EUROPEAN
ECONOMICS
Macro
European Economics
Q4 2012
A long and winding road
The promise of ECB intervention means fears of eurozone disaster have receded...
…but with the economy still slowing, unemployment rising and more austerity
ahead…
…there will be plenty more twists and turns on the road to genuine fiscal, financial
and political integration
Disclosures and Disclaimer This report must be read with the disclosures and analyst
certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it
Macro
European Economics
Q4 2012
Summary
The eurozone crisis may have abated. But it is definitely not over.
ECB president Mario Draghi’s summer promise to do “whatever it takes” to preserve the euro has certainly led
to a sharp improvement in market sentiment, and the mood has been further helped by some significant
political events – the first hint of a roadmap at the end of June EU summit and the German constitutional court
ruling on the legality of the ESM in September, for example.
But investors, companies and consumers remain nervous. They still worry that the ECB’s actions will do all
too little to lift the eurozone economy out of recession, and the protests in Greece, Spain and Portugal, as well
as the secessionist drive in Catalonia, are adding to fears that the austerity is already reaching the limits of
acceptability.
We have had periods of relative stability and market rallies before in the past three years, including earlier this
year after the announcement of the Long-Term Refinancing Operations. It is still too early to say whether this
rally will prove more durable. And although the headlines have been big, the changes to our forecasts this
quarter are modest. The eurozone recession is set to persist in the coming months and we expect a gradual
upturn in world trade to deliver only a modest recovery next year: we have lowered our 2013 GDP forecast
from 0.3% to -0.1%. The outlook is only marginally better in the UK. We are now forecasting a small fall in
full year GDP in 2012 and have cut our 2013 forecast for growth sharply.
In this report we look at what ECB action has already achieved, what it is attempting to do over the medium
term and why its efforts to keep some kind of lid on sovereign bond yields might be more successful than
previously. But while the ECB backstop can prevent a catastrophe, it can’t single-handedly solve the crisis. By
its own admission it is trying to address the “convertibility” or euro break-up risk, but only governments can
improve their credit risk, both by delivering the required fiscal consolidation and structural reforms and by all
the member states taking much more far-reaching steps towards closer financial sector integration, a more
centralised fiscal framework and a new governance structure.
We look at progress so far on fiscal consolidation and structural reform in the most-affected countries and
conclude that heavy indebtedness will remain a drag on growth for the foreseeable future. There is some
evidence of improving competitiveness and successful export diversification in the periphery, but low potential
growth rates will make fiscal consolidation a long and arduous task. Even Ireland, which is ‘best in class’, has
at least another three years of austerity to follow the five it has already endured. Others are less advanced and in
deeper recessions. As recent strikes and unrest in Greece, Spain and Portugal show, austerity is becoming less
and less palatable to voters. The risk is of further upheaval, particularly as the public sector job losses still have
some way to run in many countries.
1
2
Macro
European Economics
Q4 2012
Any suggestion that governments are wavering on reform, or that populations’ acceptance of austerity (or the
euro) is starting to wane, will spell trouble for markets. While market pressure will no doubt incentivise
governments to continue with reform and fiscal consolidation, it is also likely to push more countries into
requesting external assistance. Spain looks likely to be the first, most likely in October. The fiscal consolidation
process is generally on track in Italy, but its financing needs are high, and with the elections looming in April
2013, some kind of precautionary programme, while no certainty, seems quite likely there by early 2013.
Meanwhile discussions about a further extension to the second Greek Troika programme will likely continue
through October and maybe November.
We have heard little recently on the required new institution-building, other than on plans for a single bank
supervisor. This was meant to be the most straightforward part, but has already amply demonstrated the
divergence of opinions between member states and is unlikely to be in place as soon as hoped. It is just a taster
of what lies ahead in terms of governments having to relinquish sovereignty to eurozone-wide institutions. The
rest of the building blocks, not just for the banking union, but for the fiscal union, have yet to be outlined, but
the European Council meeting in mid-October should present some preliminary ideas. Heads of government
will need to take decisions on what is achievable and then set out on the very long road to implementing them.
The ECB has bought time. Now governments need to do the rest. Our underlying assumption remains that the
eurozone will ultimately reach this destination, but not without further twists and turns along the way.
HSBC forecast revisions
_________________GDP (%Yr) __________________ _____________Consumer prices (%Yr) _____________
______ 2012f ________ ________ 2013f _________ ________ 2012f _________ ________ 2013f ________
Published in -> Previous Latest Previous Latest Previous Latest Previous Latest
Eurozone -0.6 -0.6 0.3 -0.1 2.3 2.5 1.6 1.8
Germany 0.8 0.9 1.5 0.9 2.0 2.1 1.6 2.1
France 0.3 0.2 1.3 0.9 2.2 2.3 1.7 1.8
Italy -2.0 -2.5 -0.3 -1.1 3.2 3.4 1.7 2.3
Spain -2.0 -1.5 -1.3 -2.0 2.0 2.4 1.9 2.5
Other Western Europe 0.6 0.5 1.8 1.4 2.0 1.9 1.7 2.0
UK 0.1 -0.1 1.8 1.1 2.7 2.7 1.9 2.5
Norway 3.0 3.6 3.1 3.0 0.8 0.7 1.8 1.6
Sweden 1.1 0.8 2.1 2.1 1.2 1.1 1.8 1.2
Switzerland 1.5 0.9 1.5 1.4 -0.4 -0.6 0.4 0.3
Other Europe
Hungary -0.5 -1.0 1.4 1.3 5.4 5.7 3.4 3.7
Poland 2.7 2.5 3.1 2.0 3.8 3.9 2.6 2.7
Romania 1.0 1.1 3.0 2.5 3.0 3.1 3.9 3.5
Turkey 2.0 2.7 3.5 3.8 9.3 9.0 7.9 7.3
Czech Republic -0.5 -0.9 1.5 1.0 3.5 3.3 2.1 2.0
Russia 3.0 3.0 2.5 2.5 5.0 5.2 7.5 7.4
Source: HSBC estimates
Macro
European Economics
Q4 2012
Key Forecasts
Key forecasts
___________GDP ___________ _________ Inflation___________ ______ Unemployment _______ ____ Consumer Spending _____
% Year 2011 2012f 2013f 2011 2012f 2013f 2011 2012f 2013f 2011 2012f 2013f
Eurozone 1.5 -0.6 -0.1 2.7 2.5 1.8 10.2 11.4 12.1 0.1 -0.8 -0.2
Germany 3.1 0.9 0.9 2.5 2.1 2.1 7.1 6.8 6.7 1.7 0.9 1.2
France 1.7 0.2 0.9 2.3 2.3 1.8 9.7 10.2 10.5 0.2 0.1 0.5
Italy 0.5 -2.5 -1.1 2.9 3.4 2.3 8.4 10.6 11.5 0.2 -3.4 -1.3
Spain 0.4 -1.5 -2.0 3.1 2.4 2.5 21.7 25.0 27.2 -1.0 -1.8 -1.8
Other Western Europe
UK 0.8 -0.1 1.1 4.5 2.7 2.5 10.2 11.4 12.1 -1.0 -0.1 1.3
Norway 2.5 3.6 3.0 1.3 0.7 1.6 0.0 0.0 0.0 2.4 3.7 4.5
Sweden 3.9 0.8 2.1 3.0 1.1 1.2 7.5 8.1 7.5 2.2 1.6 1.2
Switzerland 1.9 0.9 1.4 0.2 -0.6 0.3 2.8 2.9 3.1 1.2 2.3 1.6
Other Europe
Hungary 1.6 -1.0 1.3 3.9 5.7 3.7 10.7 11.1 10.9 0.2 -1.3 0.2
Poland 4.3 2.5 2.0 4.3 3.9 2.7 12.5 13.0 13.0 3.1 1.6 1.6
Romania 2.5 1.1 2.5 5.8 3.1 3.5 5.1 5.0 5.0 0.7 0.1 2.1
Turkey 8.5 2.7 3.8 6.5 9.0 7.3 9.8 10.0 9.0 7.7 0.0 3.0
Czech Republic 1.7 -0.9 1.0 1.9 3.3 2.0 9.8 10.0 9.0 -0.5 -2.8 0.3
Russia 4.3 3.0 2.5 8.5 5.2 7.4 15.4 13.8 12.7 6.8 5.5 4.5
Source: HSBC estimates
Consensus forecasts for 2012 GDP growth have been getting steadily
worse …
5
4
3
2
1
0
-1
% 2012 GDP forec ast
% Year
01-11
02-11
03-11
04-11
05-11
06-11
07-11
08-11
09-11
10-11
11-11
12-11
01-12
02-12
03-12
04-12
05-12
06-12
07-12
08-12
09-12
Western Europe Eastern Europe
Eurozone
Source: Consensus economics Source: Consensus Economics
5
4
3
2
1
0
-1
… as have 2013 growth forecasts but at a much lower rate
% Year 2013 GDP forecast
% Year
4
3
2
1
0
01-12
02-12
03-12
04-12
05-12
06-12
07-12
08-12
Western Europe Eastern Europe
Eurozone
09-12
4
3
2
1
0
3
4
Macro
European Economics
Q4 2012
Contents
Key Forecasts 3
A long and winding road 5
Turning the corner? 5
The central bank task 5
Challenges for governments 7
Reforms, reforms 13
Roadmap for integration 16
Life outside the euro isn’t easy either 20
Emerging Europe is slowing too 21
Periphery at a glance 23
Spain 25
Italy 26
Ireland 27
Greece 28
Portugal 29
Rescue Packages 30
Key European forecasts and
statistics 31
GDP 32
Consumer prices 33
Consumer spending 34
Budget balance 35
Debt 36
Unemployment 37
Demographics 38
Economic infrastructure 39
Eurozone 40
Germany 42
France 44
Italy 46
Spain 48
UK 50
Norway 52
Sweden 53
Switzerland 54
Hungary 55
Poland 56
Romania 58
Czech Republic 59
Russia 60
Turkey 62
Disclosure appendix 67
Disclaimer 68
Macro
European Economics
Q4 2012
A long and winding road
The promise of ECB intervention has pulled the eurozone back
from the brink once more …
… but with the economy still slowing, unemployment rising and
more austerity ahead …
… there will be plenty more twists and turns on the road to
genuine fiscal, financial and political integration
Turning the corner?
For much of the past three years, attempts to solve
the eurozone sovereign crisis appear to have been
a case of ‘one step forward, one step back’. Over
the summer months we had a rare period of a
couple of consecutive steps forward. The 28-29
June European Council summit, which in our
view represented an important first step from
coordination to genuine integration, did little to
impress the markets. But the subsequent
commitment by the ECB president Mario Draghi
to do “whatever it takes” to preserve the euro has
1. The rollercoaster continues
since led to a bond market rally on the scale that
followed the ECB announcement of the unlimited
three-year LTROs (chart 1) and this is before the
ECB has even bought a euro of bonds.
The central bank task
From SMP to OMT
% 2y r Bond Yields
8
7
6
5
4
3
2
1
0
EC B starts
buying Spanish
and Italian debt
EC B announces
3y r LTR Os
The initial market impact was in response to Mr
Draghi’s 26 July speech but, as further details
have become available, the ECB’s commitment
that, in exchange for countries meeting strict
conditions, it will undertake unlimited, but
Jan 11 Mar 11 May 11 Jul 11 Sep 11 Nov 11 Jan 12 Mar 12 May 12 Jul 12 Sep 12
Source: Bloomberg, Reuters
Draghi commits to do
"w hatev er it takes "
Spanish 2y r Bond Yields Italian 2y r Bond Yields
%
8
7
6
5
4
3
2
1
0
5
6
Macro
European Economics
Q4 2012
2. Outright monetary transactions (OMT): what we know and what we don’t
Measure OMT programme
Eligibility & Sequencing ECB will start purchasing a country’s bonds in the secondary market once:
1) the country has requested for assistance;
2) has reached an agreement on conditionality with the EFSF/ESM and signed a MoU – this can either be a full or a
precautionary programme but must include a primary market programme (PMP) as part of it; and
3) EFSF/ESM has started buying bonds in the primary market.
Bond purchases would be undertaken by the national central banks according to the ECB’s capital key.
Conditionality Strict conditionality will be imposed, ideally involving the IMF, and the ECB has said it will cease intervention in case
the member state does not fulfil these conditions. Part of the conditionality will be that the maturity structure of the
debt may not change so that governments do not put all new debt in the short end of the market to take advantage of
the new scheme.
Maturity Bond purchases would be focused on the short end of the curve, only bonds with three or fewer years until they
mature will be bought under the programme.
Size 1) No specific ceiling on spreads or yields. No outright limit on how many purchases the ECB can make of
government bonds.
2) Not restricted to only buy bonds that were issued before a government requested an OMT programme - ECB can
buy debt issued after the start of a programme with an implicit limit on it.
Seniority ECB will not have the preferred creditor status on its purchases.
Sterilisation Intervention will be sterilised with the ECB taking weekly deposits similar to the SMP.
Transparency ECB will publish the size of its purchases by bonds of each country bought every month.
Source: ECB, FT and HSBC
sterilised, purchases of government bonds and that
it will not be a preferred creditor on its future
purchases (table 2), has caused most asset classes
to rally strongly. But we shouldn’t get too carried
away. Ten-year yields on Spain and Italy are still
only back where they were in May and, in the
final days of September were rising again. The
really strong performance has actually been in
Ireland and Portugal, which, although they are
viewed as much less likely to pursue ECB support
via the OMT programme any time soon, have
seen a continuation of the spread narrowing which
began earlier this year for Portugal and before
that for Ireland.
The economic data has been much more
disappointing. Admittedly it is still early days, but
most sentiment indicators are still moving down
(charts 3 and 4). Both consumers and industry
have yet to be convinced that the eurozone crisis
has genuinely taken a turn for the better.
What is the ECB trying to achieve?
By the ECB’s own admission, it can only provide
a backstop. It aims to address severe distortions in
government bond markets which originate from
euro break-up fears and to ensure the proper
transmission of monetary policy to the real
economy throughout the monetary union. The fear
is that without such a policy there would be a risk
of such “destructive scenarios” that the ECB
would not be able to deliver price stability.
Certainly, this does have the potential to be a
much more genuine firewall than any of the
rescue mechanisms put in place over the past few
years because of the scale of the purchases that
could be made. But this is not the first time that
the ECB has found it necessary to step into
government bond markets. Why should this
initiative be any more successful? From the
markets’ perspective the key differences between
the OMT and the Securities Markets Programme
(SMP) is that the OMT is unlimited (the SMP was
always designed to be temporary and limited in
Macro
European Economics
Q4 2012
3. Companies have been less impressed than financial
markets....
Index
115
110
105
100
95
90
85
80
75
08 09 10 11 12
scale) and the ECB will not be senior. In total, the
SMP only purchased EUR220bn of five different
governments’ bonds in the nearly two years that it
was operational. To put this in perspective, it is
less than one year of Italian bond issuance.
The other key difference, and the one that Mr
Draghi tends to focus on, is that there will be
explicit, rather than implicit, conditionality. A
commitment to fiscal and structural reforms,
through an actual EFSF/ESM programme, is a
necessary pre-requisite for ECB action and
implementation of those reforms will be needed
for ongoing support. This also gives the ECB’s
policy greater legitimacy than the SMP. Under
the SMP, the Eurosystem was undertaking bond
purchases and therefore effectively mutualising
the debt of eurozone member states but with no
legal mandate or democratic legitimacy to do so.
Under the OMT the European Commission and
IMF will set and monitor the conditions.
Will it work?
Ifo industry e x pec tations (L HS)
ZEW econom ic ex pec tations (R HS)
Source: Centre for European Economic Research (ZEW), Institute for Economic
Research (IFO)
In dex
60
40
20
0
-20
-40
-60
-80
-100
The ECB has now accepted its role as a credible
lender of last resort but knows that it can’t singlehandedly
provide a permanent solution to the
crisis. It can merely buy time. For the market to
remain stable at these levels, investors will have
to make a leap of faith that governments will take
the necessary steps towards much greater
4. ...while consumers remain unimpressed
Index Consumer confidence
20
10
0
-10
-20
-30
-40
-50
07 08 09 10 11 12
EMU France Italy
Germany Spain
Source: Directorate General for Economic and Financial Affairs
financial, fiscal and political integration. But the
creditor nations within the monetary union will
only be prepared to go down that route if all of the
member states have shown that they can stabilise
their debt burdens and restore their
creditworthiness without requiring indefinite
assistance from the ECB. Therefore the ECB has
to try to provide incentives for governments to
continue the reform process.
Given that recent history has shown that the
urgency for reform has tended to fade whenever the
pressure from the market has eased, the ECB has
said it will not only cease purchases of the bonds of
a country but potentially even sell them if its
government steps out of line with regards to the
programme. Whether such a threat is credible we
will only discover over time. It should be borne in
mind, however, that the ECB wasted no time in
halting the SMP scheme for Italy when prime
minister Silvio Berlosconi stepped out of line.
Challenges for governments
Waiting for Spain
Index
20
10
0
-10
-20
-30
-40
-50
At the time of writing no country had actually
requested an EFSF/ESM programme, but Spain
was widely expected to do so before long. On
27 September, the government announced a new
reform programme alongside the 2013 budget.
7
8
Macro
European Economics
Q4 2012
5. EFSF/ESM Macro Economic Programmes: a precautionary, rather than a full-blown, programme would help a government to save face
Measure Precautionary Programme (enhanced conditions credit
line or ECCL)
Eligibility Activated when request made by country to Eurogroup
members. Can be drawn by way of loan/primary market
purchase by non-programme countries with sound policies
and fundamentals, but with some vulnerability. Aimed at
overcoming external shocks and to prevent a crisis from
occurring.
Conditionality Country to adopt corrective measures aimed at addressing
its weaknesses after consultation with EC and ECB.
Remains under enhanced surveillance by the EC. Failure to
meet these can result in closing of the credit line.
Size No upfront cap, but the typical size could vary between 2-
10% of GDP of the member state.
Duration One year with the possibility of renewing it for six months
twice.
Source: EFSF, HSBC
While the deficit projection for 2013 still looks
overly optimistic given the assumption that the
economy will only contract by 0.5% in 2013, the
reform package and planned spending cuts were
generally perceived as paving the way for a
EFSF/ESM programme. It included nearly all of
the measures recommended by the Commission
earlier this year. It also seems likely that it will be
a precautionary programme rather than a fullblown
macro-economic adjustment programme
(table 5) which would allow prime minister
Mariano Rajoy to at least nominally stand by his
election promise of not allowing Spain to go the
same way as Ireland or Portugal.
Nonetheless, Spain is still wary of relinquishing too
much sovereignty and is likely to resist any
demands for further austerity, and Mr Rajoy would
also prefer not to request assistance ahead of the
regional elections on 21 October. But the rise in
public protests in the final days of September and
the secessionist drive in Catalonia are already
pressuring markets, so Mr Rajoy may not be able to
wait that long before requesting assistance: Spain
Full macro economic adjustment programme
Activated only when a support request is made and a
country programme is negotiated with the EC, IMF and euro
area finance ministers and a MoU is signed. This would only
occur when the country is unable to borrow on markets at
acceptable rates.
Linked to strict policy conditions which are set out in a MoU.
The loan disbursement would be interrupted in case the
country fails to meet these conditions until the MoU is
renegotiated.
Maximum amount of a loan, its margin and maturity, and the
number of instalments to be disbursed are decided
unanimously by the euro area member states’ finance
ministers. Portugal’s EUR78bn package of EFSF/IMF
funding amounts to 45% of GDP.
A programme is typically for three years. Does not contain
any maturity limitations for the loans nor for the funding
instruments, to be defined case-by-case. Maturities to have a
minimum average of 15 years and up to 30 years.
has EUR20bn of bond redemptions falling due in
the last week of October.
Even assuming Spain does go into a programme,
it still means that its adjustment is closer to the
beginning rather than the end. The eurozone
member states that have gone into Troika
programmes have always seen their government
bond yields rise rather than fall after being
granted external assistance (see chart 6). As long
as the ECB clearly demonstrates its willingness to
undertake unlimited purchases this time, yields
should remain contained, which should help to
curb rising corporate borrowing costs at the same
time. This should also have some positive
confidence effects. Nonetheless, there would still
need to be a large amount of fiscal consolidation:
the primary surplus just doesn’t need to be quite
as big as under a higher effective interest rate.
Macro
European Economics
Q4 2012
6. A Troika programme has typically led to higher, not lower, yields – the ECB should mean it will be different for Spain
%
40
35
30
25
20
15
10
5
0
LTRO alt. EUR489bn
IMF-EU Greek loan & EFSF
Portugal bailout
LTRO
announcement and ECB
announcement
purchasing (SMP) begins ECB restarts
Jan-10 May -10 Sep-10 Jan-11 May -11 Sep-11 Jan-12 May -12 Sep-12
Source: Bloomberg, Reuters
10y r Gov ernme nt bond spreads ov er German Bunds
Italy going it alone?
Deauv ille
agreement
Ireland bailout
While Spain is currently centre stage, Italy is also
viewed as a potential candidate for requiring
ECB/ESM assistance in the coming months. The
budget deficit is much smaller than that of Spain:
even with a deep contraction in GDP of about
2.5% in 2012, Italy’s budget deficit should come
in below 3% of GDP. However, given the size of
its debt stock and low potential growth rate, a
renewed rise in borrowing costs would pose a big
challenge for Italy. Its annual bond issuance needs
are in the region of EUR200bn. The negative
impact that austerity is already having on the
economy means that the prime minister, Mario
Monti, will continue to resist any calls for more
aggressive fiscal consolidation, and will therefore
remain very reluctant to submit to EFSF/ESM
conditionality. Besides, if Spain goes into a
programme and the ECB starts to walk the talk,
then Italy would probably benefit. A continuation
of Mr Monti’s various reforms to raise long-term
potential growth should also help to reassure the
market. Nonetheless, the elections looming in
April 2013 could lead to political uncertainty and
concerns about the continuity of the reforms,
meaning that some kind of precautionary
programme for Italy cannot be ruled out.
SMP programme
LTRO alt. EUR529bn
Italy Spain Portugal Greece Ireland
No shortcuts for fiscal consolidation…
As we have discussed before, when the IMF first
signed a letter of intent with Greece in May 2010,
its projections showed that Greece would have
one more year of recession in 2011, but would be
roughly stable overall in 2011-2013, which would
allow the economy to return to primary surplus in
2012 and the debt burden would peak at just under
150% of GDP in 2013.
The latest projections suggest that, far from being
stable over that three-year period, the Greek
economy will actually contract by nearly 17%
(chart 7). Greece is still struggling to come up with
additional austerity measures and has also been
seeking an extra two years (until 2016) to achieve
the required fiscal consolidation.
7. Greece IMF GDP forecasts: the damage to the real economy
has been much worse than the programme ever envisaged
%Yr 2011 2012 2013 Cumulative
May-10 -2.6 1.1 2.1 0.5
Dec-10 -3.0 1.1 2.1 0.1
Mar-11 -3.0 1.1 2.1 0.1
Jul-11 -3.9 0.6 2.1 -1.3
Dec-11 -6.0 -3.0 0.3 -8.5
Mar-12 -6.9 -4.8 0.0 -11.4
Sep-12 (Consensus
Economics)
-6.9 -6.3 -3.3 -16.5
Source: IMF country reports, Consensus Economics
Draghi commits
to "do w hatev er it takes"
OMT
%
40
35
30
25
20
15
10
5
0
9
10
Macro
European Economics
Q4 2012
Greece may be an extreme example and no-one is
suggesting that any other member state is in such a
dire position. But the Greek projections show how
hard it was to appreciate in advance just how
damaging austerity on that scale would be for the
real economy when the private sector was not in a
position to compensate. Other countries have been
relatively successful, but even Ireland is a useful
reminder of the lengthy painful adjustment
associated with these kinds of programmes.
Ireland began its austerity programme very early – in
July 2008 when countries such as Spain (and most
other countries in the Western world, except Italy)
were providing a fiscal stimulus. It has delivered a
total cumulative fiscal consolidation between 2008
and 2012 of 13% of GDP, over half of which was
spending cuts. It also undertook a large internal
devaluation, returned to positive GDP growth and is
back in the market raising medium-to-long term
debt. Yet it will still have a budget deficit of about
8.3% of GDP this year. Hence it is projecting a
further 5% of GDP of fiscal consolidation over the
next three years (chart 8).
…which still has a long way to run
Nonetheless, Ireland is still further along in its
adjustment than the other most problematic member
states, particularly regarding shrinking the public
sector. Charts 10-15 speak for themselves. Not every
country provides a neat split between public and
private sector employment so, where it is not
available, we have used the IMF approach of
9. Official projections are still a little optimistic
8. Irish austerity: five years down; three to go
%GDP Ireland F iscal Consolidation
4
3
2
1
0
08 09 10 11 12f 13f 14f 15f
Ex penditure contribution R ev enue contribution
Source: IMF Ireland Country Report Seventh Review
aggregating the three sectors which are
predominantly public sector (public administration
& defence, education and health & social work). The
charts show that although Ireland had started to shed
public sector jobs by the end of 2008 and Greece
started in 2010, the Spanish public sector increased
public sector employment between 2008 and mid-
2011 by about 12%. Spain has only started to cut
jobs, largely through natural wastage over the past
year (see Spanish Labour Reforms: Protest or
Progress, 12 September 2012). Italy and Portugal do
not appear to have started yet. In contrast, the US
and, in particular the UK, have been consistently
shedding public sector jobs (charts 16 and 17). In
both of those countries the public sector job losses
have been offset by private sector job gains. In the
periphery the private sector is still shedding jobs
and unemployment rates are likely to continue
rising for at least the next year.
