0.1

2.4

0.71.0

88

90

92

94

96

98

100

102

104

106

108

110

112

-3

-2

-1

0

1

2

3

4Q

15

1Q

16

2Q

16

3Q

16

4Q

16

4Q

15

1Q

16

2Q

16

3Q

16

4Q

16

4Q

15

1Q

16

2Q

16

3Q

16

4Q

16

4Q

15

1Q

16

2Q

16

3Q

16

4Q

16

4Q

15

1Q

16

2Q

16

3Q

16

4Q

16

3Q

15

4Q

15

1Q

16

2Q

16

3Q

16

3Q

15

4Q

15

1Q

16

2Q

16

3Q

16

4Q

15

1Q

16

2Q

16

3Q

16

4Q

16

4Q

15

1Q

16

2Q

16

3Q

16

4Q

16

Germany France Italy Spain Portugal Austria Belgium Finland Netherlands

IP (% QoQ) IP (2012=100)

IP (level)

IP (% QoQ)

3.3



Exports slowed in October, but looking through volatility they are

improving in the second half of the year


TRADE BALANCE (€ bn, %GDP)

EXPORTS CONTRIBUTION BY DESTINATION

(%QoQ, pp)


-4

-3

-2

-1

0

1

2

3

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14

2Q

14

3Q

14

4Q

14

1Q

15

2Q

15

3Q

15

4Q

15

1Q

16

2Q

16

3Q

16

Other EU countries United StatesChina Asia (excl China)LatAm Rest of worldTotal Exports

0.5

0.5

0.7

0.8

0.90.8

0.0

0.2

0.4

0.6

0.8

1.0

1.2

140

145

150

155

160

165

170

175

180

Jul-1

2

Oct-

12

Jan-1

3

Apr-

13

Jul-1

3

Oct-

13

Jan-1

4

Apr-

14

Jul-1

4

Oct-

14

Jan-1

5

Apr-

15

Jul-1

5

Oct-

15

Jan-1

6

Apr-

16

Jul-1

6

Oct-

16

Trade balance (€ bn) Imports

Exports Trade balance (%GDP)

Exports, Imports & Trade balance

Trade Balance (% GDP)



The rebound of retail sales in October points to private consumption

remaining as the main driver of growth

11 *October with respect to three previous months


RETAIL SALES AND CONSUMER CONFIDENCE

(%QoQ, pts)

RETAIL SALES AND TOTAL WAGE BILL

(%YoY)


-5

-4

-3

-2

-1

0

1

2

3

4

1Q

07

3Q

07

1Q

08

3Q

08

1Q

09

3Q

09

1Q

10

3Q

10

1Q

11

3Q

11

1Q

12

3Q

12

1Q

13

3Q

13

1Q

14

3Q

14

1Q

15

3Q

15

1Q

16

3Q

16

Employees Real compensation

Total wage bill Retail sales

• Retail sales increased strongly in October (0.8% QoQ)

and reverted the moderation observed in the previous two

quarters (around 0.3% QoQ)

0.2 0.4

*0.8

-30

-25

-20

-15

-10

-5

0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

Ma

y-12

Aug

-12

Nov-1

2

Fe

b-1

3

Ma

y-13

Aug

-13

Nov-1

3

Fe

b-1

4

Ma

y-14

Aug

-14

Nov-1

4

Fe

b-1

5

Ma

y-15

Aug

-15

Nov-1

5

Fe

b-1

6

Ma

y-16

Aug

-16

Nov-1

6

Retail Sales (% QoQ) Consumer Confidence

Retail Sales (% QoQ)

ConsumerConfidence

• Consumer confidence rose in November to its highest

this year, which together with labour market gains should

support household spending despite increasing inflation



Employment growth slowed in 3Q mainly driven by weaker public and

private services …


JOB GROWTH CONTRIBUTION BY COUNTRY

(pp, %QoQ)

JOB GROWTH CONTRIBUTION BY SECTOR

(pp, %QoQ)


-0.4

-0.3

-0.2

-0.1

0.0

0.1

0.2

0.3

0.4

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14

2Q

14

3Q

14

4Q

14

1Q

15

2Q

15

3Q

15

4Q

15

1Q

16

2Q

16

3Q

16

Germany France Italy Spain Others Total

• Lower employment growth contribution from

Germany and Italy in 3Q16, but higher from Spain

• By sector, lower contributions from public and private

services, which add to trade and travel activities

-0.4

-0.3

-0.2

-0.1

0.0

0.1

0.2

0.3

0.4

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14

2Q

14

3Q

14

4Q

14

1Q

15

2Q

15

3Q

15

4Q

15

1Q

16

2Q

16

3Q

16

Agriculture & fishing IndustryConst. & real state Trade & travelInformation & comm. Fin & private servicesPublic services Total



