ECONOMIC REPORT OF THE PRESIDENT

Euro area
Recovery from the financial and sovereign debt crises in the euro area
remains uneven, with new uncertainties creating downward pressure on
growth. Unemployment only recently edged down to 9.8 from over 10 percent,
and the euro area’s real GDP-per-capita has only just recovered its precrisis
peak in 2016:Q3. The IMF expects the euro area economy as a whole to
grow 1.6 percent over the four quarters of 2016, more slowly than its 2-percent
growth rate in 2015, reflecting some weakness in domestic demand in
the first half of 2016. The unemployment rate in the nations hardest hit by
the sovereign debt crisis remains elevated, as high as 20 percent. This persistently
slow economic growth and labor market slack, coupled with very low
inflation (averaging 0.2 in 2016 for the euro area as a whole, and deflation
in Ireland, Italy, and Spain) highlight the need for more supportive policy
in Europe, including expansionary fiscal policy. Meanwhile, the euro area’s
current account surplus has widened since 2012, driven by Germany’s growing
current account surplus.
Although euro area banks are more resilient to market stress than
before the financial crisis, weak profits and concerns about sufficiency of
financial capital leaves euro-area banks and the financial sector vulnerable,
potentially acting as a drag on growth. Burdened by high levels of legacy
non-performing loans, Portuguese and Italian banks in particular are struggling
to recapitalize and achieve a sustainable business model. Additionally,
declines in investor confidence may signal questions about the capacity of
both countries to support its banks, if necessary, given weak growth and
high sovereign indebtedness. Similar vulnerabilities are also weighing on
some large institutions such that the Euro Stoxx Bank Index—an aggregate
of European bank equity prices—has fallen 17.8 percent since the beginning
of the year. Slow growth, low interest rates, and what some observers call
oversaturation of lenders in some credit markets have compressed profit
opportunities.
Japan
Japan has continued to face economic challenges in 2016. Prime
Minister Shinzo Abe is promoting a package of structural reforms aimed at
jumpstarting growth in the Japanese economy, in addition to campaigning
for monetary stimulus and advocating for “flexible” fiscal policy, renewing
his signature “Abenomics.” After dipping in and out of recession since its
1992 financial crisis, economic growth in 2016 continues to be sluggish,
growing 0.8 percent over the four quarters ended in 2016:Q3. Slow growth
is due in large part to Japan’s declining working-age population. When
looking at real GDP per working-age population rather than real GDP,
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