___ Budget Balance (% GDP) ____ __ Real GDP Growth (% Year) ___ ___ Government Debt (% GDP) ___
2011 2012f 2013f 2011 2012f 2013f 2011 2012f 2013f
Latest budgets
France -5.2 -4.5 -3.0 1.7 0.3 0.8 86.0 89.9 91.3
Spain
Peripheral projections
-8.5 -6.3 -4.5 0.7 -1.5 -0.5 68.5 … …
Spain (IMF) -8.5 -6.3 -4.7 0.7 -1.7 -1.2 68.5 89.6 94.3
Greece -9.1 -7.3 -8.4 -6.9 -4.7 0.0 165.3 160.6 168.0
Ireland -12.8* -8.3 -7.5 1.4 0.4 1.4 106.5 117.7 119.3
Italy -3.9 -2.6 -1.8 0.4 -2.4 -0.2 120.1 126.4 126.1
Portugal -4.2 -5.0 -4.5 -1.6 -3.0 -1.0 107.8 119.1 123.7
Source: IMF forecasts, country budgets.
Note: *=including bank support. IMF report for Ireland published on 10 September, Portugal Ministry of Finance published September, Italian Ministry of Finance projections published on 20
September, Spain budget on 27 September which kept the GDP forecasts and deficit projections unchanged from July forecasts, Spain IMF report published on 27 July
%GDP
4
3
2
1
0
Macro
European Economics
Q4 2012
10. In the eurozone, Ireland has shrunk public sector
employment the most...
Index
115
110
105
100
95
90
85
80
Ireland Index
08 09 10 11 12
Public sector Private sector
115
110
105
100
95
90
85
80
11. ...while Greece is a close second
Index Greece
115
110
105
100
95
90
85
80
08 09 10 11 12
P ubli c se ctor* Priv ate s ector
Source: Central Statistics Office of Ireland Note: *With no national data reported, public sector employment includes Public
Administration, Defence, Compulsory Social Security, Education, Human health and
Social Work Activities from Eurostat, in line with IMF approximations made for Greece
Source: Eurostat
12. Spain has only started to cut public sector jobs
recently...
Index Spain
115
110
105
100
95
90
85
80
08 0 9 10 11 12
Public sector Priv ate s ector
Index
115
110
105
100
95
90
85
80
13. ...while Italy hasn’t really started...
Inde x Ita ly
115
110
105
100
95
90
85
80
08 09 10 11 12
Public sec tor* Priv ate s ector
Source: INE Note: *With no national data reported, public sector employment includes Public
Administration, Defence, Compulsory Social Security, Education, Human health and
Social Work Activities from Eurostat, in line with IMF approximations made for Greece
Source: Eurostat
14. ...and public sector employment is Portugal seems to
have grown steadily
Index Portugal
115
110
105
100
95
90
85
80
08 09 10 11 12
Public sector* Priv ate s ecto r
Index
11 5
11 0
10 5
10 0
95
90
85
80
Note: *With no national data reported, public sector employment includes Public
Administration, Defence, Compulsory Social Security, Education, Human health and
Social Work Activities from Eurostat, in line with IMF approximations made for Greece
Source: Eurostat
15. No public sector job cuts in Germany
Index Germ any
115
110
105
100
95
90
85
80
08 09 10 11
Source: Federal Statistic Office
Public sec tor Priv ate s ector
Index
115
110
105
100
95
90
85
80
Index
11 5
11 0
10 5
10 0
95
90
85
80
Index
115
110
105
100
95
90
85
80
11
12
Macro
European Economics
Q4 2012
16. More public sector job losses in the UK than in the
eurozone
Index U K
115
110
105
100
95
90
85
80
08 09 10 11 12
Public sector Priv ate s ector
High debt to constrain growth
Clearly the fiscal consolidation challenges are not
just confined to the periphery. Most European
countries, whether inside or outside the eurozone,
face a similar challenge in trying to stabilise their
debt burdens, just to varying degrees. With the
exception of Switzerland and parts of
Scandinavia, debt levels are historically high. Not
only will the austerity deliver a big dent to GDP
in the short term, the continued high debt burden
can reduce growth for many years through a
number of channels. Most obviously, higher taxes
can create unwelcome distortions that harm
growth, as can the need to cut back on longerterm
government investment. In addition, the
government financing need can ‘crowd out’
private borrowers, particularly if default risk has
driven government borrowing rates up, as has
been the case in the eurozone periphery. Finally,
so-called ‘financial repression’, where authorities
impose restrictions on finance to reduce
borrowing costs, can also impede growth (as
discussed in Stephen King’s report From
depression to repression, 23 April).
Index
A recent study by a trio of leading economists
examined 26 episodes where economies nursed
115
110
105
100
95
90
85
80
17. Even the US has shed more public sector workers than
most
Index U S
Source: ONS Source: Bureau of Labor Statistics
115
110
105
100
95
90
85
80
08 09 10 11 12
“exceptionally high” levels of debt 1 (gross public
debt exceeding 90% of GDP) and reached two
main conclusions: growth in highly indebted
economies is more than 1pp below average and
18. General government gross debt (%GDP)
1999 2007 2012f
Greece* 94.9 107.4 168.0
Italy* 113.0 103.1 126.1
Ireland* 48.0 24.8 119.3
Portugal* 49.4 68.3 123.7
Belgium 113.6 84.1 100.5
EU17 71.6 66.3 91.8
United Kingdom 43.7 44.4 91.2
France 58.9 64.2 90.5
EU27 65.7 59.0 86.2
Germany 61.3 65.2 82.2
Spain 62.4 36.2 80.9
Hungary 60.8 67.1 78.5
Cyprus 59.3 58.8 76.5
Malta 57.1 62.3 74.8
Austria 66.8 60.2 74.2
Netherlands 61.1 45.3 70.1
Poland 39.6 45.0 55.0
Slovenia 24.1 23.1 54.7
Finland 45.7 35.2 50.5
Slovakia 47.8 29.6 49.7
Czech Republic 15.8 27.9 43.9
Latvia 12.5 9.0 43.5
Denmark 58.1 27.5 40.9
Lithuania 22.6 16.8 40.4
Sweden 64.3 40.2 35.6
Romania 21.7 12.8 34.6
Luxembourg 6.4 6.7 20.3
Bulgaria 77.6 17.2 17.6
Estonia 6.5 3.7 10.4
*Official forecasts
Source: European Commission
Public sector Priv ate s ector
Index
115
110
105
100
95
90
85
80
1
See Reinhart, Reinhart and Rogoff (2012), ‘Debt overhangs: past and
present’, NBER WP 18015
Macro
European Economics
Q4 2012
debt overhangs are highly persistent, with an
average duration of more than two decades. So if
history is any guide, many indebted European
countries (table 18) could suffer from sub-par
growth for a decade or more. The consequences
are considerable. If eurozone growth averaged
1% rather than 2% over the next 20 years, output
at the end of this period would be more than a
fifth lower and debt-to-GDP ratios would remain
stubbornly high.
The example of Ireland makes the point neatly.
Under a base-case scenario, using the IMF’s
forecasts of 2.5% annual average GDP growth in
2013-2017 Ireland’s debt-to-GDP ratio would
gradually ease to 109% of GDP by 2017. If GDP
growth is 1pp higher in each of those five years it
would be 93% (chart 19). If, however, GDP
growth is 1pp lower in each year the debt burden
would still be more than 125% of GDP: further
fiscal consolidation would be required to lower
the deficit below the European Commission’s
threshold of 3% of GDP and the debt burden
would remain very high unless growth revives
more convincingly.
19. The importance of growth to debt stabilisation
%GDP
140
130
120
110
100
90
80
Source: IMF, HSBC
Ireland Debt-to-GDP ratio %GDP
10 11 12f 13f 14f 15f 16f 17f
140
130
120
110
100
GDP -1% GDP Bas e GDP +1%
Reforms, reforms
With the public sector likely to be a drag on
growth for the foreseeable future, the private
sector needs to be on the strongest possible
footing in order to generate jobs. Hence, there is
90
80
even greater need to undertake the structural
reforms required to raise the potential growth rate
in these increasingly demographically-challenged
countries. Of course many of the necessary
reforms were meant to have been undertaken even
before the inception of the euro but, with the main
exception of Germany, were put on the
backburner once the euro was formed and now,
under the guardianship of the Troika and/or
pressure from the markets, they have resumed.
Table 24 summarises the broad range of structural
reforms for which the sovereign crisis has been
the catalyst. Clearly much still needs to be done,
and not just in the periphery. Minimum wages are
high in many countries. A country such as
Belgium still has a much higher incidence of
wage indexation than Spain. And France, for
much of the population, still has a lower
retirement age than most member states. But even
France recently announced that it is establishing a
committee for competiveness in an attempt to
curb labour cost growth.
20. Periphery is starting to regain competitiveness
Index REER, Jan 2001=100 Index
140
130
120
110
100
90
01 02 03 04 05 06 07 08 09 10 11 12
140
130
120
110
100
Greece Ireland Portugal
Spain Italy
Source: European Commission
There are now firmer signals that the reforms are
starting to deliver some improvements in
competitiveness, particularly in Ireland, where the
real effective exchange rate has fallen most
rapidly thanks to wage cuts and job losses, but all
of the peripheral countries have seen some
improvement over the past year or so (chart 20).
90
13
14
Macro
European Economics
Q4 2012
21. The periphery seems to be diversifying its exports with Africa becoming increasingly important to Portugal and Spain
12mma % share _______ Greece ________ ________ Ireland _________ _______ Portugal_______ _________ Spain _________
of exports May-07 May-12 Jul-07 Jul-12 May-07 May-12 Jul-07 Jul-12
Eurozone 44.6 32.2 41.0 39.1 67.4 62.1 57.3 51.3
Germany 11.6 7.2 7.7 7.5 13.4 13.2 10.9 10.5
France 4.5 2.7 5.7 5.2 12.6 11.9 18.8 17.3
Italy 10.9 8.4 3.6 3.2 4.1 3.6 8.7 7.5
Portugal 0.6 0.5 0.5 0.5 - - 8.7 7.5
Spain 3.9 2.0 3.8 3.3 28.4 23.7 - -
UK 5.9 3.3 16.5 15.5 6.5 5.2 7.7 6.2
USA 4.4 4.7 18.4 21.2 5.5 3.6 4.3 3.7
China 0.8 1.4 2.0 2.6 0.6 1.5 1.0 1.7
Japan 0.7 0.1 2.1 2.1 0.6 0.4 0.8 1.0
Brazil 0.1 0.1 0.2 0.3 0.7 1.4 0.7 1.2
Africa 2.1 3.5 - - 6.1 10.5 4.2 6.2
Note: Spain eurozone figure calculated as a sum of exports to each eurozone country
Source: IMF Direction of Trade Statistics (Greece and Ireland), Central Statistics Office Ireland, Spanish Ministry of Economy and Competitiveness
Much of the sharp improvement in the current
account positions of the periphery (chart 22) is
attributable to a collapse in imports rather than an
export revival. The periphery still has a long way
to go to close the competitiveness gap with
Germany that widened steadily throughout the
first decade of the euro. But it is notable that some
peripheral countries are starting to narrow the gap,
and they also seem to be having considerable
success at diversifying their export markets (table
21). For instance, Portugal has doubled the share
of its exports going to Africa over the past five
years. Similarly, Germany’s current account
surplus is still huge (as a share of GDP it is much
bigger than China’s) but it is not an import
compression story. It has managed to offset much
of the loss of exports to the periphery with exports
22. Periphery current account deficits are narrowing
sharply...
% GDP Current ac count
8
4
0
-4
-8
-12
-16
00 02 04 06 08 10 12
% GDP
Portugal Ire land Greece
Italy Ge rmany Spain
8
4
0
-4
-8
-12
-16
elsewhere. Hence, the countries that it has a
bilateral surplus with have changed significantly
(chat 23). The surplus vis-à-vis the periphery has
shrunk markedly while it has eliminated the
deficit it used to run with China and its surplus
vis-à-vis both the US and the rest of Asia has
continued to grow.
That said, while an improvement in competitiveness
is essential to the long-term growth outlook, it won’t
revive growth quickly if external demand keeps
weakening. Worryingly, the biggest downward
forecast revisions in our latest global forecasting
round have been to the emerging world (see Why
pump priming isn’t working, 27 September).
23. ...while Germany’s surplus remains large as its balances
with non-eurozone trading partners improve
EURbn, 4Q sum
Source: National Sources Source: Deutsche Bundesbank
120
90
60
30
0
-30
German bilateral current account balances
EURbn, 4Q sum
00 02 04 06 08 10 12
120
90
60
30
0
-30
China Eurozone Asia US
Macro
European Economics
Q4 2012
24. Structural reforms catalysed by the euro area debt crisis
Tax reforms
Greece Ireland Portugal Spain Italy
Base broadening by rationalising personal income tax & eliminating some
deductions
Broadening VAT tax base
Budget-neutral tax shifting aiming to lower labour costs
Reforming property tax
Environmentally friendly taxation increases
Measures to combat tax evasion and enhancing tax compliance
Pension reforms
Increasing the legal and/or minimum retirement ages
Lengthening contribution periods required for a full pension
Reducing generosity of pension benefits
Abolished seniority pension, replacing it with an early-retirement pension
Reducing early retirement (via reducing benefits) *
Indexing the retirement age to life expectancy **
De-indexation of high-level pensions
Welfare and active labour market policies reforms
Reducing unemployment benefit rates
Reducing unemployment benefit duration
Introducing means tested benefits
Cutting other welfare payments
Strengthening active labour market policies
Increasing provision of training and internship
Enhancing efficiency in Public Employment Service
Strengthening the mutual obligations approach
Product market reforms
Privatisation programmes aimed at raising public revenues
Launch of public-private partnerships and concessions to develop some
state-owned immovable assets
Strengthening power, independence or effectiveness of competition authority
Enforcement of competition law
Easing formalities to start a new business
Reducing complexity of licensing procedures
Increasing competition in transport and network industries
Phasing out regulated tariffs in electricity and gas
Increasing competition in retail trade
Reducing barriers to entry in professional services
Increasing R&D tax incentives and improving business-academic research links
Public sector reforms
Efficiency enhancing measures
Reorganising local and central government
Rationalising the public remuneration system
Rationalising management and improving efficiency and governance
Cross public sector measures
Public healthcare measures
Labour market reforms
Reduction in severance pay for regular contracts and simplification of
dismissal procedures
Measures to boost temp employment by increasing maximum work time
Moves to reduce temp employment by making temp contracts restricted
Measures to boost flexibility by cutting overtime pay/earnings of part time
employees
Measures to enhance flexibility in wage setting, eg easing conditions for
firms to opt out from higher level collective bargaining agreements
Reforming sectoral wage agreements
Introducing a sub-minimum wage for young people
Financial sector reforms
Measures to help deleverage banking system
Enhancing prudential regulation by reinforcing banking supervision
Restructuring the banking system
Note: * and revising the list of arduous occupations. **2006 reduced pension by >3%
Source: OECD, IMF
15
16
Macro
European Economics
Q4 2012
Roadmap for integration
Given that both the fiscal consolidation and the
beneficial impact of the structural reforms on
growth will take several years, it is asking a great
deal of the markets to take the leap of faith that
the ECB will keep buying the debt indefinitely
without more rapid progress being made on future
eurozone integration. This requires new
institutions for financial and fiscal integration as
well as a new governance framework.
Financial integration
Since the broad plan was set out at the late June
summit (see EU Summit: First steps to banking
union, 29 June 2012), the only further details we
have so far been given have been the European
Commission’s proposals for the single banking
supervisor, published on 12 September (table 25).
It had been hoped that this would be the relatively
straightforward part of the integration process and
could be put in place fairly swiftly. Progress on
this issue is essential before the EFSF/ESM loan
to the Spanish banks can stop being a government
liability as it would allow the ESM to recapitalise
the banks directly. However, the European
Commission plan currently looks too ambitious to
be palatable to all of the eurozone member states.
It would eventually give the ECB broad
supervision powers over all 6,000 eurozone banks
rather than just the 20 or so large international
banks which could “pose a systemic risk at a
Europe level” that has been advocated by some.
The German government in particular has called
for national supervisors to retain control over
most of the smaller regional banks.
25. Supervisory powers given to the ECB in the single supervisory mechanism proposed by the European Commission
ECB National supervisory authorities EBA
Scope Banking supervision across the eurozone. EU countries
outside the eurozone that wish to participate will be able
to enter if they meet specific conditions. The ECB will be
the host supervisor for credit institutions established in
non-eurozone EU countries, which establish a branch or
Prudential
rules
provide cross-border services in the eurozone.
Assess qualifying holdings, ensure compliance with the
minimum capital requirements and with provisions on
leverage and liquidity, may impose additional capital
buffers, may carry out early intervention measures when
a bank is in breach of, or is about to breach, regulatory
capital requirements.
Authorisation Competent authority for authorisation of credit
/Licensing institutions/withdrawal of authorisation in participating
member states.
Investigatory
powers
Will be able to request all relevant information from
supervised entities.
Will also be empowered to conduct all necessary
investigations, including on-site inspections.
Sanctions In case of a breach of a requirement under directly
applicable Union acts, the ECB may impose
administrative pecuniary sanctions of up to twice the
amount of the profits gained or losses avoided because
of the breach, or up to 10% of the total annual turnover
Internal risk
model
Source: European Commission
of a legal person in the preceding business year.
All tasks not conferred on the ECB will remain
with national supervisors. Ex Consumer
protection, fight against money laundering,
supervision of third country credit institutions
establishing branches or providing crossborder
services within a member state.
Assess compliance with any conditions of
authorisation set out in national law and if
conditions are met/infringed, could propose to
the ECB to grant/withdraw the authorisation.
Carry out ongoing day-to-day assessment of a
bank’s situation and on site verifications,
implementing general guidance or regulations
issued by the ECB.
In the cases not covered, the ECB may require
national supervisory authorities to take action
in order to ensure that appropriate sanctions
are imposed.
Final validation of the model. The national supervisor could assess the
model and could propose to the ECB whether
and under which conditions to validate the
model. After validation, the national supervisor
could oversee the application of the model and
monitor its ongoing use.
Develop the rules at EU
level and ensure
convergence and
consistency of
supervisory practice.
Design rules at EU level.
Macro
European Economics
Q4 2012
26. Depth of Banking Unions : Eurozone and United States compared
Eurozone (European Commission proposals) United States
Bank Supervision The ECB would ultimately have responsibility for supervision
of all banks in the eurozone.
Deposit Insurance
Scheme
Bank Resolution
Scheme
Sources: HSBC, European Commission
The ECB would first be allowed to take over supervision of
any bank it wants in the eurozone (and in particular banks
receiving public support) as early as 1 January 2013. It would
then be granted supervisory powers on the most systemically
important European banks on 1 July, 2013. Finally, all banks
in the Eurozone would come under ECB supervision on
1 January 2014.
Coverage of national Deposit Guarantee Schemes has been
raised to a harmonised level of EUR100,000 since
31 December 2010. There is no common deposit insurance
scheme.
Existing Resolution schemes exist only at the national level.
However, the Commission indicated in its proposal on
integrated bank supervision that it envisages making a
proposal for a single resolution mechanism within the future
banking union.
No doubt some kind of compromise on the range
of banks that will be covered will be reached, but
it will take time. The European Commission
President, Jose Manuel Barroso, optimistically
hopes to have a consensus on the single banking
sector supervisor issue by the end of this year but
the plan cannot become law until passed by all EU
governments. Even once it is in place, the
common supervision will in itself be unable to
break the negative feedback loop between a
eurozone sovereign and its banks. Meeting that
goal will require much more controversial
elements such as a eurozone-wide deposit
guarantee scheme and bank resolution
mechanism. The current official proposals
therefore still fall short of the mechanisms
existing in the US, despite a very fragmented
supervisory network there (table 26).
On the other areas of integration, the plan is that
four building blocks will be put in place over the
next decade. The first block is the move towards
some kind of banking union discussed above
while the others are integrated frameworks for
fiscal matters and economic policy, accompanied
by increased democratic legitimacy and
Bank supervision remains very fragmented.
The Office of the Comptroller of the Currency (OCC) is the
primary regulator of National Banks. At the federal level, the
Federal Reserve Board regulates state-chartered banks that
are members of the Federal Reserve System and bank
holding companies. For other state-chartered banks, the
primary regulator is the Federal Deposit Insurance
Corporation. Finally, thrift holding companies and savings
banks are regulated by the Office of Thrift Supervision.
The FDIC provides deposit insurance for 7,246 financial
institutions (as of 30 June 2012) in the United States. Dodd-
Frank legislation temporarily put in place unlimited deposit
insurance for interest-bearing accounts until the end of this
year. For interest bearing (consumer) accounts the limit will
revert to USD250,000.
The FDIC has resolution powers on federally insured banks
and thrift institutions but also on systemically-important
financial institutions since the passage of the Dodd-Frank act.
Since the crisis began the FDIC has resolved, liquidated and
restructured more than 400 banks.
accountability. European Council President
Herman Van Rompuy said he will present an
interim report on at least some of the issues at the
next European Council meeting in October.
Fiscal integration
As with the banking union proposal, Mr Van
Rompuy’s report may be what he believes is
necessary, but will nonetheless probably be at the
more ambitious end of what is actually feasible.
Much of the focus will be on any new information
on what an integrated fiscal framework would
actually involve. As well as a swift
implementation of the existing governance
framework (table 27) it will also have to entail a
qualitative move towards a fiscal union. This
would involve a much greater pooling of decisionmaking
on budgets. EU institutions would have
much greater powers over the national budgets of
member states which breach debt and deficit
rules, and if a country needs to increase its
borrowing, it would be forced to go to other
eurozone governments to obtain prior approval.
17
18
Macro
European Economics
Q4 2012
27. The current governance framework
Measure Sanctions
Excessive Deficit
Procedure (6-pack)
Macroeconomic
Imbalance Procedure
(6-pack)
Once an Excessive Deficit Procedure is
initiated, the European Commission may
decide sanctions (up to 0.5% of GDP) if
no effective action has been taken.
These sanctions are only rejected if a
qualified majority of member states in the
Council votes against them.
Once a Macroeconomic Imbalance
Procedure is initiated, the European
Commission may decide sanctions (up
to 0.1% of GDP) in case of failure to
comply with the recommended corrective
action. These sanctions are only rejected
if a qualified majority of member states in
the Council votes against them.
Fiscal Compact (TSCG*) Fiscal Compact requires integration of
fiscal rules into national law, preferably
at a constitutional level. In case of failure
to comply with this integration, the
European Commission may ask the
European Court of Justice (CoJ) to rule.
The CoJ may then impose financial
sanctions (up to 0.1% of GDP).
* TSCG is the Treaty on Stability, Coordination, and Governance (TSCG)
Source : European Commission, HSBC
As we discussed in our last quarterly (A rocky
road ahead, 12 July 2012) progress towards this
kind of fiscal integration at the eurozone level is
only possible if both creditors and debtors agree
to relinquish more sovereignty to a supranational
institution. This will be difficult in any of the
member states and will require a much higher
degree of democratic legitimacy but it will be
particularly challenging for France. The budget
announced on 28 September by the prime
minister, Jean-Marc Ayrault, reiterated the
government’s commitment to reducing the budget
deficit to 3% of GDP in 2013, but this looks too
optimistic. With the market currently quite
forgiving about France, we fear that Mr Hollande
will be under little pressure to move closer to the
German position regarding the need for genuinely
coercive fiscal integration and oversight of
member states’ fiscal policy by European
institutions, unless the French bond market starts
to come under pressure too.
Timeline
Any clear timelines for steps towards common
bond issuance are unlikely to be in the report at
this early stage. The Van Rompuy report 2
published in the summer briefly mentioned the
prospect of partial common debt issuance “in a
medium-term perspective” citing bills or a
redemption fund, but plenty of other options such
as blue-red bonds or stability bonds have also
been proposed. Clearly Germany will continue to
resist being on the hook for further transfers of
funds or a further sharing of its credit rating
without a certain loss of sovereignty of the debtor
attached to it. Hence we expect any explicit
timelines to be glaringly absent in either of the
upcoming reports. Rather than coming up with
some kind of 2020 deadline, we expect the next
roadmap to be a building-block process with any
goals only being achieved if various conditions
are met along the way. By the end of this year, we
might also have an indication as to which
elements of the roadmap can be achieved within
existing treaties and what needs to be changed.
Germany has admitted a referendum will be
needed at some stage. Ultimately populations
across the eurozone will have to vote for it.
2
Towards a Genuine Economic and Monetary Union, Herman Van
Rompuy, European Council 26 June 2012
Macro
European Economics
Q4 2012
28. The collapse in consumer spending in the periphery… 29. …has been driven by big increases in taxation as well as
job losses
% Yr C ons umption Grow th
% Yr
4
2
0
-2
-4
-6
-8
07 08 09 10 11 12
Ge rma ny Portugal Italy
Will populations vote for it?
To keep populations on side over the coming
months and years there will need to be some signs
of light at the end of the tunnel. The stabilisation
in Italian consumer confidence in September,
which must be at least in part a response to the
ECB’s new policy, is therefore welcome. But for
the peripheral countries to continue to see the
benefits of remaining inside the monetary union
they will need to believe that there will ever be an
end to the deepening recession and ongoing rise in
unemployment. For the creditor nations within the
euro, they would feel more comfortable about
continuing to underwrite future rescue packages if
their governments were able to point to a success
story or a country successfully graduating from a
programme. Ireland is currently the relative
success story, but, as discussed above, others have
much farther still to go and the contraction in
GDP does not always give a fair representation of
the depth of the recession underway in some of
these countries. Italy is a case in point. In 2009
Italian GDP declined by 5.5%, but much of that
recession was driven by the collapse in the world
trade cycle. In some of the periphery countries the
rising unemployment and persistent tax rises and
spending cuts mean domestic recessions are much
deeper now. According to our forecasts, Italian
consumer spending will contract by 3.4% in 2012
4
2
0
-2
-4
-6
-8
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
Source: Eurostat Source: Eurostat
pts Tax im pact on inflation pts
04 05 06 07 08 09 10 11 12
Eurozone Ita ly Portugal
compared with a 1.5% fall in 2009. The same
point holds for Portugal (charts 28 and 29). It is
perhaps hardly surprising that hundreds of
thousands of protestors participated in a peaceful
demonstration in Portugal in September when the
prime minister announced that he proposed to
raise workers’ social security contributions from
11% to 18%. The number of working days lost
due to industrial action in Portugal is typically
among the lowest in the eurozone.