… with weakness mostly in Germany and Italy, while job creation

continued in France and Spain

13

JOB GROWTH CONTRIBUTION BY SECTOR

(pp, %QoQ)

• Public employment explained all job

growth in Germany, offsetting the

decline of private employment growth

• Job destruction in Italy in 3Q driven

by construction, trade and travel

activities

• Employment growth in France and

Spain still supported by services


-0.3

0.0

0.3

0.5

0.8

1.0

-0.1

0.0

0.1

0.2

0.3

0.4

3Q

15

4Q

15

1Q

16

2Q

16

3Q

16

3Q

15

4Q

15

1Q

16

2Q

16

3Q

16

3Q

15

4Q

15

1Q

16

2Q

16

3Q

16

3Q

15

4Q

15

1Q

16

2Q

16

3Q

16

Germany France Italy (rh axis) Spain (rh axis)

Agriculture & fishing Industry Const. & real state

Trade & travel Information & comm. Fin & private services

Public services Total


Sep-16 Oct-16

Eurozone Germany France Italy Spain


Unemployment continued to decline at the beginning of 4Q, after

some stabilization by mid-year


UNEMPLOYMENT RATE BY COUNTRY

(%) ANNUAL UNEMPLOYMENT CHANGE BY GENDER & AGE

(millions)


• Jobless rate continues to fall at a low pace, driven

mostly by Spain

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

Oct-

13

De

c-1

3

Feb

-14

Apr-

14

Jun-1

4

Aug-1

4

Oct-

14

De

c-1

4

Feb

-15

Apr-

15

Jun-1

5

Aug-1

5

Oct-

15

De

c-1

5

Feb

-16

Apr-

16

Jun-1

6

Aug-1

6

Oct-

16

Women 25-74Y Men 25-74Y Men < 25Y

Women < 25Y Total

• Unemployed decline is observed mostly among the

experienced population

0

5

10

15

20

25

Oct-15



Headline inflation accelerated slightly in November but the core

measure remained subdued at low levels


INFLATION AND CONTRIBUTION OF COMPONENTS

(%YoY, pp) INFLATION AND TRIMMED MEAN

(%YoY)


• Eurozone HCPI came out as expected at 0.6% YoY in

November, slightly accelerating (0.5% YoY in October),

and marked the highest figure since April 2014

• The core measure remained stable at 0.8% YoY

• We expect increases in inflation during coming

months, while energy base effects will continue to ease

-1,5

-1,0

-0,5

0,0

0,5

1,0

1,5

Nov-1

4

Jan-1

5

Ma

r-1

5

Ma

y-15

Jul-1

5

Sep

-15

Nov-1

5

Jan-1

6

Ma

r-1

6

Ma

y-16

Jul-1

6

Sep

-16

Nov-1

6

Services Non-energy industrial goods

Processed Food Energy

Unprocessed Food HICP (% y/y)

0

1

2

3

Oct-

04

Oct-

05

Oct-

06

Oct-

07

Oct-

08

Oct-

09

Oct-

10

Oct-

11

Oct-

12

Oct-

13

Oct-

14

Oct-

15

Oct-

16

Trimmed mean inflation Core inflation



Inflation is picking up in most countries in 4Q16

16

HEADLINE AND CORE INFLATION

(%YoY)

*4Q16 calculated using October and November data


0.1 0.1 0.1

-0.6

0.5 0.8

0.6

-0.2 0.2

-1.1

0.0

1.0

0.5 0.7

0.4 0.7

1.7 1.6

0.5 0.9

0.1

1.2

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

2Q

16

3Q

16

4Q

16

2Q

16

3Q

16

4Q

16

2Q

16

3Q

16

4Q

16

2Q

16

3Q

16

4Q

16

2Q

16

3Q

16

4Q

16

2Q

16

3Q

16

4Q

16

2Q

16

3Q

16

4Q

16

2Q

16

3Q

16

4Q

16

2Q

16

3Q

16

4Q

16

2Q

16

3Q

16

4Q

16

2Q

16

3Q

16

4Q

16

Germany France Italy Spain Portugal Austria Belgium Finland Netherlands Greece Ireland

Headline Inflation (% YoY) Core Inflation (% YoY) Headline Inflation 2015 Core Inflation 2015

• By country, HCPI inflation picked up in France (0.7% YoY) and Italy (0.1% YoY) in November, while it remained stable in

Spain (0.5% YoY) and Germany (0.7% YoY)

EUROZONE ECONOMIC WATCH

DECEMBER 2016


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opinions or estimations regarding the date of issue of the report, prepared by BBVA or obtained from or based on sources we consider to

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eurozone - bbva research · eurozone watch │ december 2016 2 key messages: gaining some momentum...

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