Market Outlook - BNP PARIBAS - Investment Services India

Germany: On the Hook• German data releases signal risks to growthare increasing.• The labour market seems strong butaggregate figures hide some crucial shifts in itsstructure, which could weaken domesticdemand.• This week, the Ministry of Economicspublished its new forecasts of 2.9% GDP growthin 2011 and 1.0% in 2012. It does not expect arecession.• Neither do we currently forecast a recession,expecting GDP growth of 2.7% in 2011 and 1.0%in 2012. However, we recognise that risks of aweak start to 2012 are rising.Source: Reuters EcoWin ProChart 1: Trade Balance (EUR bn)Chart 2: Industrial Production vs. Orders (Levels)In general, German data releases over the pastmonth have sent conflicting signals about theeconomy’s growth outlook. Although only one quarterof a q/q fall in GDP is currently expected by BNPParibas, arguments that the domestic economy willremain resilient in the face of the slowdown in globalactivity look vulnerable.Official forecasts: no recessionThis week, the German Ministry of Economicsofficially presented its new growth forecasts. Itforecasts that in 2011 GDP will grow by 2.9%,representing only a slight downward revision to itsprevious forecast of 0.1 of a percentage point. Aslowdown in activity in Q4 is expected, but not a fall.2012 growth is forecast at only 1.0%, down from1.8% forecast previously. Domestic demand will, inthis scenario, replace the external sector as the maindriver of growth.In our October Global Outlook, we expected “normal”growth in Q3 to be followed by a fall in activity in Q4and a return to trend growth thereafter. For the fullyear, this results in 2.7% growth for 2011, comingfrom the strong carryover from Q1. We then expect aweakening in growth to 1.0% in 2012.Both Ministry of Economics and our forecasts see areturn to trend growth as early as Q1 2012, butrecent data suggest that the economy could prove tobe less resilient than anticipated and may start 2012below expectations.Expectations declineSurveys of current economic conditions show aSource: Reuters EcoWin Prodeterioration in sentiment, but levels indicate thatconditions remain well above long-term averages.Expectations for activity over the next six months,however, declined earlier and more sharply in boththe ZEW and the Ifo. In October, the ZEWexpectations index fell further than expected to thelowest level since the post-Lehman crisis. However,due to the composition of the survey, the index ismore vulnerable to financial than to real economydata and hence tends to overshoot. The Ifoexpectation index is following the ZEW’s downwardtrend. Comparable falls in the Ifo in the past weretypically followed by a recession, but theserecessions were neither steep nor longer than twoquarters.The PMIs lie between confidence and hard data asthey rely on a qualitative statement based oncompany accounts. Currently, it is the labour marketthat is keeping the PMI, now at 50.5, in expansionterritory. Sub-indices, such as new orders, declinedKen Wattret 20 October 2011Market Mover8www.GlobalMarkets.bnpparibas.com