The end of the road
2.5
2.0
1.5
1.0
0.5
0.0
-0. 5
-1. 0
No one ever said it would be easy, and things appear
set to get tougher still in the year ahead. Heads of
government will need to take decisions on exactly
what kind of financial, fiscal and political integration
is achievable and then set out on the very long road
to implementing them. The ECB has bought time.
Now governments need to do the rest, most likely in
the face of growing resistance from their
populations, some of which may start to think that
the answer to their problems lies outside the
eurozone (table 30). But the euro is not the sole
source of their problems and their structural rigidities
will have to be addressed and new institutions built.
Our underlying assumption remains that the
eurozone will ultimately reach this destination but
believe there will continue to be periods when it
takes the market to keep member states moving in
the right direction.
19
20
Macro
European Economics
Q4 2012
30. What is your opinion of a European economic and monetary
union with one single currency, the euro?
% For Against Don’t know
Cyprus 52 44 4
Italy 53 33 14
Spain 55 36 9
Portugal 58 33 9
Malta 63 32 5
Germany 65 30 5
Austria 65 30 5
France 69 28 3
Estonia 71 25 4
Netherlands 73 25 2
Finland 74 24 2
Belgium 75 23 2
Greece 75 21 4
Luxembourg 78 19 3
Slovenia 80 18 2
Slovakia 80 16 4
Ireland 79 13 8
Source: European Commission Eurobarometer survey July 2012 (Fieldwork May 2012)
Life outside the euro isn’t easy
either
Given the immense challenges that lie ahead for
the eurozone member states, one could be forgiven
for thinking that life is considerably easier for
countries not in the euro. Despite the size of its
budget deficit and debt burden, the UK has
benefited from being something of a safe haven.
Whereas many eurozone member states have seen
a gradual fall in the maturity of their debt stocks
(chart 31) the UK has managed to extend the
maturity of debt recently. But in public finance
terms, this is a rare bright spot in an otherwise
darkening picture: it is not only the eurozone
economies that face fiscal difficulties.
In 2010, the UK government set itself two tough
fiscal targets: to balance the cyclically-adjusted
current budget within a rolling five-year period
and to have net-debt-to-GDP falling in 2015/16.
The UK’s Office for Budgetary Responsibility
(OBR) has so far considered the UK government
to be on track to meet these aims – just. But this
is likely to change in its next assessment, largely
because growth has disappointed. In our view,
the OBR has consistently been too optimistic on
the strength of the recovery. In November 2010,
31. Average duration of debt stocks is shortening
Years Duration of Debt Stocks
Years
15
14.5
14
13.5
13
12.5
12
Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12
Source: Bloomberg
UK (LHS) Italy (RHS)
Spain (RHS) Portugal (RHS)
7.5
7
6
5.5
the OBR projected that growth in 2012 would be
2.6%, but even in March of this year it forecast
0.8% growth. We expect a 0.1% contraction.
So before new official forecasts are published on
5 December, the UK government faces a huge
dilemma: does it tighten fiscal policy and weaken
the economy further, or does it take the political
hit and admit its deficit reduction programme is
failing. Currently we think it will opt for the latter
and try to pin the blame on a global slowdown.
Whether or not markets will give the UK
government the benefit of the doubt remains to be
seen. So far, UK borrowing costs have been
helped by a supportive Bank of England, which
has bought huge amounts of debt under its QE
policy. But we think there is a good chance the
BoE may pause QE, at least for the rest of this
year, (see Time for caution, 30 August). This,
alongside a weak growth outlook and the fact that
the UK has done less actual deficit reduction than
several other European countries (chart 32), could
put the UK’s AAA rating under renewed pressure.
What’s more, the UK, like other governments, has
huge contingent liabilities that are hangovers from
support offered during the financial crisis. While
these are hard to quantify, the numbers are large.
The UK for example excludes the debt of publicly
owned banks from its benchmark measures of net
8
6.5
5
Macro
European Economics
Q4 2012
32. The UK is lagging behind others on the primary balance
adjustment
6
4
2
0
-2
-4
-6
-8
% Potential % Potential
2000 2002 2004 2006 2008 2010 2012
Source: OECD
debt as it assumes these institutions will eventually
be returned to the private sector. This is probably a
fair assumption, but more than three years after
bailing out two of its biggest banks, they are still in
public ownership (and even where ‘good’ parts have
been sold, the ‘bad’ assets have been retained). If
we look at total public debt including financial sector
support, net debt more than doubles from 66% to
136% of GDP (chart 33).
33. Including the debt of publicly-owned banks greatly
increases the net-public-debt-to-GDP ratio
% %
180
180
150
150
120
120
90
90
60
60
30
30
0
0
Source: ONS
United Kingdom France
Italy Spain
Portugal
06 07 08 09 10 11 12
Debt:GDP Debt:GDP (ex fin support)
Emerging Europe is slowing
too
The relatively less indebted part of the region is
not holding up particularly well either. Across
emerging Europe, economic activity stabilised in
the second quarter, but all indicators point to
renewed weakness in the second half. Even the
6
4
2
0
-2
-4
-6
-8
outperformer Russia is losing steam as oil prices
moderate, fiscal consolidation kicks in and
inflation picks up. The outlook for Central &
Eastern European (CEE) countries remains fairly
dire. Hungary has dipped into technical recession
and the Czech Republic is looking worse by the
day. Poland is losing traction at an astounding
pace. Turkey has so far held up better than we
feared, thanks to a very successful diversification
effort of export destinations, but even though
domestic demand tends to be resilient Turkey
cannot escape the global slowdown and
policymakers are gearing towards lower growth
targets for this year and the next.
Although activity has been losing steam since the
second half of last year, inflation has been simply
sticky, cruising above the target in many countries.
Nowadays, there is even further upside risk to
headline inflation given the ominous path of global
agricultural commodity prices. This is especially
true for the large economies with big domestic
markets, such as Russia and Turkey. Nonetheless,
wage inflation remains in check, broadly speaking,
although Russia is an exception.
Overall, the growth/inflation trade-off has
deteriorated in Emerging Europe since the global
crisis. We see policymakers shifting their focus
more towards growth and looking comfortable with
above-target inflation for longer. They are possibly
emboldened by ultra-loose monetary policy in the
developed world. As the developed world keeps its
fingers on the trigger for further pump-priming, the
developing countries would also likely tilt, on
balance, towards a higher tolerance for inflation
and other imbalances in order to use what scope
they have to support growth.
21
22
Macro
European Economics
Q4 2012
33. Policy rates forecasts
Q4 2011
Eurozone
Q1 2012 Q2 2012 Current rate Q4 2012f Q1 2013f Q2 2013f Q3 2013f Q4 2013f
Repo rate
UK
1.00 1.00 0.75 0.75 0.50 0.50 0.50 0.50 0.50
Base rate
Norway
0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50
Sight deposit rate
Sweden
1.75 1.50 1.50 1.50 1.50 1.75 1.75 1.75 2.00
Repo rate
Switzerland
1.75 1.50 1.50 1.25 1.00 0.75 0.75 0.75 1.00
SNB target rate
Czech Republic
0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Repo rate
Romania
0.75 0.75 0.25 0.25 0.25 0.25 0.25 0.25 0.25
Repo rate
Poland
6.00 5.50 5.25 5.25 5.25 5.25 5.25 5.25 5.50
Reference rate
Hungary
4.50 4.50 4.75 4.75 4.50 4.00 4.00 4.00 4.00
Base rate
Russia
7.00 7.00 6.50 6.50 6.50 6.00 5.50 5.50 5.50
Refinancing rate
Turkey
8.00 8.00 8.25 8.25 8.75 8.75 8.75 8.00 8.00
One week repo rate
US
5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75
Targeted Fed Funds
Japan
0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25
Overnight call rate 0-0.10 0-0.10 0-0.10 0-0.10 0-0.10 0-0.10 0-0.10 0-0.10 0-0.10
Note: values are end-period
Source: National Central Bank and HSBC estimates
Macro
European Economics
Q4 2012
Periphery at a glance
Ireland, Portugal and Greece have made more progress on
primary balances this year than Spain and Italy
Capital spending is still easier to cut than current spending
Primary budget balances are improving generally Total revenues have grown in Ireland, Portugal and Spain
EURbn Primary Budget Balanc e
0
-5
-10
-15
-20
Greece Ireland Portugal Spain Italy
EURbn
Year-to-date* 2011 Year-to-date* 2012
Note: *Year-to-date = Jan-Mar for Italy and Jan-Aug for Ireland, Greece, Spain and
Portugal. Countries should be compared on a year-to-date basis, as different timings of
payments or revenue collection can distort the comparisons.
Source: ISTAT, Hellenic Republic Ministry of Finance, Irish Department of Finance,
Spanish Government Office IGAE, DG Orçamento
0
-5
-10
-15
-20
% Year
25
20
15
10
5
0
-5
Total Rev e nue* % Year
Greece Italy Portuga l Ireland Spain
Note: *Year-to-date = Jan-Mar for Italy and Jan-Aug for Ireland, Greece, Spain and
Portugal
Source: ISTAT, Hellenic Republic Ministry of Finance, Irish Department of Finance,
Spanish Government Office IGAE, DG Orçamento
Some improvement in direct tax revenues Interest expenditure surging as debt levels and interest rates rise
% Year
15
10
5
0
-5
-10
Tax Revenue* % Year
Spain Italy Portugal Greece Ireland
Direct Tax Indirect Tax
Note: *Year-to-date = Jan-Mar for Italy and Jan-Aug for Ireland, Greece, Spain and
Portugal
Source: ISTAT, Hellenic Republic Ministry of Finance, Irish Department of Finance,
Spanish Government Office IGAE, DG Orçamento
15
10
5
0
-5
-10
% Year
70
60
50
40
30
20
10
0
-10
25
20
15
10
Interest Ex penditure* % Year
Greece Italy Spain Portugal Ireland
Note: *Year-to-date = Jan-Mar for Italy and Jan-Aug for Ireland, Greece, Spain and
Portugal
Source: ISTAT, Hellenic Republic Ministry of Finance, Irish Department of Finance,
Spanish Government Office IGAE, DG Orçamento
5
0
-5
70
60
50
40
30
20
10
0
-10
23
24
Macro
European Economics
Q4 2012
Capital spending has borne the brunt of cuts … … while current spending has been harder to trim
% Year
0
-20
-40
-60
-80
Capital Ex penditure* % Year
Ireland Portugal Spain** Italy
Note: *Year-to-date = Jan-Mar for Italy and Jan-Aug for Ireland, Greece, Spain and
Portugal
Source: ISTAT, Hellenic Republic Ministry of Finance, Irish Department of Finance,
Spanish Government Office IGAE, DG Orçamento
General government expenditure
20
0
-20
-40
-60
-80
% Year
18
15
12
9
6
3
0
Current Ex penditu re* % Year
Portugal Ireland Italy Spain**
Note: *Year-to-date = Jan-Mar for Italy and Jan-Aug for Ireland, Greece, Spain and
Portugal. **Spanish current account based on a calculation of the sum of current
transfers, staff expenses and goods and services
Source: ISTAT, Hellenic Republic Ministry of Finance, Irish Department of Finance,
Spanish Government Office IGAE, DG Orçamento
EURbn 2007 2008 2009 2010 2011
Ireland
Total 50.9 55.7 60.0 55.0 64.2
Current 40.9 44.7 45.2 47.0 48.0
Capital 10.0 11.0 14.7 8.0 16.2
Interest 1.6 1.5 2.5 4.1 3.9
Italy
Total 740.3 765.5 788.4 788.4 788.7
Current 677.7 706.3 721.4 730.7 740.8
Capital 62.6 59.2 66.9 53.8 47.9
Interest 76.9 80.7 69.7 69.2 76.1
Greece
Total 67.2 74.9 86.4 80.7 81.4
Interest 9.8 11.2 12.3 13.2 16.4
Spain
Total 139.7 148.1 189.3 179.6 151.1
Current 77.7 82.8 112.4 104.7 79.9
Capital 9.2 8.9 17.4 14.9 10.4
Interest 14.5 15.9 17.7 19.6 22.2
Portugal
Total 75.1 77.1 83.8 88.5 83.6
Current 69.5 71.8 77.2 78.8 77.2
Capital 5.6 5.3 6.7 9.8 6.4
Interest 5.1 5.3 4.8 5.0 6.6
Source: ISTAT, Hellenic Republic Ministry of Finance, Irish Department of Finance, Spanish Government Office IGAE, DGOrçamento
18
15
12
9
6
3
0
Macro
European Economics
Q4 2012
Spain
Key information
Economy Spain’s GDP contracted 0.4% in the second quarter of 2012, pulling the economy further into recession, as tough austerity measures aimed at
tackling the budget crisis took their toll on both overall demand and the prices that consumers have to pay for goods. On 20 September 2012, the
Spanish government slashed its GDP forecasts to a contraction of 2.4% in 2012 and a further contraction of 0.2% in 2013, due to “a deterioration in
the international environment”.
Unemployment rates hit record highs in July at 25.1%, of which 52.2% are long-term unemployed according to AGETT, an association of temporary
employment.
Politics Spain’s centre-right opposition, Popular Party (PP) led by Mariano Rajoy, won the parliamentary election with an absolute majority on 20 November
2011, but did not take office formally until 22 December 2011. The next general election will be held no later than 13 December 2015.
Financing programme On 25 June, Spain became the fourth country to officially request aid from the eurozone’s bailout funds. It asked for up to EUR100bn to recapitalise a
number of regional banks that have been badly affected by the collapse of the real estate bubble, after stress tests revealed that Spanish banks’
recapitalisation needs could, in a worst-case scenario, reach EUR62bn. Detailed stress test results released 28 September showed that the country’s
lenders have capital needs of cEUR60bn. Markets are still waiting for Spain to formally request a support package for the government, a necessary
step to unlock the ‘conditional’ support that has been made available by the ECB.
Spain’s regions are facing fiscal and liquidity challenges: the 17 autonomous regions posted a 0.9% of GDP budget deficit in the first half of 2012 (the
target for 2012 is 1.5%), but three regions – Extremadura, Murcia and Navarra – are already reporting deficits above this target. Nonetheless, Spain’s
treasury minister said on 13 September that the country’s indebted regions will meet their 2012 deficit targets. In July, the Spanish central
government announced a new liquidity mechanism to help cash-strapped regions meet their funding requirements, which is able provide EUR18bn of
funding for the rest of this year. Regions can tap the fund on a voluntary basis but will be subject to strict conditionality in terms of central government
monitoring and austerity plans. Currently around EUR14bn is expected to be requested, and only Madrid, Galicia and La Rioja have ruled out the
option of using the fund. Five regions have so far requested aid: Catalonia (EUR5bn), Valencia (EUR4.5bn), Murcia (EUR0.3bn), Andalusia
(considering EUR4.9bn) and Castilla-La Mancha (EUR0.848bn). Despite this, Treasury Minister Cristobal Montoro said on 27 September that he saw
no need to increase the EUR18bn of funding available.
2013 Budget On 10 July, the European Council gave Spain an extra year to correct its deficit, on account of adverse economic circumstances. 2014 has been set as the new
deadline for bringing its deficit below the EU’s 3% of GDP threshold. Headline deficit targets of 6.3% of GDP for 2012, 4.5% for 2013 and 2.8% for 2014 have
been established. Spain’s economy minister Luis de Guindos said on 27 September that the 2012 budget deficit target would be met.
On 26 September, Spain announced a tough 2013 budget which focuses on cutting spending (by an additional 0.77% of GDP in 2013) over
increasing taxes (an additional 0.56% of GDP in 2013). It detailed 43 new reforms which will be implemented in the next six months to revive the
economy and rein in debt levels. The budget is based on unchanged economic forecasts (an optimistic -0.5% for 2013). Social spending will be the
focus of the budget cuts and government ministries will face spending reductions of 8.9%. Despite the austerity measures, though, total spending is
set to rise by 5.6% as pensions, school grants and interest payments are due to climb, with interest expenditure alone increasing by 33%. The
government is expecting tax revenue to be higher than originally budgeted in 2012; it plans a further increase of 3.8% in 2013 and forecasts total
revenue to increase by 2.7%. Spain is establishing an independent fiscal authority to oversee compliance with this new budget.
In January–August, Spanish expenditure increased by 8.9% compared with the same period last year. Despite overall revenue increasing 22.8% y-oy
in the eight-month period, tax revenue fell by 4.6%, although Spain’s deputy budget minister Marta Fernandez Curras said that she expects higher
tax revenues (mainly due to the increase in VAT from 18% to 21%, which was implemented on 1 September) and lower spending in the upcoming
months.
Structural reforms On 26 September, Spain announced a timetable of 43 new reforms which go beyond the European Commission’s demands for the country and are
thought to be pre-emptive of the conditions of a bailout. They will include the following:
Pension reforms: A pension reform will be presented by year-end which will limit individuals’ ability to retire before the mandated retirement age of
65 and ensure that the retirement age is tied to life expectancy.
Privatisation and liberalisation: Spain’s deputy prime minister announced that there will be further privatisations in the energy, services and
telecom sectors. Efforts will also be made to make markets more efficient by cutting down red tape.
Labour reforms: New measures will be adopted to further labour market reforms as well as to reform public administration.
Banking reforms On 31 August 2012, Spain unveiled a new set of financial reforms aimed at preventing capital flight from Spain caused by eroding investor
confidence and speeding up the clean-up of its banking sector. Previous measures adopted over the past three years have failed to put an end to the
financial crisis that has forced Madrid to take over four of its banks; however, deputy prime minister Soraya Saenz has said that these reforms will fix
Spain’s banking sector once and for all. She added that “the fundamental objective of this reform is to have credit flowing back into the country” to
remedy the fact that Spanish banks have been locked out of markets and left dependent on the ECB for funding after suffering a flight of deposits
(net outflows totalled EUR56.5bn in June). The centrepiece of the reform is the creation of an asset management company or “bad bank” which,
starting later this year, will buy property assets from banks at an average discount of 45-50% of original book value. The bank will receive unfinished
developments, unsold homes and building plots from developers that have gone bankrupt and will be expected to sell this stock on at a profit over the
next 10 to 15 years. Another key point of the reform is the creation of a new process for breaking up and winding down banks that will also ensure
that investors who invested in risky preference shares will bear some of the losses.
Source: Reuters, IMF, FT, National Ministries of Finance
25
26
Macro
European Economics
Q4 2012
Italy
Key information
Economy Italy’s economy shrank more than expected in Q2 2012, with GDP contracting 0.8% q-o-q, causing the recession to deepen further. The austerity
measures are weighing on the country, with both private and public investment and consumption the hardest hit. However, prime minister Mario
Monti emphasised that 2013 would be “a year of recovery” and would be followed by 1.1% growth in the economy in 2014 “as demand increases
both domestically and internationally, and the positive effects of a budget balance, a decreasing debt and structural reforms permeate through the
economy.”
Italy has been registering one of the highest inflation rates in the eurozone over the past year (3.6% in July 2012) due to methodological changes and
VAT increases.
Italian unemployment has reached its highest level since the euro was formed in 1999, at 10.7%.
Politics The current prime minister, Mario Monti, the head of a government of technocrats, took over from his predecessor, Silvio Berlusconi, who resigned
amid the mounting national debt crisis on 13 November 2011. The next set of parliamentary elections is due in April 2013 and the presidential
elections in May 2013. According to the most recent opinion poll carried out on 29 August 2012 by IPR, The Democratic Party, led by Pier Luigi
Bersani, is leading, with 26% of the vote.
2012 Budget Italy fell behind plan to meet the budget deficit target of 1.7% of GDP for 2012, down from 3.9% in 2011, raising its deficit projection to 2.6% of GDP
in late September. An emergency package of austerity measures involving EUR33bn of cuts was approved on 22 December 2011. Almost two-thirds
of the fiscal consolidation is to come from higher taxes and EUR10.5bn from spending cuts. Italy’s debt burden currently stands at 123.4% of GDP,
second only to Greece’s in the eurozone.
Revenue: Up from the same period last year
Italian tax revenues rose 4.7% y-o-y to EUR232bn in January-July 2012 after the introduction of several tax hikes and a crackdown on tax evasion as
part of a series of measures implemented to improve public finances. Italian economy minister Vittorio Grilli is expecting revenues from anti-taxevasion
measures to be over EUR10bn this year.
Expenditure: Higher than expected
In H1 2012, the budget deficit was reported as EUR47.7bn, EUR1.1bn higher than in H1 2011, largely due to increased spending on Italy’s share of
bailouts for other eurozone countries – up from EUR6.1bn in January-June 2011 to EUR16.6bn in the same period of 2012. However, prime minister
Mario Monti won a vote of confidence on 7 August 2012 to cut spending by a further EUR4.5bn during 2012 to help rein in the budget deficit, and to
postpone the planned 2pp hike in VAT from 21% to 23% until July 2013. The government estimates that savings from the cuts will amount to
EUR10.9bn in 2013 and EUR11.7bn in 2014, and will come from reductions in healthcare spending together with decreases of 10% in the number of
public sector workers and 20% in state managers. One major risk for the Italian budget at the moment is its debt-servicing cost. Despite 10-year bond
yields falling dramatically from their high of 6.5% in July, they are still currently showing high yields of around 5%. Italy is planning to spend
EUR84.2bn (5.3% of GDP) on servicing its debt in 2012.
Structural reforms Although the ECB plans detailed at its meeting on 6 September 2012 provoked widespread relief in Italy, Prime Minister Monti has said that reforms
must continue.
Deregulation package: A package involving the deregulation of some service sectors and professions in order to increase competition won
parliamentary approval on 21 March 2012, with the measures taking effect immediately. These include abolishing minimum tariffs among most
professions (except for lawyers), increasing the number of pharmacies nationwide, restricting cross membership of banking foundations and banks,
introducing free current account banking for pensioners earning less than EUR1,500 per month and simplifying procedures for starting up companies
by virtually eliminating the related costs for people under the age of 35.
Justice reforms: Justice minister Paola Severino has introduced reforms aimed at tackling Italy’s judicial inefficiency, which is helping stifle its
already weak economy. These reforms are expected to halve trial times, taking Italy to the average European level. The reforms include a ‘filter’ to
cut the number of cases that are allowed to proceed to the appeals level or are eligible for a second evaluation, and the creation of specialist
business tribunals.
Labour reforms: Italy’s highly controversial labour reform was passed by the Chamber of Deputies on 27 June 2012 despite provoking considerable
criticism, especially from trade unions. The reform, which aims to boost job creation and restore competitiveness, makes temporary contracts more
costly for employers by raising tax and welfare contributions, and eases firing restrictions in order to discourage firms from rotating temporary workers
rather than hiring them permanently, the aim being to prevent many young people from being stuck in dead-end, short-term jobs. It will also make it
easier for companies to fire workers by introducing a special legal procedure to speed up dismissal disputes. The intention is to reduce the
uncertainty of the current system in which workers can be reinstated after years of dispute. However, participation rates, especially among women,
are still extremely low at around 50%, compared to the 65% average across the EU.
Pension reforms: In late 2011, Italy introduced a pension reform including three key changes: the abolition of seniority pensions, a contribution
system for all pension schemes and an increase in the pension age for men and women. The current retirement age for men is 66 and, by 2018, the
retirement age for women will also rise to 66. Many workers in Italy retire before 60 under the system of seniority based on years of contribution paid,
but this scheme is to be phased out by 2018 and, with immediate effect, men and women must make one more year of contributions to retire. The
government estimates that this will cause 65,000 people who took early retirement to be left without a state pension; however, funds have been set
up to help them.
Source: Reuters, IMF, FT, National Ministries of Finance
Macro
European Economics
Q4 2012
Ireland
Key information
Economy The Irish economy has bucked the weakening trend evident in most eurozone economies. Industrial output has remained strong in the third quarter,
with manufacturing PMIs showing continued growth. The persistently high unemployment rate continues to be a source of uncertainty and, as an
export-led economy, Ireland is particularly vulnerable to the weak growth of its eurozone trading partners. This explains the IMF’s forecast of just
0.4% GDP growth for 2012, down from 1.4% in 2011.
Financing programme Officially requested on 21 November 2010. Approved on 16 December 2010
Amounts to EUR85bn supported by the IMF, EFSM, EFSF, bilateral loans from Demark, Sweden and the UK and Ireland’s own contributions
The IMF completed its seventh review and approved a EUR0.9bn disbursement on 5 September 2012. The Irish authorities have continued to
successfully implement their programme to meet the targets for end-June despite the weak global economic backdrop.
Ireland returned to the sovereign debt markets on 26 July 2012, raising EUR4.2bn of new funds in 5- and 8-year bonds, while financing needs for
2013 and 2014 were reduced by a further EUR1bn through a bond swap tailored to meet the needs of domestic pension funds. Irish bond yields have
fallen significantly, and are now below 5% for the first time since September 2010. At the euro area summit on 28-29 June, the need to break to
vicious circle between banks and sovereigns was recognised as a means of further improving Ireland’s debt sustainability and reducing its reliance
on official financial support. Euro area leaders and the IMF would like the ESM to be able to invest directly in key Irish banks to alleviate pressure on
government finances and allow more funds to be directed to the country’s restructuring programme.
2012 Budget Ireland is on track to meet its budget deficit target of 8.6% of GDP for 2012, down from 9.9% in 2011. Total fiscal consolidation measures, outlined on
6 December 2011, amount to EUR3.8bn, of which EUR2.2bn is to come from spending cuts and EUR1.6bn from increased revenue. A fiscal
responsibility bill, published in July 2012 and to be brought before parliament by end-September, will further support the necessary consolidation
measures through to 2013. Following the passage of the bill the government will be able to formally ratify the Fiscal Compact Treaty, which was
approved in a referendum on 31 May 2012.
Financial reforms
Revenue: Strong returns so far in 2012
Tax receipts were up 5.2% y-o-y at end-August, which is 1.7% ahead of target. The 2pp increase in the standard rate of VAT to 23% since the start
of 2012 has made significant contributions, and income and corporation tax continue to outperform.
Expenditure: Higher than expected
The social protection department has spent more than expected on unemployment benefits as a result of a persistently high unemployment rate.
Health spending has overrun significantly, with only 22% of planned savings achieved so far this year. Ireland’s Health Service Executive (HSE) has
already announced an emergency corrective package amounting to EUR130bn to be introduced in addition to other non-operational measures.
Measures include a 10% cut in overtime pay, a 6% reduction in the hours of those who care for the elderly at home and a halving in the use of staff
not directly employed by the HSE.
Reorganisation – creating a two-pillar banking system: The first stages have been implemented. Pillar one will be the Bank of Ireland and the
second will be created by merging Allied Irish Banks and EBS. The restructuring of Permanent TSB (PTSB) is proceeding with the establishment of
three separate business units (a core retail bank, an asset management unit and the UK mortgage loan book). As of 2012 the Department of Finance
has established a banking policy division to advise and support the government, helping to ensure a sustainable banking system that can drive
economic growth and job creation.
Recapitalisation – targeting Core Tier 1 capital ratios of 10.5% and 6% under base and stress cases, respectively: Aggregate recapitalisation
needs of EUR24bn were identified when banks forecast their financial statements through end-2013 in March 2011. The total cost to the state was
limited to EUR17.8bn through capital-raising from private investors and burden-sharing with subordinated debtholders. The exercise will run again
with the EBA’s euro area stress tests in 2013.
Deleveraging – a three-year framework to downsize the banking system, improve market funding prospects and reduce reliance on official financial
support: This is advancing faster than planned, in part due to front-loaded disposals by banks and the run-off of core asset portfolios, reflecting write-offs and
lacklustre credit demand. More than half of the EUR70bn worth of assets initially identified by banks has already been disposed of or amortised.
The authorities are continuing to work to improve the quality of banks’ assets and are attempting to resolve current household debt distress through
considerable efforts to reform the personal insolvency framework (see Box 2 IMF fifth review, March 2012).
Structural reforms European leaders have agreed to increase the EIB’s capacity to aid growth and investment. Ireland’s authorities propose to use EIB funds together
with other sources to supplement the exchequer’s capital investment in sectors including education, transport and healthcare.
Source: Reuters, IMF, FT, National Ministries of Finance
Addressing high unemployment: Under the Pathways to Work labour activation strategy, benefit and training services are being integrated to
provide a more streamlined approach, with four pilot programmes under way so far. The plan contains proposals to cut social welfare benefits where
claimants fail to co-operate with reasonable offers of education, training or employment. The resource and training needs of employment centres and
the involvement of private sector firms are being examined in a study that will be completed by end-September. The authorities are replacing rental
assistance with a new Housing Assistance Payment for those with long-term housing needs to reduce disincentives to work.
27
28
Macro
European Economics
Q4 2012
Greece
Key information
Economy The Greek economy has deteriorated sharply and is currently suffering its fifth consecutive year of recession, with the economy contracting 6.2% y-oy
in Q2 2012. GDP contracted by 6.9% in 2011, worse than expected; Consensus Economics is projecting contractions of 6.2% in 2012 and 3.3% in
2013. Prime minister Antonis Samaras was more pessimistic in his recent forecast, saying that he expected the Greek economy to contract by more
than 7% this year. In cumulative terms, this would be a contraction of 18.6% from 2008 to 2012.
Unemployment has continued to rise since May 2008, reaching a record high of 21.9% in March, but the IMF expects it to ease in 2014.
Politics The pro-bailout party, New Democracy, led by Antonis Samaras, formed a coalition with PASOK and the Democratic Left in the second round of
Greek elections on 17 June.
The fragile coalition is making negotiation of an EUR11.5bn bailout package more difficult, as both the PASOK and Democratic Left leaders are
objecting to some of the measures outlined by the prime minister and finance minister. However, all agree that the main objective is for the country to
“move on to the next stage”.
Financing programme A second adjustment programme was approved by the IMF and euro area member states in mid-March 2012.
The new official assistance amounts to EUR172.6bn, to be disbursed between the start of the programme and end-2014, of which EUR109.1bn will
be contributed by the EFSF and EUR28bn by the IMF (including EUR8.2bn of disbursements in 2015). The disbursements under the first economic
programme totalled EUR73bn.
The Troika returned to Greece on 9 September to complete the first review of the second programme. A report will be published, also including an
updated debt sustainability analysis, which will provide information on whether Greece is on track to reduce its public debt burden to below 120%
before end-2020. To date discussions are still ongoing, although the report was originally due before the Eurogroup meeting on 8 October (see fiscal
consolidation measures below).
2012 Budget The 2012 budget was approved on 6 December 2011, with a supplementary budget adopted on 20 February 2012, allowing Greece to access the
second bailout fund. This supplementary budget contained additional measures worth EUR3.3bn (1.5% of GDP) on top of the measures outlined in
the 2012 budget. The additional package is heavily tilted towards revenue measures, in particular improving the taxation system. On the expenditure
side, the focus lies on pension spending, which is to be cut by 15% of GDP. However, preliminary findings by the Troika discovered that Greece is
currently facing a budget shortfall totalling EUR20bn – double its previous estimate.
Revenue: Not as good as targeted
Government revenue rose by only 1.6% y-o-y for the first eight months of the year, which is EUR2.1bn less than was targeted in an interim report
detailed under the bailout plan. This shortfall is due to the failure of thousands of Greeks to make their first income tax payments by the 31 August
deadline, leading to EUR270m of lost revenue. This prompted the finance minister to step up the crackdown on tax dodgers, with the government
seizing houses, cars, deposits and shares worth millions of euros in September.
Expenditure:
The Greek government managed to reduce its budget balance by 33.2% y-o-y in January–August thanks to the reductions in public spending and
investment set out in the 2012 budget.
Structural reforms Following the latest Troika review at the start of July, prime minister Antonis Samaras said Greece would step up the pace of reforms, acknowledging
that its austerity programme was off track. The government was scheduled to present a new set of reforms aimed at meeting the Troika’s demands at
the euro working group meeting on 28 September.
It has already committed to a selection of reforms including:
• Labour market reforms such as the reduction of private sector wages, including a 22% reduction in the minimum wage
• Product market reforms to promote competition and facilitate price flexibility
• Service market reforms with the priority of abolishing restrictions in 20 high-value or highly restricted professions
• Business environment improvements designed to improve the functioning of the fast-track investment framework and make the judicial system
more efficient.
Fiscal consolidation
measures
The economic adjustment programme, outlined in February, aims to achieve a primary deficit of 1% of GDP in 2012 and a primary surplus of 4.5% of
GDP in 2014. To achieve these targets, additional consolidation measures amounting to 1.5% of GDP (all on the expenditure side) were adopted in
the supplementary 2012 budget on top of those approved in the 2011 medium-term fiscal strategy and the 2012 budget. However, further measures
of around 5.5% of GDP must be identified to close the fiscal gap through to 2014. On 27 September, ministers reached an agreement on the “basic
framework” of the EUR13.6bn austerity package required by the Troika if Greece is to receive the next EUR31.5bn instalment of aid. This will
allegedly comprise EUR3bn of additional revenue and EUR10.6bn from additional expenditure savings. However, further details have yet to be
provided. Finance minister Yannis Stournaras said that Greece will attempt to insert a “symmetrical fiscal performance clause” which, in the case of
fiscal shortfalls, will trigger new measures and, in the case of fiscal outperformance, will allow measures to be clawed back. Measures amounting to
EUR7.5bn out of the EUR13.6bn package should be included in the draft 2013 budget.
Source: Reuters, IMF, FT, National Ministries of Finance, Consensus Economics
Macro
European Economics
Q4 2012
Portugal
Key information
Economy Portuguese GDP contracted 1.2% q-o-q in the second quarter of 2012 as the government’s austerity drive depressed domestic demand. This has
caused the economy to sink deeper into recession, as GDP has declined for the last seven consecutive quarters. The IMF is projecting economic
activity to decline by 3% in 2012 thanks to weaker import growth among the country’s main trade partners in the eurozone and additional austerity
measures. GDP is now expected to turn positive in the second quarter of 2013, causing a 1% decline in full-year GDP in 2013.
Weak domestic demand has combined with pressures on firms to reduce their debt levels to push up the unemployment rate on a year-on-year basis
since October 2008, and it hit a record high of 15% in Q2 2012. However, the IMF expects the rate to peak in early 2013 at 15.9%.
Politics The current government came to power in June 2011 and is a coalition led by the centre-right Social Democratic Party with the smaller conservative
Popular Party, led by Prime Minister Pedro Passos Coelho. The next Portuguese legislative election must take place by 2015 at the latest.
Financing Programme Portugal officially requested an EU-IMF bailout on 7 April 2011 and a EUR78bn bailout (to which EFSF, EFSM and IMF each contributed EUR26bn)
was unanimously approved on 17 May 2011. Of this EUR78bn, EUR51.5bn has been disbursed so far (EUR20.1bn from the EFSM, EUR17.4bn from
the EFSF and EUR13.5bn from the IMF).
After completing Portugal’s fifth review on 11 September 2012, the IMF stated that this “confirms that the programme is making progress, albeit
against strong headwinds”. Approval of the conclusion of this review by the IMF executive board and at the Eurogroup and Ecofin meetings on the 14
and 15 October will allow a further disbursement of EUR4.3bn, of which EUR2.8bn will be from the EU and EUR1.5bn from the IMF. The next
programme review is due to take place in November 2012.
2012 Budget On 11 September, after Portugal’s fifth Troika review, its deficit targets were revised upwards from 4.5% to 5% of GDP in 2012 and from 3% to 4.5%
in 2013. In 2014, Portugal’s target is to reduce its deficit to 2.5%, below the 3% threshold of the Stability and Growth pact. The IMF hopes that the
new targets will ease the short-term economic costs associated with fiscal adjustment while allowing the government to implement sound structural
fiscal measures.
Revenue: Lagging behind plans
First-half tax collection was weak. Despite overall revenue increasing thanks to one-off transfers of banks’ pension funds to the state, January–
August tax revenue fell 2.4% y-o-y, largely due to the continued rise in unemployment.
Expenditure: Performing better than budgeted
January–August primary expenditure fell 3.2% y-o-y largely thanks to cuts in benefits paid to public sector workers. However, increased debt
servicing costs caused total expenditure to fall only 0.7%. The majority of cuts came from capital expenditure, which was reduced by 21.5% y-o-y.
2013 Budget On 7 September prime minister Pedro Passos Coelho announced new measures that will be imposed next year, as part of the 2013 budget, to meet
budget deficit targets and curb Portugal’s high unemployment levels. These included a sharp cut in take-home pay for workers, with social security
contributions deducted from wages increasing from 11% to 18% while the rate companies pay will be cut from 23.75% to 18% to encourage hiring
and make Portuguese exports more competitive by cutting labour costs. In the face of widespread protests, the government is now renegotiating with
labour unions.
Financial Reforms Portugal’s banking system is still benefiting from Eurosystem support, and the authorities are finalising efforts to ensure that targets for bank’s capital
buffers will be met, while further progress has been made in strengthening the banking supervision and resolution frameworks. Deleveraging in the
banking system has continued at an acceptable pace, although in some parts of the economy, access to credit at reasonable rates is still difficult.
Portugal is still planning on returning to the bond markets by September 2013.
Structural Reforms Business environment: The Portuguese government is currently planning reforms which include an economy-wide overhaul of licensing intended to
increase competition, strengthen the business environment and improve efficiency as well as reducing rents in the services and network industries.
Source: Reuters, IMF, FT, National Ministries of Finance
Judicial: Portugal is making progress a number of reforms designed to improve the efficiency of the court system and to reduce the backlog of
enforcement cases that has slowed the judicial process, increasing costs across the economy.
Labour: On 1 August 2012 new labour reforms came into force aimed at increasing worker flexibility to improve productivity and job creation.
Reforms include abolishing four public holidays as well as reducing the number of paid days of holiday a worker is entitled to from 25 to 22 days. The
entitlement to extra holidays previously granted to workers who had not been absent in the preceding year has also been removed. The new law
introduces an “hours bank” which allows employers to increase the working day by up to two hours and decreases the pay received for overtime.
Dismissals have been made easier by abolishing the employer’s obligation to find a fired worker alternative employment, by making layoffs easier in
a situation where there is a “business crisis” and by decreasing redundancy pay.
Public sector: After the prime minister’s proposal to cut both Christmas and summer holiday bonuses (each equivalent to a month’s pay) for all
public sector workers was blocked by the constitutional court on 5 July 2012, the government will now only cut one of these bonuses in 2013 while
both will be cut in 2012. However, both will be abolished for state pensioners.
Privatisation: Thanks to a 2011 agreement with the EU, Portugal is currently in the process of privatising its national air carrier, TAP Portugal, and
its airport concession, Aeroportos de Portugal. The IMF had hoped that the sale of TAP would be possible by the end of 2011 but adverse market
conditions have meant that the sale has not yet materialised. The country’s comprehensive privatisation plan includes the energy and insurance
sectors, media industries and transport. On 31 May 2012 Fitch Ratings said it expected Portugal to exceed its privatisation revenue target of
EUR7bn.
29
30
Macro
European Economics
Q4 2012
Rescue Packages
Disbursements to Greece under first bailout package
EURbn EU IMF Total
1. May 2010 14.5 5.5 20.0
2. Sep 2010 6.5 2.6 9.1
3. Dec 2010/Jan 2011 6.5 2.5 9.0
4. Mar 2011 10.9 4.1 15.0
5. Jul 2011 8.7 3.2 11.9
6. Dec 2011 5.8 2.2 8.0
Total 52.9 20.1 73.0
Note: EUR34.3bn was rolled over from this package to the second package (EUR10bn from the IMF and
EUR24.4bn from the EFSF’s undisbursed Greek Loan Facility
Source: IMF, EFSF, ESM, ECB and European Commission
Disbursements to Ireland
EURbn EFSM EFSF IMF
Disbursements to Portugal
EURbn EFSM EFSF IMF
31 May 11 1.8 22 Jun 11 3.7 1st review (12 Sep 11) 4.0
01 Jun 11 4.8 29 Jun 11 2.2 2nd review (19 Dec 11) 2.9
21 Sep 11 5.0 20 Dec 11 1.0 3rd review (04 Apr 12) 5.2
29 Sep 11 2.0 12 Jan 12 1.7 4th review (16 Jul 12) 1.5
06 Oct 11 0.6 19 Jan 12 1.0
16 Jan 12 1.5 30 May 12 5.2
24 Apr 12 1.8 17 Jul 12 2.6
04 May 12 2.7
Already disbursed 20.2 17.4 13.5
Pending disbursement 5.8 8.6 12.5
Total 26.0 26.0 26.0
Source: IMF, EFSF, ESM and European Commission
12 Jan 11 5.0 01 Feb 11 3.6 1st review (18 Jan 11) 5.8
24 Mar 11 3.4 10 Nov 11 3 2nd review (16 May 11) 1.6
31 May 11 3.0 15 Dec 11 1 3rd review (02 Sep 11) 1.5
29 Sep 11 2.0 12 Jan 12 1.2 4th review (15 Dec 11) 3.9
06 Oct 11 0.5 19 Jan 12 0.5 5th review (27 Feb 12) 3.2
16 Jan 12 1.5 03 Apr 12 2.7 6th review (13 Jun 12) 1.4
05 Mar 12 3.0
03 Jul 12 2.3
Already disbursed 20.7 12.0 17.4
Pending disbursement 1.8 5.7 5.1
Total 22.5 17.7 22.5
Source: IMF, EFSF, ESM and European Commission
Disbursements to Greece under second bailout package
EURbn Total committed Disbursed
PSI 30.0 29.7*
Accrued interest 5.5 4.8*
IMF contribution 28.0
EFSF contribution 109.1 39.4
Total 2nd package 172.6 73.9
Note: *the residual amounts committed will not be used by Greece
This second package contains EUR130bn of “new” money to finance Greece until the end of 2014. A further
EUR34.4bn was rolled over from the second package and in 2015 the IMF will become the sole creditor and
disburse a further EUR8.2bn.
Note on ECB collateral: As a temporary operation, the EFSF provided the Eurosystem with bonds amounting to
EUR35bn as collateral during Greece’s selective default period due to the PSI operation. These bonds were
returned to the EFSF on 25 July 2012 and were cancelled on 3 August 2012
Source: IMF, EFSF, ESM, ECB and European Commission
Macro
European Economics
Q4 2012
Key European
forecasts and statistics
31
32
Macro
European Economics
Q4 2012
GDP
Real GDP growth
GDP growth continues to weaken in 2012 GDP growth divergence persists across Europe
%Yr
4
2
0
-2
-4
-6
-8
Germany
France
Italy
Spain
Greece
Ireland
2011 2012f 2013f
Portugal
%Yr
4
2
0
-2
-4
-6
-8
6
4
2
0
-2
-4
-6
-8
PT
GR
UK
IT
EM U
ES
IR
CZ
HU
CH
FR
% Year 2005 2006 2007 2008 2009 2010 2011 2012f 2013f
Eurozone 1.8 3.3 3.0 0.3 -4.4 2.0 1.5 -0.6 -0.1
Germany 0.8 3.9 3.4 0.8 -5.1 4.0 3.1 0.9 0.9
France 1.8 2.6 2.2 -0.2 -3.1 1.6 1.7 0.2 0.9
Italy 1.1 2.3 1.5 -1.2 -5.5 1.8 0.5 -2.5 -1.1
Spain
Other eurozone*
3.6 4.1 3.6 0.9 -3.7 -0.3 0.4 -1.5 -2.0
Austria 2.4 3.7 3.7 1.4 -3.8 2.3 3.1 0.8 1.7
Belgium 1.7 2.7 2.9 1.0 -2.8 2.3 1.9 0.0 1.2
Cyprus 3.9 4.1 5.1 3.6 -1.9 1.1 0.5 -0.8 0.3
Estonia 8.9 10.1 7.5 -3.7 -14.3 2.3 7.6 1.6 3.8
Finland 2.9 4.4 5.3 0.3 -8.4 3.7 2.9 0.8 1.6
Greece 2.3 5.5 3.0 -0.2 -3.3 -3.5 -6.9 -4.7 0.0
Ireland 5.3 5.3 5.2 -3.0 -7.0 -0.4 0.7 0.5 1.9
Luxembourg 5.4 5.0 6.6 0.8 -5.3 2.7 1.6 1.1 2.1
Malta 3.7 2.9 4.3 4.1 -2.7 2.3 2.1 1.2 1.9
Netherlands 2.0 3.4 3.9 1.8 -3.5 1.7 1.2 -0.9 0.7
Portugal 0.8 1.4 2.4 0.0 -2.9 1.4 -1.6 -3.3 0.3
Slovakia 6.7 8.3 10.5 5.8 -4.9 4.2 3.3 1.8 2.9
Slovenia
Other Western Europe
4.0 5.8 6.9 3.6 -8.0 1.4 -0.2 -1.4 0.7
UK 2.0 2.6 3.4 -1.1 -4.4 1.8 0.8 -0.1 1.1
Norway** 4.4 5.0 5.3 1.4 -1.5 1.8 2.5 3.6 3.0
Sweden 3.2 4.6 3.4 -0.8 -5.0 6.3 3.9 0.8 2.1
Switzerland 2.7 3.8 3.8 2.2 -1.9 3.0 1.9 0.9 1.4
Denmark*
Other Europe
2.4 3.4 1.6 -0.8 -5.8 1.3 1.0 1.1 1.4
Hungary 4.0 3.9 0.1 0.9 -6.8 1.3 1.6 -1.0 1.3
Poland 3.6 6.2 6.8 5.1 1.6 3.9 4.3 2.5 2.0
Romania 4.1 7.9 6.3 7.2 -6.6 -1.7 2.5 1.1 2.5
Turkey 8.4 6.9 4.7 0.7 -4.8 9.2 8.5 2.7 3.8
Czech Republic 6.8 7.2 5.7 2.9 -4.5 2.6 1.7 -0.9 1.0
Bulgaria* 6.4 6.5 6.4 6.2 -5.5 0.4 1.7 0.5 1.9
Latvia* 10.1 11.2 9.6 -3.3 -17.7 -0.3 5.5 2.2 3.6
Lithuania* 7.8 7.8 9.8 2.9 -14.8 1.4 5.9 2.4 3.5
Russia 6.4 8.2 8.5 5.2 -7.8 4.3 4.3 3.0 2.5
Note: *European Commission Spring 2012 forecasts for 2011, 2012 and 2013, **mainland GDP
Source: HSBC estimates, European Commission Spring 2012 forecasts
Source: HSBC estimates, European Commission Spring 2012 forecasts Source: HSBC, European Commission
%Yr
2011
NO
RO
RU
PL
SE
DE
%Y r
6
4
2
0
-2
-4
-6
-8
Macro
European Economics
Q4 2012
Consumer prices
CPI
% Year 2005 2006 2007 2008 2009 2010 2011 2012f 2013f
Eurozone 2.2 2.2 2.1 3.3 0.3 1.6 2.7 2.5 1.8
Germany 1.9 1.8 2.3 2.7 0.2 1.2 2.5 2.1 2.1
France 1.9 1.9 1.6 3.2 0.1 1.7 2.3 2.3 1.8
Italy 2.2 2.2 2.0 3.5 0.8 1.6 2.9 3.4 2.3
Spain
Other eurozone*
3.4 3.6 2.8 4.1 -0.2 2.0 3.1 2.4 2.5
Austria 2.1 1.7 2.2 3.2 0.4 1.7 3.6 2.4 2.0
Belgium 2.5 2.3 1.8 4.5 0.0 2.3 3.5 2.9 1.8
Cyprus 2.0 2.2 2.2 4.4 0.2 2.6 3.5 3.4 2.5
Estonia 4.1 4.4 6.7 10.6 0.2 2.7 5.1 3.9 3.4
Finland 0.8 1.3 1.6 3.9 1.6 1.7 3.3 3.0 2.5
Greece 3.5 3.3 3.0 4.2 1.3 4.7 3.1 -0.5 -0.3
Ireland 2.2 2.7 2.9 3.1 -1.7 -1.6 1.2 1.7 1.2
Luxembourg 3.8 3.0 2.7 4.1 0.0 2.8 3.7 3.0 2.0
Malta 2.5 2.6 0.7 4.7 1.8 2.0 2.4 2.0 2.2
Netherlands 1.5 1.7 1.6 2.2 1.0 0.9 2.5 2.5 1.8
Portugal 2.1 3.0 2.4 2.7 -0.9 1.4 3.6 3.0 1.1
Slovakia 2.8 4.3 1.9 3.9 0.9 0.7 4.1 2.9 1.9
Slovenia
Other Western Europe
2.5 2.5 3.8 5.5 0.9 2.1 2.1 2.2 1.7
UK 2.0 2.3 2.3 3.6 2.2 3.3 4.5 2.7 2.5
Norway 1.5 2.3 0.7 3.8 2.2 2.4 1.3 0.7 1.6
Sweden 0.5 1.4 2.2 3.4 -0.5 1.2 3.0 1.1 1.2
Switzerland 1.2 1.1 0.7 2.4 -0.5 0.7 0.2 -0.6 0.3
Denmark*
Other Europe
1.7 1.9 1.7 3.6 1.1 2.2 2.7 2.6 1.5
Hungary 3.6 3.9 8.0 6.1 4.2 4.9 3.9 5.7 3.7
Poland 2.1 1.0 2.5 4.2 3.5 2.6 4.3 3.9 2.7
Romania 9.0 6.6 4.8 7.9 5.6 6.9 5.8 3.1 3.5
Turkey 8.2 9.6 8.8 10.4 6.3 8.6 6.5 9.0 7.3
Czech Republic 1.9 2.5 2.8 6.3 1.0 1.5 1.9 3.3 2.0
Bulgaria* 6.0 7.4 7.6 12.0 2.5 3.0 3.4 2.6 2.7
Latvia* 6.9 6.6 10.1 15.3 3.3 -1.2 4.2 2.6 2.1
Lithuania* 2.7 3.8 5.8 11.1 4.2 1.2 4.1 3.1 2.9
Russia 12.7 9.7 9.0 14.1 11.7 6.8 8.5 5.2 7.4
Note: *European Commission Spring 2012 forecasts for 2011, 2012 and 2013
Source: HSBC estimates, European Commission Spring 2012 forecasts
Inflation easing through to 2013 Inflation above 2% for most European countries in 2011
%Yr
4
3
2
1
0
-1
Germany
Franc e
Italy
Spain
Greece
Ireland
2011 2012f 2013f
Portugal
%Yr
4
3
2
1
0
-1
10
8
6
4
2
0
IR
CH
CZ
NO
EM U
DE
FR
Source: HSBC estimates, European Commission Spring 2012 forecasts Source: HSBC, European Commission
%Yr
GR
ES
SE
IT
20 11
HU
PT
RU
RO
UK
PL
%Y r
10
8
6
4
2
0
33
34
Macro
European Economics
Q4 2012
Consumer spending
Consumer spending
% Year 2005 2006 2007 2008 2009 2010 2011 2012f 2013f
Eurozone 1.8 2.2 1.7 0.4 -1.0 1.0 0.1 -0.8 -0.2
Germany 0.3 1.6 -0.2 0.6 0.3 0.8 1.7 0.9 1.2
France 2.5 2.5 2.2 0.2 0.2 1.4 0.2 0.1 0.5
Italy 1.2 1.3 1.1 -0.8 -1.6 1.2 0.2 -3.4 -1.3
Spain
Other eurozone*
4.1 4.0 3.6 -0.6 -3.8 0.7 -1.0 -1.8 -1.8
Austria 2.2 1.8 0.9 0.8 -0.3 2.2 0.6 0.8 1.0
Belgium 1.0 1.8 1.7 1.9 0.8 2.5 0.7 0.1 1.2
Cyprus 3.5 4.7 10.2 7.8 -7.5 1.3 0.2 -2.5 0.3
Estonia 9.5 13.5 8.8 -6.1 -15.6 -1.7 4.2 2.8 3.0
Finland 3.1 4.3 3.5 1.9 -2.7 3.0 3.3 1.7 1.0
Greece 4.5 4.3 3.7 4.0 -1.3 -3.6 -7.1 -5.7 -1.1
Ireland 6.8 6.6 6.3 -1.4 -7.2 -0.9 -2.7 -1.7 0.3
Luxembourg 2.6 3.2 3.3 3.4 1.1 2.1 1.8 0.7 2.0
Malta 1.7 3.5 0.6 5.1 -1.4 -1.7 3.1 0.3 1.0
Netherlands 1.0 -0.3 1.8 1.3 -2.6 0.4 -1.1 -1.5 0.0
Portugal 1.7 1.8 2.5 1.3 -2.3 2.1 -3.9 -6.1 -1.0
Slovakia 6.5 5.9 6.8 6.1 0.2 -0.7 -0.4 0.2 1.6
Slovenia
Other Western Europe
2.1 2.8 6.1 3.7 -0.1 -0.7 -0.3 -1.4 -0.4
UK** 2.1 1.8 2.7 -1.5 -3.5 1.3 -1.0 -0.1 1.3
Norway 4.9 5.1 5.4 2.0 -0.2 3.6 2.4 3.7 4.5
Sweden 2.8 2.8 3.8 -0.1 -0.2 3.9 2.2 1.6 1.2
Switzerland 1.7 1.6 2.2 1.2 1.8 1.6 1.2 2.3 1.6
Denmark*
Other Europe
3.8 3.6 3.0 -0.3 -4.2 1.9 -0.5 1.4 1.6
Hungary 2.9 1.7 -1.0 -0.2 -5.7 -2.7 0.2 -1.3 0.2
Poland 2.1 5.0 4.9 5.7 2.1 3.2 3.1 1.6 1.6
Romania 9.7 11.5 10.1 8.8 -9.1 -0.3 0.7 0.1 2.1
Turkey 7.9 4.6 5.5 -0.3 -2.3 6.7 7.7 0.0 3.0
Czech Republic 3.1 4.4 4.2 2.8 -0.3 0.5 -0.5 -2.8 0.3
Bulgaria* 6.7 8.6 9.0 3.4 -7.6 0.1 -0.6 0.6 1.9
Latvia* 11.6 21.4 14.3 -5.8 -22.6 0.4 4.4 2.2 3.3
Lithuania* 11.2 10.0 11.3 4.2 -17.5 -4.9 6.1 3.0 3.4
Russia 12.2 12.2 14.3 10.6 -5.1 5.1 6.8 5.5 4.5
Note: *European Commission Spring 2012 forecasts for 2011, 2012 and 2013, no estimates available for Greece, **fiscal year forecasts
Source: HSBC estimates, European Commission Spring 2012 forecasts
Weak consumer spending in 2012 for the largest member states Consumption particularly weak in periphery in 2011
%Yr
2
0
-2
-4
-6
-8
Germany France Italy Spain Ireland Portugal
2011 2012f 2013f
Source: HSBC estimates, European Commission Spring 2012 forecasts Source: HSBC, European Commission
%Yr
2
0
-2
-4
-6
-8
%Yr
6
4
2
0
-2
EMU
IR
ES
IT
PT
HU
CH
DE
FR
CZ
2011
RO
PL
SE
UK
RU
NO
%Yr
6
4
2
0
-2
Macro
European Economics
Q4 2012
Budget balance
Budget balance
%GDP 2005 2006 2007 2008 2009 2010 2011 2012f 2013f
Eurozone -2.6 -1.3 -0.6 -2.0 -6.2 -6.3 -4.6 -3.9 -3.2
Germany -3.3 -1.6 0.2 -0.1 -3.1 -4.3 -1.0 -0.8 -0.6
France -2.9 -2.3 -2.7 -3.3 -7.5 -7.1 -5.2 -4.5 -3.5
Italy -4.4 -3.4 -1.6 -2.7 -5.4 -4.6 -3.9 -2.9 -2.3
Spain
Other eurozone*
1.3 2.4 1.9 -4.1 -11.2 -9.3 -8.9 -6.8 -5.0
Austria -1.8 -1.7 -1.0 -1.0 -4.1 -4.5 -2.6 -3.0 -1.9
Belgium -2.6 0.3 -0.1 -1.0 -5.7 -3.9 -3.9 -3.1 -3.3
Cyprus -2.4 -1.2 3.5 0.9 -6.1 -5.3 -6.3 -3.4 -2.5
Estonia 1.6 2.5 2.4 -2.9 -2.0 0.3 1.0 -2.4 -1.3
Finland 2.7 4.0 5.3 4.2 -2.7 -2.8 -0.9 -1.0 -0.6
Greece -5.6 -6.0 -6.8 -9.9 -15.6 -10.5 -9.2 -7.3 -8.4
Ireland 1.7 2.9 0.1 -7.3 -14.0 -31.2 -13.0 -8.3 -7.5
Luxembourg 0.0 1.4 3.7 3.0 -0.8 -0.9 -0.6 -1.8 -2.2
Malta -2.9 -2.8 -2.4 -4.6 -3.8 -3.7 -2.7 -2.6 -2.9
Netherlands -0.3 0.5 0.2 0.5 -5.6 -5.0 -4.6 -4.4 -4.6
Portugal -6.5 -4.6 -3.2 -3.7 -10.2 -9.8 -4.2 -4.7 -3.1
Slovakia -2.8 -3.2 -1.8 -2.1 -8.0 -7.7 -4.8 -4.8 -5.1
Slovenia
Other Western Europe
-1.5 -1.4 0.0 -1.9 -6.1 -6.0 -6.4 -4.3 -3.8
UK -2.9 -2.3 -2.4 -6.7 11.2 -9.5 -7.9 -6.6 -7.1
Norway 15.1 18.5 17.7 19.1 10.7 10.6 11.3 13.8 13.6
Sweden 2.2 2.3 3.6 2.2 -0.7 0.2 0.3 -0.4 -0.6
Switzerland* -0.7 0.8 1.7 2.3 1.0 0.6 0.6 0.5 0.4
Denmark*
Other Europe
5.0 5.0 4.8 3.3 -2.7 -2.7 -1.9 -4.2 -2.1
Hungary -7.9 -9.5 -5.1 -3.7 -4.5 -4.3 4.2 -3.0 -3.5
Poland -4.1 -3.6 -1.9 -3.7 -7.3 -7.8 -5.1 -3.4 -3.0
Romania -1.2 -2.2 -2.9 -5.7 -9.0 -6.8 -5.2 -2.8 -2.5
Turkey -1.3 -0.5 -1.6 -1.8 -5.5 -3.6 -1.4 -2.2 -1.5
Czech Republic -3.2 -2.4 -0.7 -2.2 -5.8 -4.8 -3.1 -2.9 -2.9
Bulgaria* 1.0 1.9 1.2 1.7 -4.3 -3.1 -2.1 -1.9 -1.7
Latvia* -0.4 -0.5 -0.4 -4.2 -9.7 -8.1 -3.5 -2.1 -2.1
Lithuania* -0.5 -0.4 -1.0 -3.3 -9.4 -7.3 -5.5 -3.2 -2.8
Russia 7.5 7.4 5.4 4.1 -6.0 -4.0 0.8 0.0 -1.1
Note: *European Commission Spring 2012 forecasts for 2011, 2012 and 2013
Source: HSBC estimates, European Commission Spring 2012 forecasts
Budget balances expected to improve as austerity measures kick in Worst deficits in Ireland and Greece in 2011
%GDP
0
-5
-10
-15
Germany
Franc e
Italy
Spain
Greece
Ireland
20 11 2012f 2013f
Portugal
%GDP
0
-5
-10
-15
%GDP
Source: HSBC estimates, European Commission Spring 2012 forecasts Source: HSBC, European Commission
15
10
5
0
-5
-10
-15
EMU
PL
RO
FR
UK
ES
GR
IR
CZ
IT
PT
2011
NO
HU
RU
CH
SE
DE
%GDP
15
10
5
0
-5
-10
-15
35
36
Macro
European Economics
Q4 2012
Debt
General government gross debt
%GDP 2005 2006 2007 2008 2009 2010 2011 2012f 2013f
Eurozone 70.2 68.6 66.3 70.1 79.9 85.6 89.3 91.9 93.5
Germany 68.6 68.0 65.2 66.7 74.4 83.0 81.2 80.3 78.7
France 66.8 64.1 64.2 68.2 79.2 82.3 86.0 90.5 91.9
Italy 105.4 106.1 103.1 105.8 115.5 118.4 120.1 126.6 127.0
Spain
Other eurozone*
43.1 39.6 36.2 40.2 53.9 61.2 68.5 81.3 86.1
Austria 64.2 62.3 60.2 63.8 69.5 71.9 72.2 74.2 74.3
Belgium 92.0 88.0 84.1 89.3 95.8 96.0 98.0 100.5 100.8
Cyprus 69.4 64.7 58.8 48.9 58.5 61.5 71.6 76.5 78.1
Estonia 4.6 4.4 3.7 4.5 7.2 6.7 6.0 10.4 11.7
Finland 41.7 39.6 35.2 33.9 43.5 48.4 48.6 50.5 51.7
Greece 101.2 107.3 107.4 113.0 129.4 145.0 165.3 160.6 168.0
Ireland 27.2 24.7 24.8 44.2 65.1 92.5 108.2 116.1 120.2
Luxembourg 6.1 6.7 6.7 13.7 14.8 19.1 18.2 20.3 21.6
Malta 69.7 64.4 62.3 62.3 68.1 69.4 72.0 74.8 75.2
Netherlands 51.8 47.4 45.3 58.5 60.8 62.9 65.2 70.1 73.0
Portugal 62.5 63.7 68.3 71.6 83.1 93.3 107.8 113.9 117.1
Slovakia 34.2 30.5 29.6 27.9 35.6 41.1 43.3 49.7 53.5
Slovenia
Other Western Europe
26.7 26.4 23.1 21.9 35.3 38.8 47.6 54.7 58.1
United Kingdom** 42.5 43.4 44.4 54.8 69.6 79.6 85.7 91.2 94.6
Norway 44.5 55.4 51.5 48.2 43.5 43.7 39.7 36.6 33.2
Sweden 50.4 45.0 40.2 38.8 42.6 39.3 38.3 38.0 37.5
Switzerland 51.6 47.4 44.7 43.0 41.5 40.5 42.3 42.3 42.0
Denmark*
Other Europe
37.8 32.1 27.5 33.4 40.6 42.9 46.5 40.9 42.1
Hungary 61.7 65.9 67.1 72.9 79.7 81.3 80.6 76.0 75.0
Poland 47.1 47.7 45.0 47.1 50.9 54.9 56.0 55.0 54.0
Romania 15.8 12.4 12.8 13.4 23.6 31.0 33.0 36.0 36.0
Turkey 52.7 46.5 39.9 40.0 46.1 42.4 39.4 37.0 35.0
Czech Republic 28.4 28.3 27.9 28.7 34.4 38.1 41.2 44.0 45.0
Bulgaria* 27.5 21.6 17.2 13.7 14.6 16.3 16.3 17.6 18.5
Latvia* 12.5 10.7 9.0 19.8 36.7 44.7 42.6 43.5 44.7
Lithuania* 18.3 17.9 16.8 15.5 29.4 38.0 38.5 40.4 40.9
Russia 14.9 8.8 8.7 6.6 10.2 11.6 11.5 12.1 12.7
Note: *European Commission Spring 2012 forecasts for 2011, 2012 and 2013 **HSBC forecasts for the UK are calculated based on net debt, therefore for comparison purposes we have used European Commission forecasts
Source: HSBC estimates, European Commission Spring 2012 forecasts
Debt levels are way above the Maastricht threshold of 60% of GDP... ...in most EU countries
%GDP
200
150
100
50
0
Germany
France
Italy
Spain
Greece
Ireland
Portugal
2011 2012f 2013f
%GDP
200
150
100
50
0
%GDP
180
150
120
90
60
30
0
RO
NO
Source: HSBC estimates, European Commission Spring 2012 forecasts Source: HSBC, European Commission
PT
EMU
FR
UK
DE
HU
ES
PL
CZ
SE
2011
GR
IT
IR
%GDP
180
150
120
90
60
30
0
Macro
European Economics
Q4 2012
Unemployment
Unemployment rate
% 2005 2006 2007 2008 2009 2010 2011 2012f 2013f
Eurozone 9.2 8.5 7.6 7.7 9.6 10.1 10.2 11.4 12.1
Germany 11.7 10.8 9.0 7.8 8.1 7.7 7.1 6.8 6.7
France 9.3 9.3 8.4 7.8 9.5 9.8 9.7 10.2 10.5
Italy 7.7 6.8 6.5 6.8 7.8 8.4 8.4 10.6 11.5
Spain
Other eurozone*
9.2 8.5 8.3 11.4 18.0 20.1 21.7 25.0 27.2
Austria 5.2 4.8 4.4 3.8 4.8 4.4 4.2 4.3 4.2
Belgium 8.5 8.3 7.5 7.0 7.9 8.3 7.2 7.6 7.9
Cyprus 5.3 4.6 3.9 3.7 5.3 6.2 7.8 9.8 9.9
Estonia 7.9 5.9 4.7 5.5 13.8 16.9 12.5 11.6 10.5
Finland 8.4 7.7 6.9 6.4 8.2 8.4 7.8 7.9 7.7
Greece 9.9 8.9 8.3 7.7 9.5 12.6 17.7 19.7 19.6
Ireland 4.4 4.5 4.6 6.3 11.9 13.7 14.4 14.3 13.6
Luxembourg 4.6 4.6 4.2 4.9 5.1 4.6 4.8 5.2 5.9
Malta 7.3 6.9 6.5 6.0 6.9 6.9 6.5 6.6 6.3
Netherlands 5.3 4.4 3.6 3.1 3.7 4.5 4.4 5.7 6.2
Portugal 8.6 8.6 8.9 8.5 10.6 12.0 12.9 15.5 15.1
Slovakia 16.3 13.4 11.1 9.5 12.0 14.4 13.5 13.2 12.7
Slovenia
Other Western Europe
6.5 6.0 4.9 4.4 5.9 7.3 8.2 9.1 9.4
UK 4.8 5.4 5.3 5.6 7.6 7.8 8.1 8.1 8.2
Norway 3.5 2.6 1.9 1.7 2.7 2.9 2.7 2.5 2.3
Sweden 7.6 6.6 6.1 6.7 8.7 7.9 7.5 8.1 7.5
Switzerland 3.8 3.3 2.8 2.6 3.7 3.5 2.8 2.9 3.1
Denmark*
Other Europe
4.8 3.9 3.8 3.4 6.0 7.5 7.6 7.7 7.6
Hungary 7.3 7.5 7.7 8.0 10.5 10.8 10.7 11.1 10.9
Poland 17.6 14.8 11.2 9.5 12.1 12.4 12.5 13.0 13.0
Romania 5.9 5.2 4.1 4.4 7.8 6.9 5.1 5.0 5.0
Turkey 10.3 9.9 9.9 13.6 13.7 11.4 9.8 10.0 9.0
Czech Republic 8.9 7.7 6.0 6.0 9.2 9.6 8.6 8.8 8.8
Bulgaria* 10.1 9.0 6.9 5.6 6.8 10.2 11.2 12.0 11.9
Latvia* 8.9 6.8 6.0 7.5 17.1 18.7 16.1 14.8 13.2
Lithuania* 8.3 5.6 4.3 5.8 13.7 17.8 15.4 13.8 12.7
Russia 7.6 6.9 6.1 7.8 8.2 7.2 6.1 5.8 5.7
Note: *European Commission Spring 2012 forecasts for 2011, 2012 and 2013
Source: HSBC estimates, European Commission Spring 2012 forecasts
Diverging unemployment between largest member states Spanish unemployment highest in Europe
%
30
25
20
15
10
5
0
05 06 07 08 09 10 11 12f 13f
Eurozone Germany France Ital y Spain
%
30
25
20
15
10
5
0
25
20
15
10
5
0
CH
NO
RU
RO
SE
DE
Source: HSBC estimates, European Commission Spring 2012 forecasts Source: HSBC, European Commission
%
IT
UK
EMU
FR
CZ
2011
GR
IR
PT
PL
HU
ES
%
25
20
15
10
5
0
37
38
Macro
European Economics
Q4 2012
Demographics
Changes in population of working age in each decade
% 1990-00 2000-10 2010-20f 2020-30f 2030-40f 2040-50f
Eurozone 0.3 0.4 -1.9 -4.6 -5.8 -3.7
Germany 0.2 -0.3 -5.1 -10.6 -7.7 -4.3
France 0.3 0.7 -0.3 0.2 0.3 2.1
Italy -0.1 0.3 -2.3 -5.4 -9.8 -5.3
Spain
Other eurozone
0.7 1.4 1.8 -1.0 -7.2 -7.7
Austria 0.4 0.5 -0.4 -6.7 -6.8 -3.6
Belgium 0.1 0.5 -1.5 -2.7 -1.9 0.4
Cyprus 2.4 2.2 8.6 2.8 0.1 -6.8
Estonia -1.2 0.0 -7.0 -3.9 -3.6 -7.9
Finland 0.3 0.3 -5.5 -2.9 0.2 -1.3
Greece 0.9 0.2 -1.7 -2.4 -6.3 -6.3
Ireland 1.6 2.0 5.9 7.1 2.6 0.0
Luxembourg 1.0 1.6 12.7 5.1 2.4 0.2
Malta 1.0 1.3 -4.4 -4.9 -2.6 -7.6
Netherlands 0.5 0.3 -2.1 -5.4 -5.2 0.4
Portugal 0.5 0.4 -2.3 -7.2 -11.7 -12.4
Slovakia 0.7 0.7 -4.5 -5.2 -4.8 -11.0
Slovenia
Other Western Europe
0.3 0.3 -5.2 -5.5 -5.5 -7.8
UK 0.2 0.7 2.2 1.6 0.5 0.8
Norway 0.6 1.1 2.3 2.0 0.6 3.8
Sweden 0.4 0.7 -0.6 2.0 1.0 1.2
Switzerland 0.5 0.9 -0.9 -5.4 -7.5 -4.7
Denmark
Other Europe
0.3 0.2 -0.5 -1.9 -2.5 0.8
Hungary 0.0 -0.1 -6.4 -3.4 -5.3 -7.5
Poland 0.5 0.4 -7.5 -6.4 -3.7 -12.0
Romania 0.0 -0.2 -5.9 -4.6 -10.0 -12.2
Turkey 2.4 2.0 13.2 7.3 1.9 -3.3
Czech Republic 0.5 0.5 -7.1 -1.1 -3.3 -8.8
Bulgaria -0.7 -0.5 -12.1 -9.4 -12.1 -15.3
Latvia -1.1 -0.2 -8.4 -7.2 -5.5 -10.1
Lithuania -0.6 -0.1 -7.2 -9.2 -5.4 -7.6
Russia 0.1 0.2 -7.7 -6.8 -4.6 -10.6
Source: World Bank, UN population estimates
Significant declines in working population over the next two decades Ageing populations are an issue across the whole of Europe
% change
3
0
-3
-6
-9
-12
1990-00
2000-10
2010-20
2020-30
2030-40
2040-50
Germany France Italy Spain
% change
3
0
-3
-6
-9
-12
0
-10
-20
-30
-40
-50
-60
RO
PT
RU
PL
IT
DE
Source: UN population estimates Source: World Bank, UN population estimates
% change in w orking population betw een now and 2050
CH
HU
CZ
GR
UK
SE
FR
ES
IR
NO
0
%
-10
-20
-30
-40
-50
-60
Macro
European Economics
Q4 2012
Economic infrastructure
Economic infrastructure
Nominal GDP Population GDP per capita Average years
male schooling*
Life
expectancy*
Fertility*
(average child
per person)
Tax revenue* Government
spending
2011 EURbn Persons, million EUR Years Years Children % GDP % GDP
Eurozone 9410 333 28,258 10.5 81 1.6 24.5 21.5
Germany 2567 82 31,413 11.8 80 1.4 22.3 19.5
France 1995 65 30,494 10.5 81 2.0 25.8 24.5
Italy 1581 61 26,013 9.5 82 1.4 28.7 20.5
Spain
Other eurozone*
1073 46 23,216 10.4 82 1.4 20.2 20.3
Austria 300 8 35,673 9.5 80 1.4 27.2 18.8
Belgium 370 11 33,605 10.5 80 1.8 29.1 24.1
Cyprus 18 1 15,915 10.1 79 1.5 26.6 19.4
Estonia 16 1 11,918 11.8 75 1.6 20.7 19.5
Finland 189 5 35,133 10.0 80 1.9 29.4 24.3
Greece** 230 11 20,376 10.7 80 1.4 19.8 17.5
Ireland 159 4 35,436 11.6 80 2.1 22.1 18.3
Luxembourg 43 1 82,843 10.1 80 1.6 26.1 16.5
Malta 6 0 15,339 10.2 81 1.4 26.9 21
Netherlands 602 17 36,079 11.0 81 1.8 24.3 28.1
Portugal 171 11 16,069 8.0 79 1.3 22.2 20.1
Slovakia 69 5 12,695 11.2 75 1.4 15.5 18.1
Slovenia
Other Western Europe
36 2 17,349 11.7 79 1.6 22.6 20.6
UK 1747 63 27,895 9.8 80 1.9 28.6 22.4
Norway 349 5 70,485 12.3 81 2.0 33.3 21.5
Sweden 387 9 40,917 11.6 81 2.0 37.4 26.6
Switzerland 459 8 58,102 9.9 82 1.5 22.4 11
Denmark
Other Europe
239 6 42,919 10.1 79 1.9 46.5 28.6
Hungary 101 10 10,143 11.7 74 1.3 25.4 20.8
Poland 370 38 9,681 9.9 76 1.4 20.6 18.1
Romania 136 21 6,367 10.4 73 1.4 18.3 14.4
Turkey 554 74 7,519 7.0 74 2.1 20.5 14
Czech Republic 155 11 14,677 12.1 77 1.5 18.2 20.9
Bulgaria 38 7 5,148 9.9 74 1.5 20.1 15.5
Latvia 20 2 9,018 10.6 73 1.2 18.7 16.2
Lithuania 31 3 9,585 10.9 73 1.6 16.5 18.9
Russia 1343 142 9,460 11.5 69 1.5 17.0 17.9
Note: * 2010 data, **Greece 2010 Nominal GDP
Source: Eurostat, World Bank, www.barrolee.com, World in 2050: From the Top 30 to the Top 100, Karen Ward, HSBC, 11 January 2012, Russian Federal Tax Agency
Population (millions, 2011) GDP per capita (EUR thousands, 2011)
NO
IR
SE
CZ
HU
PT
RO
GR
PL
ES
IT
FR
UK
DE
0 10 20 30 40 50 60 70 80 90
Persons, m n
EUR th
Source: World Bank Note: *Greece GDP 2010 data
Source: Eurostat, World Bank
80
60
40
20
0
FR
EMU
UK
IT
ES
GR*
PT
CZ
HU
PL
RU
RO
2011
NO
CH
SE
NL
IR
DE
EURth
80
60
40
20
0
39
40
Macro
European Economics
Q4 2012
Eurozone
Breathing space
The ECB has announced a framework that
could provide a backstop for the eurozone as
long as governments deliver on their side of the
bargain. By committing to buy unlimited
amounts of government bonds through its OMT
(Outright Monetary Transactions) programme,
the ECB can try to address the "convertibility"
(euro break-up) risk while governments attempt
to lower their credit risk by undertaking
structural reforms and fiscal consolidation. But
the ECB can’t purchase any bonds until a
country requests an EFSF/ESM programme, and
with spreads having narrowed sharply, the
Spanish government appears in no hurry to ask.
Even once Spain goes into a programme (most
likely in October) and the ECB starts buying
bonds, the long-term sustainability of the euro
% Year
will hinge on the debtor countries’ ability to
meet the conditions of their programmes and the
willingness of all of the member states to make
further progress on the roadmap for future
financial sector integration and fiscal
centralisation. Already the likely timing for a
banking union appears set to be delayed.
Meanwhile the growth picture remains
worrying. The eurozone was a little more
resilient than we had expected in H1 2012,
thanks to net exports which offset a domestic
contraction, but our GDP forecast remains
unchanged at -0.6% for 2012 as we now expect
the external environment to be a little weaker in
H2. Our 2013 forecast has also edged down
further, with virtually all of the mild upturn
expected to come from a gradual export revival.
2011 2012f 2013f Q3 12f Q4 12f Q1 13f Q2 13f Q3 13f Q4 13f
Consumer spending 0.1 -0.8 -0.2 -1.0 -0.6 -0.5 -0.2 -0.1 0.2
Government consumption -0.1 0.1 -0.8 0.2 0.0 -0.4 -0.8 -0.9 -0.9
Fixed investment 1.6 -3.3 -1.5 -3.7 -4.0 -2.9 -2.2 -0.9 0.1
Final domestic demand 0.3 -1.1 -0.6 -1.3 -1.1 -0.9 -0.8 -0.4 -0.1
Stockbuilding (% GDP) 0.1 -0.1 -0.3 -0.2 -0.3 -0.3 -0.3 -0.2 -0.3
Domestic demand 0.5 -1.3 -0.7 -1.5 -1.4 -1.3 -1.1 -0.5 -0.1
Exports 6.3 2.5 2.5 1.8 2.1 2.0 1.5 2.7 3.7
Imports 4.1 -0.3 1.5 -0.6 0.8 1.3 1.0 1.5 2.3
GDP 1.5 -0.6 -0.1 -0.9 -0.8 -0.8 -0.5 0.1 0.7
GDP (% quarter) - - - -0.3 -0.3 0.0 0.1 0.2 0.3
Industrial production 3.4 -2.0 1.1 -2.9 -1.0 -0.1 1.0 1.4 2.2
Unemployment (%) 10.2 11.4 12.1 11.7 11.8 12.0 12.1 12.2 12.3
Wages 2.5 2.1 2.1 2.4 2.3 2.2 2.1 2.0 1.9
Inflation 2.7 2.5 1.8 2.5 2.4 1.9 1.9 1.8 1.7
M3 2.1 3.4 3.0 3.2 3.9 3.5 3.3 2.6 2.8
Current account (% GDP) -0.0 0.5 0.5 - - - - - -
Budget balance (% GDP) -4.6 -3.9 -3.2 - - - - - -
Debt (% GDP) 89.3 91.9 93.5 - - - - - -
ECB refi rate* 1.00 0.50 0.50 0.75 0.50 0.50 0.50 0.50 0.50
3-month money (%) 1.3 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2
10-year bond yield (%)** 3.7 3.0 2.6 3.1 3.0 2.9 2.7 2.6 2.6
USD/EUR 1.30 1.35 1.40 1.30 1.35 1.37 1.38 1.39 1.40
Note. * = Period-end; ** = Weighted average of big 4, period-end
Source: Thomson Reuters Datastream, HSBC estimates
Janet Henry
Economist
HSBC Bank plc
+44 20 7991 6711
janet.henry@hsbcib.com
Macro
European Economics
Q4 2012
Promise of ECB action has caused rates to converge... … but the ECB can only buy time
% 10yr Bond yields
%
8
8
6
4
2
0
07 08 09 10 11 12
Eurozone Germany Spain
Source: Thomson Reuters Datastream
6
4
2
0
Since ECB head, Mario Draghi committed to do
whatever it takes to preserve the euro there has been a
significant convergence of eurozone government bond
yields.
The ECB can provide a backstop for the eurozone as
long as governments deliver on their side of the bargain.
The ECB can try to address the "convertibility" (euro
break-up) risk, while governments attempt to lower their
credit risk by undertaking structural reforms and fiscal
consolidation.
Governments will also need to show convincing
progress in drawing up a credible roadmap and timeline
for future financial sector and fiscal integration.
Despite the LTRO, loan growth continues to weaken… … and country divergences persist
EURbn, 3m sum Eurozone EURbn, 3m sum
200
200
150
100
50
0
-50
-100
65
60
55
50
45
40
35
30
25
20
Source: ECB
04 05 06 07 08 09 10 11 12
Corporate loan flow Household loan flow
150
100
50
0
-50
-100
Recent monetary growth has revived a little, with M3
accelerating to 3.8% from 3.2% in June.
However, loan growth remains extremely weak with no
evidence that the three-year LTROs have found their way
into an improving availability of credit. Household loan
growth has slowed to 1.1% y-o-y and corporate sector
lending to -0.2%. The monthly flows were also still falling.
The positive financial market response to the ECB’s OMT
programme should help to improve confidence, but the
country divergence in lending activity is set to persist
given the recessions and banking sector restructurings in
the periphery. Spain’s loan growth slowed to -5% y-o-y in
July while Germany’s has revived to 1.8%.
The contraction in GDP... … does not fully reflect how weak the economy is
Index % Qtr
99 00 01 02 03 04 05 06 07 08 09 10 11 12
Eurozone composite PMI output (LHS)
Eurozone GDP (RHS)
Source: Markit, Eurostat
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
-2.5
-3.0
Despite the upside surprises to German and French
GDP, eurozone GDP contracted by 0.2% q-o-q in Q2 as
the recessions elsewhere in the eurozone intensified.
Growth was still supported in Q2 by exports, particularly
to non-eurozone countries, such as China, but the world
trade cycle is now showing a more marked weakening.
This is likely to take a greater toll on the German and
eurozone industrial sectors in the coming months.
Despite the ECB’s planned OMT we still expect a
continued contraction in H2 2012, and, with official
growth forecasts for 2012-13 likely to be revised down
further, more questions will be raised about whether
member states can realistically expect to meet their
fiscal targets.
42
Macro
European Economics
Q4 2012
Germany
Cracks beneath the surface
While hard German economic data, such as industrial
orders and production, have held up remarkably well
recently, there are some cracks beneath the surface.
The intensifying crisis in the eurozone has already
left its mark on ifo export expectations, which in
September fell to its lowest level since July 2009. Net
exports, a substantial driver of GDP growth in H1
2012, will, in our view, fail to support in H2. This
also has negative implications for business fixed
investment for which growth has already declined in
the last two quarters. The outlook for companies in
the capital goods sector has deteriorated substantially
as a result of falling capacity utilisation in the
manufacturing sector, hinting at lower capital
spending ahead, despite favourable financing
conditions. Consequently, the willingness to hire has
receded further, pointing towards slow or no growth
in employment in future.
% Year
Nonetheless, with employment marking a postreunification
record high, and wages and salaries
showing y-o-y growth rates of almost 4%,
consumption should continue to contribute positively
to growth. Buying intentions (a subcomponent of
GfK consumer climate) largely maintained their
elevated level over the last couple of months.
Disposable income should receive a further boost
from a cut in the contribution rates for pension
insurance from 19.6% to 19.0% to take place in
January 2013.
Due to the strong first half, our 2012 full-year GDP
growth forecast of 0.9% looks achievable. Even so,
the combination of weaker net exports and business
fixed investment should lead to stagnation in the
second half. Even if we pencil in a rebound in
activity starting in Q1, the lower than anticipated
base makes cutting our growth forecast for 2013
from 1.5% to 0.9% necessary.
2011 2012f 2013f Q3 12f Q4 12f Q1 13f Q2 13f Q3 13f Q4 13f
Consumer spending 1.7 0.9 1.2 0.4 1.0 1.2 1.1 1.2 1.2
Government consumption 1.0 1.1 0.7 1.1 0.7 0.7 0.7 0.7 0.8
Investment 6.4 -1.4 -0.0 -2.1 -3.2 -2.1 -0.8 0.9 1.9
Machinery & equipment 7.2 -3.6 -2.1 -6.3 -7.5 -6.6 -4.0 -0.0 2.5
Construction 6.0 0.1 1.2 1.1 0.2 1.2 1.7 1.1 0.8
Stockbuilding (% GDP) 1.6 0.9 0.5 0.6 0.5 0.5 0.5 0.4 0.4
Domestic demand 2.8 -0.2 0.3 -0.9 -0.9 -0.5 -0.2 0.8 1.2
Exports 7.9 3.9 2.9 3.1 3.5 2.7 1.2 2.9 4.6
Imports 7.5 2.9 3.3 2.2 2.7 3.5 2.3 2.9 4.4
GDP 3.1 0.9 0.9 0.6 0.7 0.4 0.5 1.0 1.5
GDP (% quarter) - - - 0.0 -0.1 0.3 0.3 0.5 0.5
Industrial production 8.0 0.1 2.3 -0.9 1.1 2.1 2.7 2.2 2.4
Unemployment (%) 7.1 6.8 6.7 6.8 6.8 6.7 6.7 6.7 6.7
Average earnings 1.7 2.6 3.2 3.0 3.0 3.1 3.1 3.2 3.2
Producer prices 5.7 2.0 2.0 1.1 1.6 1.4 1.6 2.4 2.4
Consumer prices 2.5 2.1 2.1 2.1 1.9 1.8 2.1 2.2 2.1
Current account (EURbn) 146.6 150.9 144.0 27.0 45.2 39.0 35.0 28.0 42.0
Current account (% GDP) 5.7 5.7 5.3 4.1 6.8 5.8 5.1 4.1 6.1
Budget balance (% GDP) -1.0 -0.8 -0.6 - - - - - -
3-month money (%)* 1.3 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2
10-year bond yield (%)* 1.9 1.5 1.2 1.5 1.5 1.4 1.3 1.2 1.2
Note: * = Period-end
Source: Thomson Reuters Datastream, HSBC estimates
Stefan Schilbe
Economist
HSBC Trinkaus & Burkhardt AG
+49 211910 3137
stefan.schilbe@hsbc.de
Rainer Sartoris
Economist
HSBC Trinkaus & Burkhardt AG
+49 211910 2470
rainer.sartoris@hsbc.de
Macro
European Economics
Q4 2012
Weakening global trade to undermine German exports Exports
%
30
20
10
0
-10
-20
-30
01 02 03 04 05 06 07 08 09 10 11 12
German ex ports (LHS)
Global manufacturing PM I - new ex port orders* (RHS)
Source: Macrobond, HSBC
Note: *After 3 months
Index
Capital goods sector feels the crisis Investment
%
30
15
0
-15
-30
-45
-60
95 97 99 01 03 05 07 09 11
70
60
50
40
30
-20
-40
IFO capital goods sector - ex pectations for production
acitiv ity in the nex t 3 mo nths
Business fix ed inv estme nt
Source: Macrobond, HSBC
Money is cheap Financing conditions
% Interest rates for new non-financial corporate loans*
7
6
5
4
3
03 04 05 06 07 08 09 10 11 12
Spain Germany Italy France
Source: Macrobond, HSBC
Note: *Loans over 5 years, up to EUR1mn
20
0
%
%
7
6
5
4
3
The outlook for German exports has clearly deteriorated: the
‘new exports orders’ component of the global manufacturing
PMI has fallen to its lowest level since April 2009. The main
culprit is the deep recession in some eurozone countries, but
demand from non-eurozone economies has also begun to
fade notably.
The current level is consistent with a falling annual export
growth rate, a view that is supported by the more pessimistic
export expectations of companies questioned by ifo.
Further progress in the labour market will be difficult to
achieve as a consequence – the unemployment rate clearly
shows signs of bottoming out.
The more negative export outlook is starting to filter through
into investment companies’ spending behaviour: Firms´
assessment of the next three months in the capital goods
sector has fallen sharply, indicating negative yearly business
fixed investment rates ahead.
Capacity utilisation rates fell from 84.5% to 83.2% in Q3
2012, undershooting the long-term average for the first time
since Q4 2010.
As leading indicators in manufacturing business show no
signs of stabilisation yet, companies will be reluctant to
expand capacity.
Financing conditions for German companies (and
households) as a result of a loose monetary policy are
extremely favourable on a nominal and real basis, especially
when compared to countries like Italy and Spain.
Despite an intensifying debt crisis in the eurozone, the
Bundesbank lending survey and the ifo credit hurdle do not
point to restrictive lending behaviour by banks in Germany.
Given that key interest rates in the eurozone are likely to stay
extremely low for a prolonged time, credit growth should pick
up sharply in Germany, if and when signs of a global
recovery emerge, thus supporting business fixed investment
as well as residential investment.
43
44
Macro
European Economics
Q4 2012
France
Neither recession nor growth?
GDP is likely to remain stable in H2 2012, as it
was in H1 2012. Indeed, we expect a rise in
consumer spending in Q3 and Q4 2012, boosted
by a 25% rise in the allowance for children going
back to school in August and by a 2% hike in the
minimum wage on 1 July. In addition, the savings
rate could drop slightly after the presidential
elections as after previous presidential elections.
That said, we forecast weak growth in consumer
spending in 2013 because income tax will hike
and because the unemployment rate should
continue to rise until the beginning of 2013.
Moreover, industrial production could continue to
fall in H2 2012, as business investment declines;
the recession in southern Europe is hitting
exports, and the fall in the capacity utilisation rate
to 77% in August, from an average of 80% in
2011, will weigh on business investment.
% Year
In 2013, the tax hikes to be introduced to meet the
target of a public deficit of 3% of GDP in 2013,
despite the downward revision in GDP growth
forecasts, will shave 0.3pp off growth in gross
disposable income on our calculations. But at the
same time, social benefits will continue to grow,
as there is no target of cutting public spending,
merely of restricting its real growth (to 0.8% in
2013 from 2.3% per year before the crisis).
We also assume that France will adjust its position
on fiscal integration and come to an agreement with
Germany on giving the European Commission the
power of prior approval of all budget proposals,
and not just in the case of excessive deficit
procedures. If such an agreement is reached, the
uncertainty created by the lack of institutional
clarification will be reduced, improving the
prospects for economic activity and investment.
2011 2012f 2013f Q3 12f Q4 12f Q1 13f Q2 13f Q3 13f Q4 13f
Consumer spending 0.2 0.1 0.5 0.2 0.4 0.3 0.7 0.5 0.6
Government consumption 0.2 1.2 0.9 1.3 1.4 1.1 0.8 0.8 0.8
Investment 3.5 0.6 1.8 0.6 -0.8 0.7 0.9 2.3 3.4
Stockbuilding (% GDP) 0.4 -0.2 0.0 -0.1 -0.2 -0.1 -0.0 0.1 0.2
Domestic demand 1.7 -0.1 1.1 -0.0 0.8 0.9 0.9 1.1 1.5
Exports 5.5 2.6 3.2 2.1 1.4 2.2 3.0 3.5 4.1
Imports 5.2 1.4 3.6 1.7 3.9 4.1 3.2 3.3 3.9
GDP 1.7 0.2 0.9 0.0 0.1 0.4 0.8 1.1 1.5
GDP (% quarter) - - - 0.0 0.0 0.3 0.4 0.4 0.4
Manufacturing output 3.1 -2.4 0.5 -2.6 -1.4 -0.4 0.7 0.6 0.9
Unemployment (%) 9.7 10.2 10.5 10.4 10.4 10.5 10.5 10.4 10.4
Average earnings 2.2 2.3 2.5 2.4 2.5 2.3 2.5 2.5 2.5
Consumer prices 2.3 2.3 1.8 2.3 2.1 1.8 1.7 1.8 1.7
Trade account (EURbn) -72.2 -69.9 -68.5 -17.0 -17.2 -16.9 -17.0 -17.2 -17.4
Current account (% GDP) -2.0 -2.2 -2.1 -2.2 -2.2 -2.1 -2.1 -2.1 -2.2
Budget balance (% GDP) -5.2 -4.5 -3.5 - - - - - -
3-month money (%)* 1.3 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2
10-year bond yield (%)* 3.1 2.0 1.6 2.2 2.0 1.9 1.7 1.6 1.6
Note: * = Period end
Source: Thomson Reuters Datastream, HSBC estimates
Mathilde Lemoine
Economist
HSBC France
+33 1 40 70 32 66
mathilde.lemoine@hsbc.fr
Macro
European Economics
Q4 2012
France’s small open economy and the scale of
economic stabilisers...
%Yr %Yr
6
4
2
0
-2
-4
-6
-8
00 01 02 03 04 05 06 07 08 09 10 11 12
Germany: GDP growth (LHS)
France: GDP growth (LHS)
Sources: Destatis, INSEE, HSBC
6
4
2
0
-2
-4
-6
-8
... should help avoid a fall in consumer spending in
2013, despite higher taxes
Exports account for only 27% of French GDP, compared
to 50% in Germany, limiting the impact of the slowdown
in world trade on final domestic demand.
Moreover, public spending represented 56% of GDP in
2012, and a third of household gross disposable income
(GDI) comes from redistribution. As a result, the impact
of rising unemployment on income is limited. Since the
1990s, during periods of rising unemployment, GDI has
risen by an average of 2.6% y-o-y, compared to an
average of 4% y-o-y during periods of falling
unemployment.
Thus in 2013, on our calculations, the rise in social
benefits could offset the negative impact of tax hikes
(new 45% and 75% income tax bands for incomes
greater than EUR150,000 and EUR1,000,000 a year
respectively).
But the restructuring of the French car industry… … could limit industrial production growth in 2013
Index, 100 = 2000 Index, 100 = 2000
130
120
110
100
90
80
70
60
50
00 01 02 03 04 05 06 07 08 09 10 11 12
Sources: INSEE, HSBC
French IP French car production
130
120
110
100
90
80
70
60
50
The recession in Italy and Spain will continue to hit exports
to these countries which currently represent 15% of French
exports.
In addition, the positive effect on exports of a 7% decline in
the euro against the dollar between February and July 2012
will start to diminish in Q2 2013.
Lastly, French car makers are involved in a period of
restructuring. According to the OECD, there is 20% excess
capacity in the French auto industry. Moreover, the negative
trade balance in this sector has reduced the need for
production capacity still further. As a result, we expect car
production, which amounts to 8% of industrial production, to
continue to decline by some 11% per year between 2013
and 2015 on our calculations.
France’s acceptance of deeper fiscal integration... ... could clarify the way in which Europe works and
reduce the systemic risk premium
Bps
Sovereign credit default swaps in France, Germany
and the US
Bps
200
200
150
100
50
0
08 09 10 11 12
France Germany US
Sources: Bloomberg, INSEE, HSBC
150
100
50
0
Since the beginning of the crisis, we consider that
institutional clarification is essential to allow the eurozone to
function properly. This clarification includes the acceptance
by Europeans of the existence of supra-national decisions
that are applicable at the national level for banking, fiscal
and economic topics.
However, the Spanish Prime Minister is prevaricating on a
clean-up in the banking industry, limiting the scope of any
agreement on banking union. And France, to date, has
resisted a transfer of sovereignty over fiscal policy.
Significant moves in these two countries could boost a
European desire to introduce the reforms that would allow
the eurozone to function. Therefore, the eurozone systemic
risk premium could decrease and drive business investment
and stockbuilding.
45
46
Macro
European Economics
Q4 2012
Italy
Going it alone
The Italian government bond market has already
benefited greatly from the ECB’s announcement
that it is willing to undertake unlimited bond
purchases. Ten-year yields are now hovering just
above 5.2%, well down from their late July peak of
6.6%. The market is currently waiting for Spain to
request a precautionary EFSF/ESM programme
and trigger the ESM programme, but Italy is also
viewed as a potential candidate for requiring such
assistance in the coming months.
The budget deficit is much smaller than that of
Spain: even with a deep contraction in GDP of
about 2.5% in 2012 Italy’s budget deficit should
come in below 3% of GDP. But, given the size of
its debt stock and low potential growth rate, this
level of borrowing costs means Italy still faces
enormous challenges. The negative impact that
austerity is already having on the economy means
that the Prime Minister, Mario Monti, will continue
% Year
to resist any calls for more aggressive fiscal
consolidation, and will therefore remain very
reluctant to submit to EFSF/ESM conditionality.
The various tax increases have lifted inflation
above 3.5% for much of this year, implying a
severe squeeze on real wages at a time when the
unemployment rate is rising to new highs (10.7% in
July). Hence the contraction in consumer spending
has deepened, and the latest indicators show little
sign that spending will see an upturn any time soon.
We expect Mr Monti to continue with the various
reforms to raise long-term potential growth, which
should help to reassure the market. Nonetheless,
the elections looming in April 2013 could lead to
some political uncertainty and mean that some kind
of precautionary programme for Italy cannot be
ruled out.
2011 2012f 2013f Q3 12f Q4 12f Q1 13f Q2 13f Q3 13f Q4 13f
Consumer spending 0.2 -3.4 -1.3 -3.8 -3.3 -2.5 -1.6 -0.9 -0.4
Government consumption -0.9 -1.0 -1.5 -0.8 -0.6 -1.1 -1.7 -1.6 -1.6
Investment -1.2 -9.4 -4.8 -10.8 -10.0 -7.6 -6.2 -3.6 -1.6
Stockbuilding (% GDP) -0.6 -0.9 0.3 -0.8 -0.7 -0.6 -0.6 -0.5 -0.5
Domestic demand -0.8 -4.9 -1.7 -5.1 -4.3 -2.8 -2.0 -1.3 -0.7
Exports 6.3 0.5 1.4 -0.6 -0.5 0.5 0.9 1.7 2.5
Imports 1.0 -7.3 -0.8 -7.0 -4.8 -1.2 -1.0 -0.7 -0.3
GDP 0.5 -2.5 -1.1 -3.1 -2.9 -2.3 -1.4 -0.6 0.1
GDP (% quarter) - - - -0.7 -0.5 -0.2 0.0 0.1 0.2
Industrial production 0.3 -6.7 -1.5 -7.8 -5.7 -3.6 -2.0 -0.6 0.3
Unemployment (%) 8.4 10.6 11.5 10.8 11.1 11.3 11.4 11.5 11.6
Hourly wage rate 1.8 1.4 1.4 1.5 1.4 1.4 1.4 1.4 1.3
Consumer prices 2.9 3.4 2.3 3.3 3.1 2.5 1.8 2.5 2.3
Current account (EURbn) -51.5 -20.5 -17.0 -4.0 -2.0 -12.0 -1.0 -3.0 -1.0
Current account (% GDP) -3.3 -1.3 -1.1 -1.0 -0.5 -3.1 -0.3 -0.8 -0.3
Budget balance (% GDP)* -3.9 -2.9 -2.3 - - - - - -
3-month money (%)** 1.3 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2
10-year bond yield (%)** 6.4 5.0 4.5 5.2 5.0 4.8 4.7 4.6 4.5
Note: * = National measure ** = Period-end
Source: Thomson Reuters Datastream and HSBC estimates
Janet Henry
Economist
HSBC Bank plc
+44 20 7991 6711
janet.henry@hsbcib.com
Macro
European Economics
Q4 2012
Sharp fall in yields... ...in response to ECB’s plans
% Italian 2y r Bond Yields
8
6
4
2
0
Source: Bloomberg
Italian bond yields have fallen sharply since ECB head,
Mario Draghi, committed to do “whatever it takes” to
preserve the euro.
Italy has given no indication that it intends to request an
EFSF/ESM programme which could be needed for the
ECB to start buying Italian government bonds. The rally
has allowed the government to tap the market at much
more reasonable rates. It raised EUR4bn of 10-year
bonds on 3 September at about 5% and around
EUR1.5bn of 3 and 9-year inflation linked bonds on 25
September at 2.46% and 3.68% respectively.
While the caretaker government of Mario Monti will be
very reluctant to submit to EFSF/ESM conditionality, the
elections due to be held in April 2013 could lead to some
political uncertainty and mean that some kind of
precautionary programme cannot be ruled out.
The recession is deepening... ...with consumption and investment falling sharply
% Contribution to % Yr Growth
%
4
4
3
3
2
2
1
1
0
0
-1
-1
-2
-2
-3
-3
-4
-4
-5
-5
Q1 10 Q3 10 Q1 11 Q3 11 Q1 12
Priv con Govt cons Investment Net exports
Source: Bank of Italy, Thomson Reuters Datastream
The recession in Italy continues, with GDP contracting by
a further 0.8% q-o-q in Q2 following the 0.8% fall in Q1
and 0.7% q-o-q drop in Q4.
Overall GDP fell 2.6% y-o-y in Q2, but the domestic
situation is even weaker, with consumer spending falling
3.6% y-o-y and investment down 9.5% y-o-y.
The caretaker government of Mario Monti is pressing
ahead with implementing the required reforms to raise
long-term potential growth, but will resist any pressure to
deliver even more austerity. This is just one of the
reasons why he will wish to avoid requesting
EFSF/ESM/ECB assistance if he can.
Inflation has been very sticky... ...and further VAT rises will squeeze wages further
% Yr
5
4
3
2
1
0
-1
-2
-3
Italy
05 06 07 08 09 10 11 12
% Yr
5
4
3
2
1
0
-1
-2
-3
HICP (LHS) Nominal wages (RHS)
Real wages (RHS)
Source: Eurostat, Istat
3y r LTROs announced
SMP starts
Draghi commits
to do "w hatev er
it takes"
Jan 11 Jul 11 Jan 12 Jul 12
%
8
6
4
2
0
Italy has been registering one of the highest rates of
inflation in the eurozone over the past year, because of
methodological changes and VAT increases, as well as
the higher energy prices which have impacted on all of
the eurozone.
With rising unemployment keeping a lid on nominal wage
growth, this rise in inflation has contributed to a very
sharp squeeze on real wages and contracting consumer
spending.
Assuming stable energy prices, inflation has now peaked,
and should slow steadily, but, the further 2% rise in VAT
planned for July 2013 means inflation is unlikely to slow
below 2%, implying real wage growth will remain
negative.
47
48
Macro
European Economics
Q4 2012
Spain
A soft bailout
The ECB has opened the door for ‘conditional’
support to the Spanish sovereign, and it appears
only a matter of time before Spain formally
requests assistance. It is clear that the Spanish
government is trying to distinguish itself from
countries that have sought Troika assistance by
outlining a detailed and comprehensive
austerity/reform programme on 27 September (see
page X … Spanish periphery page). This, it hopes,
will be sufficient to appease European partners
who could then offer Spain a more concessionary
(precautionary) form of assistance than a fullscale
Troika programme, which would come with
much stricter conditionality (and loss of face).
While expectations of a soft bailout for Spain
helped calm market sentiment, the real side of the
economy continues to deteriorate. Spanish GDP
growth held up better than we had expected in H1
2012 as net exports grew strongly and the
government delivered less austerity than we had
forecast. This, together with some base effects
resulting from lower 2011 GDP growth, has
implied that the contraction in 2012 will be
shallower than we had previously forecast.
However, this only means that there is more pain
to come next year. The government will have to
step up the implementation of austerity plans once
it asks for assistance, implying a bigger drag from
government spending over the next few quarters.
At the same time, there are clear indications that
the world trade cycle has turned down, implying a
softer contribution to growth from net exports.
While tail risks relating to Spain have ebbed, the
focus over the coming quarters will increasingly turn
to how politicians and trade unions react to the
deepening recession and rising unemployment,
which in turn could call into question the
government’s commitment to reforms.
% Year
2011 2012f 2013f Q3 12f Q4 12f Q1 13f Q2 13f Q3 13f Q4 13f
Consumer spending -1.0 -1.8 -1.8 -2.0 -1.7 -2.5 -1.9 -1.7 -1.2
Government consumption -0.5 -3.1 -4.6 -2.5 -3.4 -4.0 -4.7 -5.0 -4.8
Investment -5.5 -9.4 -7.5 -10.8 -10.1 -9.9 -8.2 -6.8 -4.9
Domestic demand -1.9 -3.7 -4.0 -4.0 -3.8 -4.8 -4.2 -3.8 -3.1
Exports 7.6 1.1 1.7 -0.6 -0.9 1.5 0.6 1.8 2.8
Imports -0.9 -6.2 -2.8 -7.5 -5.9 -4.4 -3.4 -2.1 -1.2
GDP 0.4 -1.5 -2.0 -1.8 -2.1 -2.4 -2.4 -2.0 -1.3
GDP (% quarter) - - - -0.5 -0.8 -0.6 -0.4 -0.2 -0.1
Industrial production -1.4 -5.6 -2.6 -5.9 -3.8 -2.9 -2.0 -2.5 -3.0
Unemployment (%) 21.7 25.0 27.2 25.3 26.0 26.6 27.0 27.3 27.8
Average earnings 2.5 1.0 0.6 0.6 0.6 0.6 0.6 0.6 0.6
Consumer prices 3.1 2.4 2.5 2.7 3.0 2.8 3.2 2.4 1.7
Trade account (EURbn) -46.3 -8.3 -8.3 -7.5 -7.0 -9.0 -8.5 -8.0 -7.5
Current account (EURbn) -37.5 -29.1 -7.1 -4.5 -7.5 -10.5 -7.0 -6.5 -4.5
Current account (% GDP) -3.5 -2.7 -2.7 - - - - - -
Budget balance (% GDP) -8.9 -6.8 -5.0 - - - - - -
3-month money (%)* 1.3 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2
10-year bond yield (%)* 5.5 5.8 5.3 6.0 5.8 5.5 5.4 5.3 5.3
Note: * = Period-end
Source: Thomson Reuters Datastream, HSBC estimates
Madhur Jha
Economist
HSBC Bank plc
+44 20 7991 6755
madhur.jha@hsbcib.com
Macro
European Economics
Q4 2012
Net exports… … have been the only source of growth for Spain
%pts Contributio n to GDP
%qtr
1.8
1.2
0.6
0.0
-0.6
-1.2
Q2 11 Q3 11 Q4 11 Q1 12 Q2 12
Consp Gov t GFCF
net trade GDP (RHS)
Source: Thomson Reuters Datastream
0.2
0.0
-0.2
-0.4
-0.6
Government spending proved to be less of a drag in H1
2012 than in H2 2011. However, we expect the drag
from government spending to rise as the government
steps up austerity implementation.
Domestic demand overall remained very weak, though,
as consumer spending fell sharply, more than reversing
the gain seen in Q1 2012.
Net exports added a strong 1.0pp to Q2 2012 GDP, not
only because of a further collapse in imports but also a
recovery in exports. We expect net trade to provide less
support to growth over the next few quarters, with
exports likely to be much softer.
Regional budget performance remains a big concern… … despite the recent improvement
% GDP % GDP
0
-1
-2
-3
-4.25
Andalucia
Aragon
Asturias
Beleares
Canarias
Cantabria
C-L M
C y L
Cataluna
Ex tremad
Galicia
Madrid
Murcia
Navarra
La Rioja
Valencian
Pais
Total
H1 11 H1 12
Source: MHAP
Note: C-L M refers to Castialla y Leon, C y L refers to Castilla y Leon
0
-1
-2
-3
Regional governments managed to halve their
deficit/GDP ratios in H1 2012 (-0.8% of GDP) as
compared to H1 2011 (-1.7% of GDP).
While this suggests that regional governments are doing
more to tighten their belts, we hesitate to draw any
conclusions about the full-year fiscal performance as
changes in the way that regions receive transfers from
the central government reduce the comparability of
performance between H1 2011 and H1 2012.
Despite that, Murcia, Extremadura and Navarra face an
uphill battle improving budget positions, with the budget
deficit/GDP ratio already crossing 1.5%, the target for
the year as a whole.
Unemployment set to rise further… …as public sector jobs are cut back too
Index 2005 Q1 =100
120
115
110
105
100
95
90
Source: INE
Spain Employ ment
05 06 07 08 09 10 11 12
Public Sector Priv ate sector
120
110
100
90
Public sector employment continued to grow even up until
2011 even though the private sector has shed jobs rapidly
since the triple crisis hit Spain.
But austerity is forcing cutbacks in employment both at
the central and regional government levels. This is mainly
being achieved through the non-renewal/shedding of
temporary roles
We estimate that the unemployment rate could surpass
30% by end -2013 unless the government is able to push
through more reforms that allow for some of the
adjustment in personnel costs to come through wage
moderation (See Spanish labour reforms: protest or
progress)
49
50
Macro
European Economics
Q4 2012
UK
Accepting limitations
GDP fell sharply in Q2 2012, largely due to an extra
Bank Holiday for the Queen’s Jubilee. This was the
third consecutive quarterly contraction, but it should
be the last for a while, and we expect a bounce
back in Q3. However, looking past erratic factors,
underlying growth remains weak. High uncertainty,
tight credit conditions, fiscal consolidation and an
increasingly challenging international
environment continue to restrain activity.
Trade surveys suggest the difficult export conditions
are set to continue, as the Asian and eurozone
markets slow. And with commodity prices putting
upward pressure on inflation and the labour
market remaining weak, there is likely to be little
growth in real wages during 2013. Therefore
consumption is unlikely to drive a strong recovery.
So it seems that 2013 will be another year of very
slow growth. The question is, what can policy do
% Year
about it? Monetary policy is already very loose,
and it will take time to assess the impact of new
credit easing schemes, particularly the untested
Funding for Lending Scheme.
Unfortunately, ever-looser monetary policy is not a
miracle cure for the UK’s economic ills. More QE
entails risks and possibly some negative side-effects.
It is also possible that the incremental benefit may
be waning. Given that policy is already ultraloose,
there may be practical constraints on what
more it can do. We expect no further QE this year.
Fiscal policy is also highly constrained. With low
growth also meaning the public finances may be
getting off-track, the government may find it hard
to meet its own targets without a further tightening
of policy, let alone some form of loosening. So
the UK is in a bind, and may need to accept that
this is still the hangover from the pre-crisis boom
years. There may be limits to what policy can do.
2011 2012f 2013f Q3 12f Q4 12f Q1 13f Q2 13f Q3 13f Q4 13f
Consumer spending -1.0 -0.1 1.3 0.6 0.5 0.9 1.5 1.2 1.3
Government consumption 0.1 2.9 0.0 3.3 2.6 0.7 0.5 -0.3 -0.8
Investment -1.3 1.1 4.7 0.6 3.0 2.4 6.7 5.2 4.6
Stockbuilding (%GDP) 0.3 -0.2 -0.2 -1.0 0.0 0.4 -0.8 -0.3 -0.2
Domestic demand -0.5 0.5 1.3 0.2 1.4 1.5 1.3 1.2 1.1
Exports 4.4 0.1 1.5 1.9 -0.8 0.9 2.6 0.9 1.5
Imports 0.5 2.4 1.9 3.5 2.4 3.0 1.7 1.4 1.5
GDP growth 0.8 -0.1 1.1 -0.3 0.4 0.9 1.6 1.0 1.1
GDP % Quarter - - - 0.9 0.3 0.2 0.2 0.3 0.4
Manufacturing output 2.0 -1.0 0.3 -0.6 -0.2 -0.3 0.7 -0.2 1.0
Unemployment rate end-year 8.1 8.1 8.2 8.0 8.3 8.3 8.3 8.2 8.1
Average earnings 2.0 2.0 2.5 2.8 2.1 2.2 2.7 2.5 2.6
RPI 5.2 3.1 2.9 2.9 2.8 2.8 3.0 3.0 2.9
CPI, average 4.5 2.7 2.5 2.4 2.4 2.3 2.6 2.6 2.5
Current account (%GDP) -1.9 -3.0 -3.3 - - - - - -
PSNB (%GDP)* -7.9 -6.6 -7.1 - - - - - -
USD/GBP 1.55 1.60 1.60 1.58 1.60 1.62 1.61 1.60 1.60
GBP/EUR 0.84 0.84 0.88 0.82 0.84 0.85 0.86 0.87 0.88
Base rate (%)** 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50
10-year bond yield 2.1 1.8 2.0 1.7 1.8 1.7 1.6 1.7 2.0
Notes: * = Public borrowing numbers are shown in fiscal years and exclude financial sector interventions ** = Period-end.
Source: Thomson Reuters Datastream, HSBC estimates
Simon Wells
Chief UK Economist
HSBC Bank plc
+44 20 7991 6718
simon.wells@hsbcib.com
Macro
European Economics
Q4 2012
Despite the deficit reduction plan, government
consumption has grown as the economy has slowed …
% Yr Contributions to growth
% Yr
4
4
3
2
1
0
-1
-2
2010
Q1
2010
Q2
2010
Q3
2010
Q4
2011 2011 2011 2011 2012 2012
Q1 Q2 Q3 Q4 Q1 Q2
Consumption Government Investment
Stocks Net Trade
Source: ONS, HSBC
The UK’s productivity performance has become more
puzzling as employment has held up …
Index Productivity in UK recessions Index
12 0
120
11 5
11 0
10 5
10 0
95
90
Source: ONS, BoE
t t+2 t+4 t+6 t+8 t+10 t+12 t+14 t+16
3
2
1
0
-1
-2
115
110
105
100
70 s 80s 90s 00s
The Bank of England is as puzzled as anyone, and it has
never before been this uncertain about growth outlook …
18%
15%
12%
9%
6%
3%
0%
Implied probability of growth below zero 2-years-ahead
04 05 06 07 08 09 10 11 12
Source: BoE, HSBC
95
90
18 %
15 %
12 %
9%
6%
3%
0%
… and with trade slowing, the composition of growth
remains worrying
Net trade has started to drag on growth as global activity
cools and the eurozone’s recession begins to bite. Trade
surveys point to a drop in export orders suggesting the drag
from trade will continue.
Consumption is yet to add to four-quarter growth. This
reflects a prolonged period of inflation outpacing wage
growth. But with commodity prices rising, inflation will not fall
as far or as fast as we had previously expected, so real
wages will barely grow and consumption will stay weak.
Growth in 2012 has been affected by a number of one-off or
erratic factors. Excluding these factors, growth appears to
have been slow but positive. We expect a big bounce back
in Q3, with slow growth resuming in Q4 and continuing into
2013.
… which increasingly suggests the crisis may have had a
larger negative impact on the UK’s supply potential
Lower output combined with a modest amount of job
creation through 2012 means the UK’s dismal productivity
performance has continued. If this simply reflects a large
amount of spare capacity in the economy, then demand can
be stoked without fear of fuelling inflation.
But the fact that UK productivity has flat-lined for three years
increasingly points to a period of weak growth in potential
productivity. Supply-side weakness is not something that
can be addressed by ever-looser monetary policy.
Weak productivity also implies a risk of unemployment rising
again if some firms have been hoarding labour in the hope
that demand will pick up. Another year of weak demand
could be the final straw, forcing firms to reduce headcount.
… although the MPC’s implied probability of deflation in
two years’ time is way below 2009 levels
The outlook remains highly uncertain. Indeed, the MPC’s
published forecast data show it has never been more
uncertain about the outlook. In turn, its implied probability of
a GDP contraction in two years’ time is at an all-time high.
High uncertainty calls for cautious policy-making. Looser
monetary policy is not a one-way bet, and there are risks to
piling ever-more risk onto the central banks’ balance sheet.
Now would be a good time to pause QE and make a
meaningful assessment of existing policy measures.
Only if the MPC fears a really bad outcome would
aggressive policy be needed. This was the case in 2009.
Currently, the probability of deflation appears considerably
lower, meaning less need to take risks with policy.
51
52
Macro
European Economics
Q4 2012
Norway
Bucking the trend
Domestic growth is allowing Norway to decouple
from European economic weakness. Thanks to its
domestic strength, we expect output to remain
solid through H2 2012. This health will also be
reflected in the continued strength of the krone.
Norway saw another quarter of strong growth,
registering 1.0 % q-o-q in Q2. This was backed by
strong investment and consumption. Employment
continued to grow at a solid pace, as did wages.
This is not to say that Norway has been
completely immune to the downfall of its major
trading partner. The effects of eurozone weakness
were felt in lower demand for Norwegian exports
in the second quarter. In addition, given the
uncertain global environment, deposits and loans
to and from Norway also saw a marked fall in Q2.
In the coming months, we do not expect these
challenges to abate, and rising labour costs and a
% Year
strong krone should all further limit export
growth. However, this should be offset by a
stronger domestic environment and low interest
rates, resulting in trend GDP growth in 2012.
The inflation rate remains low (at 0.5% y-o-y in
August) and we expect it to hover around 0.6% in
2012. In the housing sector, the house price index
rose to 6.7% y-o-y in Q2 while household
indebtedness continued to rise faster than income.
Thus strong consumption patterns, rising
household debts and housing prices speak in
favour of higher rates. However, the problems
stemming from the eurozone crisis are far from
resolved and continue to pose a risk for the
Norwegian economy. Balancing these risks, we
expect Norges Bank to keep rates on hold this
year and start its tightening bias in 2013.
2011 2012f 2013f Q3 12f Q4 12f Q1 13f Q2 13f Q3 13f Q4 13f
Consumer spending 2.4 3.7 4.5 3.9 4.2 4.1 4.1 4.6 5.2
Government consumption 1.5 2.0 2.0 2.0 2.7 3.2 2.4 1.6 0.8
Mainland investment 8.0 4.8 5.5 5.8 5.6 8.7 6.5 4.6 2.5
Stockbuilding (% GDP) 2.8 2.1 1.5 1.5 1.5 1.5 1.5 1.5 1.5
Mainland domestic demand 3.2 3.4 4.0 3.8 4.0 4.7 4.1 3.8 3.5
Mainland exports* 0.2 1.8 2.8 0.8 0.5 2.0 2.5 3.0 3.5
Mainland imports* 3.0 4.2 4.5 4.3 4.3 4.0 4.6 4.7 4.8
Mainland GDP 2.5 3.6 3.0 3.5 3.0 2.6 2.5 3.3 3.7
Mainland GDP (% quarter) - - - 0.5 0.3 0.8 0.8 1.3 0.7
Manufacturing production 0.9 2.4 2.4 3.5 2.7 2.6 2.0 2.3 2.7
Unemployment (%)** 2.7 2.5 2.3 2.5 2.6 2.2 2.1 2.3 2.5
Average earnings 4.5 3.9 3.7 3.3 2.5 1.3 3.3 4.3 5.9
Consumer prices 1.3 0.7 1.6 0.5 0.9 1.1 1.4 1.9 2.0
Current account (% GDP) 14.5 14.7 12.0 13.0 13.0 12.0 12.0 12.0 12.0
Budget balance (% GDP) 11.3 13.8 13.6 - - - - - -
NOK/EUR 7.75 7.10 6.90 7.25 7.10 7.00 6.95 6.95 6.90
3-month money (%) ** 2.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9
10-year bond yield (%) ** 2.2 2.0 2.3 2.3 2.0 2.0 2.1 2.2 2.3
Note: * = Travel and non-oil related goods and services; ** = Period-end
Source: Statistics Norway and HSBC forecasts
Janet Henry
Economist
HSBC Bank plc
Sakshi Gupta
Economics Associate
Bangalore
Macro
European Economics
Q4 2012
Sweden
Miracle or mirage?
Sweden had been seen as something of a safe haven
in Europe this year, but the massive downward
revision to Q2 GDP (from 1.4% q-o-q to 0.7%)
indicates that while the Swedish economy is still one
of the best-performing in Europe since the financial
crisis, it does not seem to have decoupled. A trade
slowdown could lead to a recession in H2 2012.
Net exports were revised down in Q2 but still made
a positive contribution to growth. However, the
momentum is of a slowdown in imports rather than
stronger export growth. Latest survey data for export
orders point to a sharp contraction, and this is likely
to be the main drag on GDP in H2. Wages, retail
sales and house prices will be weighed down by
deteriorating labour market conditions. Recent
downside data surprises mean unemployment could
rise to 8% by the end of the year.
% Year
The Riksbank’s surprise 25bps repo rate cut in
September should mitigate the upward pressure on
the krona, which has risen sharply in 2012 and
neared all-time highs against the euro in August. But
given the weak external demand environment, rising
unemployment and low inflation, we think the
Riksbank will continue to ease, and expect the repo
rate to fall by another 25bps in Q4 to 1%. This
should help to lower the real interest rate, which is
still positive, and support investment.
Policymakers may not be able to stop a tradeinduced
slowdown, but Sweden still has relatively
strong government finances, low debt and a top
credit rating in its favour. The government’s new
budget announced cuts to corporation tax and
infrastructure investment (although projects start
from 2014). So although the government’s GDP
forecasts look optimistic, the fact that it is delivering
stimulus rather than austerity will soften the blow.
2011 2012f 2013f Q3 12f Q4 12f Q1 13f Q2 13f Q3 13f Q4 13f
Consumer spending 2.2 1.6 1.2 2.2 1.8 0.9 1.1 1.3 1.6
Government consumption 1.9 1.2 2.4 1.1 1.5 2.3 2.5 2.5 2.2
Investment 6.9 4.6 3.1 2.7 3.4 1.2 2.5 3.2 5.5
Stockbuilding (%GDP) 1.0 0.1 0.0 0.1 -0.3 -0.1 -0.0 0.1 0.2
Domestic demand 3.4 1.1 1.8 1.4 0.8 1.0 1.3 2.0 3.1
Exports 7.4 -0.4 2.2 -3.1 -0.1 -0.1 0.4 2.8 5.6
Imports 6.3 0.1 1.6 -0.4 0.1 0.2 1.0 1.9 3.3
GDP growth 3.9 0.8 2.1 -0.1 0.6 0.8 0.9 2.4 4.2
GDP (% quarter, sa) - - - -0.4 -0.3 0.8 0.9 1.1 1.4
Industrial production 5.7 0.2 2.0 1.3 1.9 2.1 1.0 1.4 3.7
Unemployment rate* 7.5 8.1 7.5 7.9 8.1 8.0 7.9 7.7 7.5
Average earnings 2.3 2.8 2.8 2.8 2.6 2.7 2.7 2.8 2.9
CPI, average 3.0 1.1 1.2 0.7 0.8 0.9 1.1 1.2 1.5
Current account (%GDP) 6.4 6.2 6.0 5.6 5.6 6.9 5.6 6.2 5.6
Budget balance (% GDP) 0.3 -0.4 -0.6 - - - - - -
State debt (% GDP) 38.3 38.0 37.5 - - - - - -
SEK/USD 6.86 6.00 5.75 6.38 6.00 5.91 5.83 5.79 5.75
SEK/ EUR 8.90 8.10 8.05 8.30 8.10 8.10 8.05 8.05 8.05
3-month money (%) * 2.7 1.8 1.8 1.9 1.8 1.8 1.8 1.8 1.8
10-year bond yield * 1.5 1.5 1.7 1.6 1.5 1.4 1.5 1.6 1.7
Note: * = Period-end.
Source: Thomson Reuters Datastream, HSBC estimates
John Zhu
Economist
HSBC Bank PLC
+44 20 7991 2170
john.zhu@hsbcib.com
53
54
Macro
European Economics
Q4 2012
Switzerland
CHF to remain stable thanks
to the SNB
Growth is likely to remain hampered by weak
foreign demand for Swiss goods and services. In
Q2, GDP fell 0.1% q-o-q, because of a sharperthan-expected
drop in exports. The recession in
the eurozone periphery and meagre growth
elsewhere in Europe and in the US are expected to
prevent any rapid recovery in exports, at least
until a lasting solution to the eurozone crisis is
found. Equipment investment is likely to remain
depressed by those weak export prospects.
Households have benefited in recent quarters from
falling consumer prices allowing them to increase
consumption. But with weak exports, we expect
the unemployment rate to keep ticking upwards in
the last few months of 2012, and so consumer
spending growth will be slower in the coming
quarters. As a result, we anticipate that GDP will
be flat in Q3.
% Year
In 2013, we expect growth to pick up gradually as
exports should cease to be a drag and monetary
policy remains very accommodative. Indeed, the
SNB has used unsterilized interventions to defend
its 1.20 EUR-CHF floor, creating ample liquidity
within Switzerland. We anticipate that
appreciation pressure on the CHF will persist, and
that the central bank will defend this floor until at
least the end of 2013, to prevent further losses of
export competitiveness and combat deflation risks.
Furthermore, the 0-0.25% target range for 3-month
LIBOR should be increased only once the EUR-
CHF floor has been lifted. Overall, this should
provide a boost to investment. The upside potential
for housing investment should, however, remain
limited. Indeed, since a Federal Council decision
in June 2012, the SNB can force banks to build
countercyclical capital buffers if needed. This
measure is designed to limit credit growth without
forcing the SNB to tighten monetary policy and
abandon its currency management.
2011 2012f 2013f Q3 12f Q4 12f Q1 13f Q2 13f Q3 13f Q4 13f
Consumer spending 1.2 2.3 1.6 2.4 1.9 1.4 1.5 1.7 1.7
Government consumption 2.0 1.9 0.7 1.4 0.8 1.3 0.4 0.5 0.4
Investment 4.0 0.8 2.5 1.4 1.0 1.8 2.5 2.8 2.7
Stockbuilding (% GDP) -0.6 -0.5 -0.5 -0.5 -0.5 -0.5 -0.5 -0.5 -0.5
Final domestic demand 2.0 1.9 1.7 2.1 1.5 1.5 1.6 1.8 1.8
Exports 3.8 -0.6 2.4 -0.2 -0.1 0.9 1.5 2.9 4.3
Imports 4.2 1.3 3.1 0.3 1.1 1.8 2.6 3.4 4.5
GDP 1.9 0.9 1.4 0.9 0.8 0.8 1.3 1.7 1.9
GDP (% quarter) - - - 0.0 0.3 0.5 0.5 0.4 0.5
Industrial production 0.9 -0.6 2.2 0.2 -0.5 0.0 3.0 2.8 2.8
Unemployment (%) 2.8 2.9 3.1 2.9 3.0 3.1 3.1 3.1 3.1
Consumer prices 0.2 -0.6 0.3 -0.6 0.0 0.0 0.3 0.5 0.5
Current account (EURbn) 49.9 51.1 50.8 10.8 11.7 12.5 12.5 12.5 13.3
Current account (% GDP) 10.5 10.4 10.1 8.8 9.5 10.1 10.0 10.0 10.6
CHF/USD 0.9 0.9 0.9 0.9 0.9 0.9 0.9 0.9 0.9
CHF/EUR 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.2
3-month money (%)* 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1
10-year bond yield (%)* 0.7 0.5 0.7 0.6 0.5 0.5 0.6 0.6 0.7
Note: * = period-end
Source: Thomson Reuters Datastream, HSBC estimates
François Letondu
Economist
HSBC France
+33 1 40 70 39 33
francois.letondu@hsbc.fr
Macro
European Economics
Q4 2012
Hungary
Still waiting
Weak economic growth is a significant risk to the
debt stabilisation strategy. We still lack confidence
that Hungary will reach an agreement with the IMF,
even though markets seem to have mostly priced that
in following the opening of negotiations in July.
The 2013 budget is the main near-term risk. The
government is under increasing pressure to deliver
stimulus to a weakening economy. The opinion polls
show that the popularity of the ruling party, Fidesz,
is declining. The Prime Minister promised earlier
this year that fiscal consolidation would come to an
end; however, more measures are necessary to
secure the 3% budget deficit ceiling.
While the 2013 budget has apparently assumed some
savings from lower debt servicing costs resulting
from an IMF deal, it also includes more spending
(labour market support programme) financed by
special taxes (financial transaction tax), something
that the IMF has criticised.
% Year
We have lowered our GDP growth forecast for this
year and next, given the weaker-than-expected
economic performance to date, uncertainty over the
outcome of the IMF negotiations, and our reduced
forecast for growth in Germany in 2013. To date,
industrial production and exports growth has shown
a small positive impact from new export capacities.
The current account is recording a significant surplus
but this is still unlikely to offset the capital outflow
(deleveraging).
In this environment, the Monetary Council’s
decision to start cutting its policy rate in August was
a risky one. We expect the easing cycle to pause
after September until an IMF deal is secured. A high
wage growth rate is a sign of second round effects
from persistently high inflation and will likely limit
the scope of total policy easing even in the positive
scenario of an IMF deal in place. Having said that,
this will still be determined by the changes in CB
management due next year.
2008 2009 2010 2011 2012f 2013f
Private consumption -0.2 -5.7 -2.7 0.2 -1.3 0.2
Government consumption -0.2 2.6 1.1 -2.4 -1.0 0.0
Fixed Investment 2.9 -11.0 -9.7 -5.5 -7.0 -4.0
Exports 5.7 -10.2 14.3 8.4 2.9 5.0
Imports 5.5 -14.8 12.8 6.3 0.8 3.0
GDP 0.9 -6.8 1.3 1.6 -1.0 1.3
Industrial Production -0.2 -17.6 10.5 5.7 1.6 5.0
Unemployment rate* 8.0 10.5 10.8 10.7 11.1 10.9
Consumer prices 6.1 4.2 4.9 3.9 5.7 3.7
Budget balance (% GDP) -3.7 -4.5 -4.3 4.2 -3.0 -3.5
Public debt (% GDP) 72.9 79.7 81.3 80.6 76.0 75.0
Current account (% GDP) -7.3 -0.2 1.2 1.4 2.2 3.2
External debt (% GDP) 116.8 149.9 141.7 130.0 123.0 113.0
CB policy rate* 10.00 6.25 5.75 7.00 6.50 5.50
HUF/EUR 265.9 270.2 278.3 314.8 280.0 270.0
10-year bond yield (%)* 8.3 8.0 8.0 9.8 7.9 6.5
Note: * = period-end
Source: Thomson Reuters DataStream, HSBC estimates
Agata Urbanska
Economist
HSBC Bank plc
+44 20 7992 2774
agata.urbanska@hsbcib.com
55
56
Macro
European Economics
Q4 2012
Poland
Slowdown triggers policy
response
Monthly activity data show no indication of the
economic slowdown bottoming out, while the decline
in domestic demand in Q2 2012 highlights downside
risks. Policymakers have responded accordingly. In
May, the National Bank of Poland had raised rates; in
September, it adopted an easing policy bias. In April,
the government had adopted a medium-term fiscal
objective of reducing the budget deficit to 0.9% of
GDP by 2015. Currently, however, it is only
planning to make the minimum deficit reduction that
would allow it to exit the excessive deficit procedure
(EDP). Along with its medium-term target set in
April, the government aimed at a budget deficit at
2.2% of GDP in 2013. This has been raised to 3% of
GDP, the level required under the EDP. In January
this year the European Commission forecast Poland’s
2012 budget deficit at 3.3% of GDP, compared to the
government’s then target of 2.9%. It said, however,
that taking account of the cost of pension reform (the
annual transfers to private pension fund) at 0.6% of
% Year
GDP this was close enough to the threshold for
Poland to meet the 2012 EDP requirement.
We have made another cut to our 2012 growth
forecast from 2.7% to 2.5% but reduced 2013 more
significantly from 3.1% to 2.0%. Growth in H1 2012
was largely in line with expectations, but recent
monthly economic data show a stronger than
expected slowdown. Also the growth composition in
Q2 was significantly worse than expected, with
domestic demand declining. Destocking was the
main driver, in line with weakening consumer and
business sentiment indicators. Labour market data
has been weaker than expected. Finally, the outlook
for global and European growth has worsened. All
these factors contributed to our 2013 forecast change,
but downside risks remain as there are no signs of the
slowdown abating, and leading business and
consumer confidence indicators are unsupportive.
Monetary policy has room to respond with easing,
and we pencil in 75bp rate cuts to 4% in the coming
months.
2008 2009 2010 2011 2012f 2013f
Private consumption 5.7 2.1 3.2 3.1 1.6 1.6
Government consumption 7.7 1.8 4.6 -1.0 -0.2 0.4
Fixed Investment 9.6 -1.2 -0.2 8.1 1.6 0.3
GDP 5.1 1.6 3.9 4.3 2.5 2.0
Exports 7.1 -6.8 12.1 7.5 3.0 4.9
Imports 8.0 -12.4 13.9 5.8 -1.0 2.9
Industrial Production 3.0 -3.6 11.1 7.0 3.3 3.5
Unemployment rate* 9.5 12.1 12.4 12.5 13.0 13.0
Consumer prices 4.2 3.5 2.6 4.3 3.9 2.7
Budget balance (% GDP) -3.7 -7.3 -7.8 -5.1 -3.4 -3.0
Public debt (% GDP) 47.1 50.9 54.9 56.0 55.0 54.0
Current account (% GDP) -6.5 -3.9 -4.7 -4.2 -4.3 -4.2
External debt (% GDP) 56.9 59.6 65.8 72.5 67.0 63.0
CB policy rate* 5.00 3.50 3.50 4.50 4.50 4.00
PLN/EUR 4.1 4.1 4.0 4.5 4.1 3.8
10-year bond yield (%)* 5.6 6.2 6.0 5.9 4.8 4.8
Note: *= period-end
Source: Thomson Reuters DataStream, HSBC estimates
Agata Urbanska
Economist
HSBC Bank plc
+44 20 7992 2774
agata.urbanska@hsbcib.com
Macro
European Economics
Q4 2012
Destocking pushed domestic demand into contraction in Q2
2012
Contribution to GDP grow th (ppt) % y -o-y
5
3
1
-1
-3
-5
1Q08 3Q081Q09 3Q091Q10 3Q10 1Q11 3Q11 1Q12
Priv cons Gov cons
Investments In v entorie s
Net exports GDP (rhs)
Domestic demand (rhs)
Source: National sources, HSBC estimates
5
3
1
-1
-3
-5
GDP is not likely to bottom until early 2013
Following 4.3% expansion in 2011, GDP growth dropped to
3.5% in Q1 2012 and 2.4% y-o-y in Q2 2012.
Both private consumption and investment growth slowed, but
the main drag in Q2 2012 came from destocking. Domestic
demand growth turned sharply recording a 0.2% y-o-y
contraction compared to 2.7% growth in Q1 2012.
On the value added side the biggest drag on growth in Q2 2012
came from trade and construction. Construction growth slowed
from 11.8% y-o-y in 2011 and 9.6% in Q1 2012 to 1.4% in Q2
2012. It is most likely to turn negative in H2 2012. Growth of the
value added component in trade slowed to 0.3% y-o-y in Q2
2012 from 5.5% in Q1 2012 and 4.6% in 2011.
Given no bottoming out of the monthly activity data, we
continue to see downside risk to our new, lower growth
forecast.
Labour market still in a downward trend A risk of more slowdown in private consumption
% y-o-y, real % y-o-y, real
8
6
4
2
0
1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12
Source: National sources, HSBC estimates
Priv ate consumption
Wage bill, whole economy (rhs)
Wage bill, enterprices (rhs)
15
10
5
0
-5
Employment growth has been slowing since early 2011 (from
4% average in Q1 2011) to zero in July 2012.
The seasonal summer unemployment rate drop was smaller
than average. We forecast the unemployment rate at 13% in
December 2012, its highest in five years, and no improvement
in 2013.
July data showed wage bill growth in the corporate sector
slowing further from 0.1% y-o-y real growth in Q2 2012 to a
contraction of 1.5%.
Private consumption growth halved from 3.1% in 2011 to 1.5%
in Q2 2012. In q-o-q terms, however, private consumption
growth has stabilised at a 0.3% average rate in the last four
quarters, and we do not expect the slowdown to go much
further, but the developments in the labour market are a
downside risk.
Inflation to fall into a 2.5% +/-1 range in November MPC signals policy easing
% y -o-y % y -o-y
Having raised rates in May, and having upheld an unofficial
hawkish policy bias in July, the Monetary Policy Council has
5
4
5
4
signalled that there will be policy easing in September if
incoming data confirm further weakening of economic
conditions and limited inflationary pressure.
3
3 We expect the MPC to cut its policy rate by 50-75bp in the
2
1
0
-1
Forecast
2
1
0
-1
coming months. We marginally favour the easing starting in
November, when the new Inflation Report is published, followed
by two more cuts in the first months of 2013. However, we see
a risk that the MPC will continue to disappoint markets and cut
later and by less than is currently priced in.
The risk to this scenario is that the MPC waits until January, to
05 06
CPI
07 08 09 10
C B inflation target
11 12
Core CPI
see inflation at least back in the +/-1pp range around the 2.5%
target, before starting the easing.
Source: Thomson Reuters Datastream, HSBC estimates
57
58
Macro
European Economics
Q4 2012
Romania
Positive domestic demand
We forecast 1% GDP growth for Romania in
2012, which is good relative to forecasts for other
EU members. Domestic demand continues to be
the main growth driver in Romania, in contrast to
what is seen in other Central European EU
member countries. Wage bill growth is positive in
real terms, supported by public sector wage hikes.
Romania’s focus on spending the funds granted
by the European Union has lifted investment
activity in the last few quarters. Together, these
factors should continue to support the economy in
2013. Exports might well be slowing, but this is
less important for the economy in Romania than it
is for the Czech Republic or Hungary.
The banking sector remains weak. Labour market
conditions are better than in Romania’s Central
European peers, but this has not significantly
diminished the problem of non-performing loans.
Also, banks’ balance sheets are still unbalanced,
with loans to deposit ratios exceeding 100%.
% Year
Credit growth is therefore likely to remain weak,
and is unlikely to support economic recovery in
2013. The rush to spend EU money has produced
some irregularities, and the EC has suspended
some funds.
The approaching parliamentary elections should
not bring any surprises. The tentative promises of
a fiscal loosening are a risk though. Lower VAT
and personal taxes would boost consumption, not
necessarily investments, drive inflation higher and
probably fuel the current account deficit,
repeating the pattern of unbalanced growth seen in
Romania before the 2008 global financial crisis.
The key policy challenge is to support balanced
economic growth. Inflation is set to double in the
second half of 2012, breaching the central bank’s
3% +/-1pp target in December and generally
staying close to the upper ceiling in 2013.
2008 2009 2010 2011 2012f 2013f
Private consumption 8.8 -9.1 -0.3 0.7 0.1 2.1
Government consumption 5.9 9.5 -10.1 -3.4 -0.6 2.0
Fixed Investment 15.1 -28.1 -2.1 6.3 5.7 5.5
Exports 8.1 -6.4 14.0 9.9 -0.5 4.5
Imports 7.3 -20.5 11.9 10.5 -1.3 5.0
GDP 7.2 -6.6 -1.7 2.5 1.1 2.5
Industrial Production 2.8 -5.2 5.5 5.8 0.6 3.0
Unemployment rate* 4.4 7.8 6.9 5.1 5.0 5.0
Consumer prices 7.9 5.6 6.9 5.8 3.1 3.5
Budget balance (% GDP) -5.7 -9.0 -6.8 -5.2 -2.8 -2.5
Public debt (% GDP) 13.4 23.6 31.0 33.0 36.0 36.0
Current account (% GDP) -11.6 -4.2 -4.4 -4.4 -4.1 -4.9
External debt (% GDP) 51.8 68.7 74.7 74.0 72.0 71.0
CB policy rate* 10.25 8.00 6.25 6.00 5.25 5.50
RON/EUR 4.0 4.3 4.3 4.3 4.4 4.3
3-month money (%)* 15.5 10.7 6.2 6.1 5.2 5.3
Note: * = period-end
Source: HSBC estimates, Thomson Reuters Datastream
Agata Urbanska
Economist
HSBC Bank plc
+44 20 7992 2774
agata.urbanska@hsbcib.com
Macro
European Economics
Q4 2012
Czech Republic
Recession in 2012, shallow
recovery in 2013
GDP growth did not rebound in Q2 2012 despite a
very weak Q1 reading. That prompted us to reduce
our growth forecasts for this year as well as next.
We now expect close to 1% economic contraction
in 2012 and only weak recovery in 2013.
The very weak confidence indicators, both on the
consumer and business side, have continued to
gradually worsen in recent months. That has been
accompanied by a further weakening of activity
indicators. In particular, labour market data
deteriorated, as indicated by the poor level of the
consumer confidence index, and justifying an
earlier drop in consumer spending.
The near-term outlook for growth remains poor,
and despite reducing our forecasts we continue to
see the balance of risks tilted to the downside. The
downward revision to HSBC’s 2013 German
growth forecast has made a substantial recovery in
the Czech Republic less likely. Net exports have
% Year
been contributing positively to growth in the last
several quarters, mostly on weak imports. But in
the coming months exports will continue to
decelerate and net exports’ contribution to growth
will start to decline.
The policy makers have very limited scope for
responding to this deterioration. We cut our central
bank policy rate forecast to a record low of 0.25%
back in May, and we do not believe that there are
many other instruments at the central bank’s disposal
that could support the economy effectively.
The recession is creating stress in domestic
politics; the government is struggling to pass a
tight 2013 budget in the parliament, and the fall of
the government is a risk.
2008 2009 2010 2011 2012f 2013f
Private consumption 2.8 -0.3 0.5 -0.5 -2.8 0.3
Government consumption 1.2 3.8 0.6 -1.4 -1.1 -0.5
Fixed Investment 4.0 -11.3 0.0 -1.2 -1.9 0.6
Exports 3.6 -9.7 16.0 11.0 5.2 3.5
Imports 2.4 -11.4 15.7 7.5 2.5 3.0
GDP 2.9 -4.5 2.6 1.7 -0.9 1.0
Industrial Production -1.5 -13.2 10.2 7.1 0.3 4.0
Unemployment rate* 6.0 9.2 9.6 8.6 8.8 8.8
Consumer prices 6.3 1.0 1.5 1.9 3.3 2.0
Budget balance (% GDP) -2.2 -5.8 -4.8 -3.1 -2.9 -2.9
Public debt (% GDP) 28.7 34.4 38.1 41.2 44.0 45.0
Current account (% GDP) -2.1 -2.4 -3.9 -2.9 -1.3 -2.2
External debt (% GDP) 42.2 43.7 46.9 48.6 52.0 50.0
CB policy rate* 2.25 1.00 0.75 0.75 0.25 0.25
CZK/EUR 26.8 26.4 25.1 25.5 25.0 24.0
10-year bond yield (%)* 4.2 3.9 3.9 3.6 2.2 2.2
Note: * = period-end
Source: Thomson Reuters Datastream, HSBC estimates
Agata Urbanska
Economist
HSBC Bank plc
+44 20 7992 2774
agata.urbanska@hsbcib.com
59
60
Macro
European Economics
Q4 2012
Russia
A lonely hawk
GDP growth in Russia eased to less than 3% y-o-y
in July. The high base set by H2 2011 and a poor
harvest are likely to prompt further slowing of
economic activity in the coming months. Private
sector fixed investment growth has paused this
year, which could further restrain GDP growth in
the medium term.
In August 2012, Russia officially became a World
Trade Organisation member, finally ending its
long accession saga. Will this boost economic
growth? We think immediate material positive
implications for the economy from WTO
membership are unlikely. Apart from a few nonenergy
exporting sectors, the rest of the Russian
economy would only be able to reap the benefits
of WTO accession in the medium to long term if
the government uses it as an opportunity to
improve the business climate and the
competitiveness of the Russian economy.
Against the backdrop of slowing economic
growth, the Central Bank’s (CBR) decision to
hike its policy rates in September might appear
controversial, at a first glance. Indeed, the Russian
Central Bank is probably the only hawk these
% Year
days. Yet, loan growth stays high at about 20% yo-y
in real terms, which looks excessive for the
slowly growing Russian economy. If it continues,
such strong credit growth could trigger a spike in
NPL and a credit crunch. That would be
detrimental for the banking sector’s stability and
economic growth sustainability. Therefore, some
cooling of credit growth is warranted.
Even more important for the rate hike decision
was the fact that inflation had breached the CBR’s
6.0% ceiling for the year. All three broad CPI
components – food, non-food and services – have
made a U-turn, signalling broad-based inflation
acceleration. Moving towards inflation targeting,
the CBR has to provide an adequate policy
response to the surge in order to start building up
its credibility as an inflation fighter.
Finally, the CBR’s repo rates, which are the key
policy rates in Russia, are likely to remain
negative in real terms after the cumulative 75bp
policy rate hikes that we expect in the coming
months, as inflation is to gain more than the
policy rates. So, despite some notional monetary
tightening, the CBR’s policy will remain
accommodative.
2008 2009 2010 2011 2012f 2013f
Private consumption 10.6 -5.1 5.1 6.8 5.5 4.5
Government consumption 3.4 -0.6 -1.4 1.5 1.0 0.5
Fixed Investment 10.6 -14.4 5.8 8.0 5.0 4.5
GDP 5.2 -7.8 4.3 4.3 3.0 2.5
Exports 0.6 -4.7 7.0 0.4 1.0 2.0
Imports 14.8 -30.4 26.1 20.3 1.3 5.1
Industrial Production -1.0 -10.3 10.3 4.1 2.7 1.8
Unemployment rate 7.8 8.2 7.2 6.1 5.8 5.7
Consumer prices 14.1 11.7 6.8 8.5 5.2 7.4
Source: Rossat, MOF, CBR and Reuters, HSBC estimates
Alexander Morozov
Economist
HSBC Bank (RR), Moscow
+7 495 783 8855
alexander.morozov@hsbc.com
Macro
European Economics
Q4 2012
GDP growth (ex-crops sector) has been moderating Poor harvest weighs on GDP growth in H2 2012
%, y-o-y
6
3
0
-3
-6
-9
Real GDP
2008 2009 2010 2011 2012
Actual Counterfactual*
Note:*Counterfactual assumes crop harvest at 79 mln tns, average for 2001-2007
Source: Rosstat, Ministry of Agriculture, HSBC
%, y-o-y
6
3
0
-3
-6
-9
The official GDP growth rate has been steady at 4.3%
over past two years, which gave a (wrong) impression of
economic growth stability. Yet, the crops sector
performance, affected by weather conditions, has been
uneven: it was better than its historical average in 2011
but worse than its average in 2010 and 2012. We found
that Russia’s GDP growth rate adjusted for the crops
sector has been declining since 2010.
A weaker performance of the crops sector this year will
weigh on economic growth in H2 2012 and may result in
temporary economic stagnation in Q3 q-o-q sa, when
the crops sector contribution to GDP is highest.
Inflation breached the official target in September Repo rates matter, refinance rate does not
% (%, y-o-y)
12
9
6
3
Aug-09
Dec-09
Apr-10
Policy rates and CPI
Aug-10
Dec-10
Apr-11
Aug-11
Dec-11
Apr-12
% (%, y-o-y)
Aug-12
Dec-12
Refinancing rate Headline CPI
Fixed REPO CBR's inflation ceiling
Source: Rosstat, CBR, HSBC
HSBC CPI forecast
12
9
6
3
The CPI growth rate accelerated to 6.3% y-o-y in early
September, breaching the official inflation range of 5-
6%. Moreover, the continuing rise in food prices has the
potential to speed up headline inflation further to 7.5% yo-y
in December 2012 and 8.2% in March 2013, taking
into account the second-round effect.
In a similar situation in 2010, the CBR increased its
refinance rate only when inflation exceeded it by a wide
margin. Now, with the CBR caring much more about
inflation targeting than before, it made a rate hike
decision much earlier. It follows that, first, the CBR’s
response function has become more sensitive, and
second, it is the CBR’s (low) repo rates rather than
(high) refinance rate that serve as an inflation
benchmark.
Policy cross: exchange rate and interest rate bands More FX volatility, less interest rate volatility
RUB
8
6
4
2
Mar-10
Jun-10
Sep-10
Dec-10
Source: Reuters, CBR, HSBC
Mar-11
Jun-11
Sep-11
Dec-11
Mar-12
Jun-12
RUB band w idth (LHS)
CBR policy rates band w idth (RHS)
Sep-12
bps
500
400
300
200
Efficient inflation targeting in a country with an open
capital account requires a fairly flexible exchange rate
and low interest rate volatility. The CBR is moving
exactly in this direction; it has been steadily widening the
RUB band while reducing the interest rate band (defined
as the difference between the fixed repo rate and
deposit rates).
The CBR has not shrunk its interest rate band since last
year, while it has widened its RUB band twice this year.
This suggests the growing probability of a faster rise in
deposit policy rates than in repo rates in the coming
months. We think that the RUB staying in the middle or
upper part of the FX band is a pre-condition for that
happening.
61
62
Macro
European Economics
Q4 2012
Turkey
Rebalancing starts to hurt
Q2 GDP growth came in at 2.9% y-o-y, driven
exclusively by net foreign demand. In annual
terms, exports were up by 19.8% in Q2 (from
11.9% in Q1), adding 5.7pp to headline growth.
Meanwhile, the contribution from domestic
demand turned negative for the first time in 10
quarters, shaving 2pp off headline GDP.
With two quarters of actual data, we now raise our
whole-year growth forecast to 2.7%, from our
cautious expectation of 2.0%. For 2013, we only
make a minor revision, taking our forecast from
3.5% to 3.8%. Domestic demand growth is likely
to be nearly flat in both Q3 and Q4 this year, but
could pick up slightly in early 2013 as the impact
of looser monetary policy is felt. Export
performance was stronger than we expected in the
first half of 2012, and our increased GDP forecast
reflects this. Going forward, we expect exports to
remain resilient, but the pace of growth is likely to
slow, in line with the deterioration in global trade.
The main downside risk here is weaker demand
from the MENA region.
% Year
On the inflation front, food prices surprised
positively in the third quarter. Even as global
agricultural commodity prices spiked, processed
and unprocessed food prices in Turkey did not
rise much above their seasonal averages in the
June-August period. As a result, we nudge down
our year-end inflation forecast from 7.9% to
7.2%. Average CPI forecasts for 2012 and 2013,
which appear in the table below, are little
changed. But larger-than-expected administered
price and tax hikes, along with rising commodity
prices, could push CPI higher.
Aggressive monetary easing by the central bank is
a risk factor. In September, the CBRT started to
narrow the overnight interest rate corridor and
manage liquidity conditions using a new iteration
of its reserve requirement framework. This could
leave the lira vulnerable during bouts of risk
aversion. It could also interrupt the rebalancing
process that has been on track since the start of
the year.
2008 2009 2010 2011f 2012f 2013f
Consumer spending -0.3 -2.3 6.7 7.7 0.0 3.0
Government consumption 1.7 7.8 2.0 4.5 2.5 2.9
Fixed investment -6.2 -19.0 30.5 18.3 -1.9 5.2
Domestic demand -1.5 -5.1 10.8 10.2 -0.2 3.5
Exports 2.7 -5.0 3.4 6.5 13.6 10.8
Imports -4.1 -14.3 20.7 10.6 0.0 9.4
GDP 0.7 -4.8 9.2 8.5 2.7 3.8
Industrial production -0.9 -9.6 13.3 9.2 2.8 5.5
Consumer Prices* 10.4 6.3 8.6 6.5 9.0 7.3
Producer Prices* 12.7 1.4 8.5 11.1 6.2 6.5
Current account (% GDP) -5.7 -2.3 -6.5 -10.0 -7.6 -7.1
Budget deficit (% GDP) -1.8 -5.5 -3.6 -1.4 -2.2 -1.5
TRY/USD 1.54 1.50 1.54 1.89 1.80 1.65
3-month money (%)** 15.5 7.5 6.7 10.1 6.0 7.5
Note: * = Year average, ** = Average
Source: CEIC, National sources, HSBC estimates
Melis Metiner
Economist
HSBC Turkey
+90 212 376 4618
melismetiner@hsbc.com.tr
Macro
European Economics
Q4 2012
The rebalancing in the economy was on track in H1 2012 Growth was driven exclusively by net foreign demand
pp Contribution to growth
pp
20
15
10
5
0
-5
-10
1Q10
Source: Turkstat
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
20
15
10
5
0
-5
-10
Domestic demand Net foreign demand
Change in inv entories Headline GDP (% Yr)
The CBRT’s priority has now shifted to supporting
growth
% %
CBRT's average funding rate
13
12
11
10
9
8
7
6
5
Sep-11
Oct-11
Source: CBRT
Nov-11
Dec-11
Jan-12
Feb-12
Mar-12
Apr-12
May-12
Jun-12
Jul-12
Aug-12
13
11
9
7
5
The shift in the growth outlook became more
pronounced in the second quarter: the contribution from
domestic demand turned negative as private
consumption contracted by 0.5% y-o-y, and private
investment by 7.9% y-o-y.
Consumer confidence, credit growth and durable goods
sales all suggest demand weakness continued in Q3.
This has prompted a policy response from the central
bank.
Monetary easing is in the pipeline
Between June and August, the central bank gradually
reduced the average cost of funding provided to the
banking sector by more than 400bp.
In its communication, the CBRT also made it clear that it
now prioritises supporting domestic demand growth.
In September, the CBRT cut the top end of the interest
rate corridor, the overnight lending rate, by 150bp to
10.0%. We expect more easing to follow, but its pace
will depend on the strength of risk appetite. Reduced
rate support could pose risks for the lira in case of risk
aversion.
Even though food prices behaved favourably in Q3 …there are signs that inflation is becoming sticky
% Yr % Yr
Consumer inflation breakdown
13
11
9
7
5
3
06
Source: CBRT
07
08
09
10
11
12
Goods Serv ices
13
11
9
7
5
3
Food inflation averaged 9.4% in the first eight months of
the year. While this is above the central bank’s 7%
average food inflation forecast for 2012, it was better
than HSBC’s expectations.
Even though processed and unprocessed food prices
did not rise sharply, there are signs that service prices
are becoming sticky. In August, service inflation rose to
6.9% y-o-y (from 5.7% in August 2011), while rent
inflation came in at 5.2%, its highest level in more than
two years.
Inflation expectations are also high at 6.6% for 12months
forward and 6.2% for 24-months forward. We
expect year-end inflation in 2012 to remain above the
CBRT’s 5% target.
63
64
Macro
European Economics
Q4 2012
Notes
Macro
European Economics
Q4 2012
Notes
65
66
Macro
European Economics
Q4 2012
Notes
Macro
European Economics
Q4 2012
Disclosure appendix
Analyst Certification
The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the
opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their
personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific
recommendation(s) or views contained in this research report: Janet Henry, Alexander Morozov, Mathilde Lemoine, Madhur
Jha, Simon Wells, John Zhu, Rainer Sartoris, Stefan Schilbe, Francois Letondu, Agata Urbanska and Melis Metiner
Important Disclosures
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67
68
Macro
European Economics
Q4 2012
Disclaimer
* Legal entities as at 8 August 2012
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Principal contributors
Janet Henry
Economist
HSBC Bank plc
+44 20 7991 6711
janet.henry@hsbcib.com
Janet Henry was appointed as HSBC’s Chief European Economist in April 2007. She joined HSBC in 1996 in Hong Kong where she
worked as an Asian Economist in the run-up to, and aftermath of, the Asian crisis before moving back to London in 1999 where
she was a Global Economist for eight years. Janet’s career began at the Economist Intelligence Unit where she worked as an Asian
economist for over four years in London and Hong Kong after graduating with an Economics degree from University College London.
Mathilde Lemoine
Economist
HSBC France
+33 1 40 70 32 66
mathilde.lemoine@hsbcib.com
Mathilde Lemoine joined HSBC in 2006 as economist. After working as a macroeconomic researcher, Mathilde has served as economic
adviser to the French Minister of Trade and Economy and then assisted the French prime minister from 2002 to 2006. She obtained a
PhD in economics from the Paris Institut d'Etudes Politiques and a master’s degree from the University of Paris Dauphine.
Simon Wells
Economist
HSBC Bank plc
+44 20 7991 6718
simon.wells@hsbcib.com
Before joining HSBC as Chief UK economist in December 2011, Simon worked as an economist and senior manager at the Bank of
England. Over a twelve-year period, he held a number of roles in the Monetary Policy, Financial Stability and Markets areas of the
Bank. For several years he was responsible for briefing the Monetary Policy Committee on financial market developments, although
immediately before joining HSBC he headed the team analysing the outlook for UK demand and output. Simon also worked for two
years at the Monetary Authority of Singapore, heading a team in the Macroeconomic Surveillance Department.
Madhur Jha
Economist
HSBC Bank plc
+44 20 7991 6755
madhur.jha@hsbcib.com
Madhur is HSBC's Global Economist. She joined HSBC London in 2007 as an ABS generalist to cover the EMEA markets. She has
gained experience in emerging markets economics research from her stints as Fixed income/FX strategist at a leading research
consultancy in London and at the largest private sector bank in India, where she also worked in FX derivative sales.
Stefan Schilbe
Economist
HSBC Trinkaus & Burkhardt AG
+49 21 1910 3137
stefan.schilbe@hsbc.de
Stefan Schilbe is Chief Economist at HSBC Trinkaus & Burkhardt, where he has been working since 1996. Since 2001, he has served
as Head of the Treasury Research department, which is responsible for interest and currency forecasts as well as technical and relative
value analysis. Stefan is member of the Committee for Economic and Monetary Policy of the Association of German Banks. After being
trained as a banker, he studied economics at the University of Cologne.
Agata Urbanska
Economist
HSBC Bank plc
+44 20 7992 2774
agata.urbanska@hsbcib.com
Agata joined HSBC in 2011 as an economist for Central and Eastern Europe. She has been covering this region for 10 years. Before
joining HSBC, Agata worked as a senior Emerging Europe economist for one of the international investment banks. She has an
MA economics from Sussex University, UK and also from Warsaw University, Poland.