ECONOMIC OUTLOOK FOR 2018 11 D 11 December 2017 2017 1 - - PowerPoint PPT Presentation

ECONOMIC OUTLOOK FOR 2018

11 D 11 December 2017 2017

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PRESENTATIONS Speakers

• Pierre Olivier Beffy (Exane BNP Paribas)
• Peter Vanden Houte (ING)
• Bart Van Craeynest (Econopolis)

PANEL DISCUSSION Moderator: Pr.Dr. Bruno Colmant (Degroof Petercam)

Disclosures & disclaimers are at the end of this publication. The date & time that recommendations were finalised can be found in Research publications on https://cube.exane.com Pierre-Olivier Beffy (+44) 207 039 9526 pierre_olivier.beffy@exanebnpparibas.com Francoise Huang (+44) 203 430 8514 francoise.huang@exanebnpparibas.com Jean-Baptiste Pethe (+33) 1 42 99 23 24 jean-baptiste.pethe@exanebnpparibas.com David Tinsley (+44) 203 430 8699 david.tinsley@exanebnpparibas.com

10 Questions for 2018

2017-18 economic scenario update

4 DECEMBER 2017

2018 outlook: let’s start by the best

4

• Global growth outlook: strong start followed by sequential slowdown

2018 global growth: upgraded to 3.9% US cycle extended until mid-2018 at least: easing financial conditions so far Eurozone: Euro appreciation/fiscal drag will cap growth next year China: mild slowdown given the moderate policy mix tightening

• Monetary policy: tightening may become a worry when the global economy slows down

Inflation: rising in H1 and risk of oil price overshooting Fed: hike in December and 3 hikes in 2018 ECB: further reduction in QE beyond September 2018 10-year US yields: limited upside (2.5% at the end-2018)

• Politics: improving… but for how long?

(+) Eurozone: rising pro-European sentiment (positive Italy) but slow institutional progress (-/+) US: tax cuts still our base case but beware of execution risks (-) Brexit: risk of NO DEAL outcome surging if no progress by end of Q1 next year

Exane BNP Paribas | 10 Questions for 2018

Is global growth normalising to a sustained high level?

Strong global growth but limited upside going forward

5

(1.3) (0.8) (0.3) 0.2 0.7 1.2 0.0 1.0 2.0 3.0 4.0 5.0 6.0 11 12 13 14 15 16 17 18 Global IP (6m/6m, %, -lhs) ELIT (-rhs)

Our global trade indicator (ELIT) is consistent with 4% global growth over the coming six months

Exane leading indicator for trade (ELIT) and global IP, %

Source: Exane BNP Paribas estimates

• 100
• 80
• 60
• 40
• 20

20 40 60 80 100 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 US Eurozone

Surprise indices are back at early-2017 high levels

Citigroup Economic Surprise Indices: US and Eurozone

Source: Citigroup, Exane BNP Paribas estimates

Exane BNP Paribas | 10 Questions for 2018

25 35 45 55 65 75 85 95 105 115 200 400 600 800 1000 1200 1400 1600 1800 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Baker Hughes US crude oil rotary rig count Brent prices in USD/barrel, rhs

How long will the reflation trade last?

Markets have been quick to reprice rising inflation expectations

6 US core inflation to significantly rise next spring

Source: Fed, Exane BNP Paribas

0.5 1.0 1.5 2.0 2.5 3.0 98 00 02 04 06 08 10 12 14 16 18 20 Trimmed mean PCE inflation (%) Model (based on unemployment, import prices, dollar) Fed's target

US oil rigs have not reacted to higher oil prices yet

US crude oil rig count and Brent prices

Source: Bloomberg, Exane BNP Paribas estimates

1999-2000 rebound Exane BNP Paribas | 10 Questions for 2018

0.0 5.0 10.0 15.0 20.0 25.0 (5.0) (4.0) (3.0) (2.0) (1.0) 0.0 1.0 2.0 3.0 4.0 5.0 Financial conditions index Corporate HY spreads (rhs, inverted scale) Source: Bloomberg, Exane BNP Paribas estimates

When will the US economy enter into a recession?

Corporate credit markets should be a leading indicator

7 High US corporate debt, but stable interest cost for now

Source: BEA, Fed, Exane BNP Paribas

1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 40 50 60 70 80 90 100 70 73 76 79 82 85 88 91 94 97 00 03 06 09 12 15 18 US recession Debt/value added (potential) Net interest payment/value added (rhs) stable for now

Financial conditions remain accommodative

US corporate high yield spreads and Financial Conditions Indicator

Exane BNP Paribas | 10 Questions for 2018

Will Trump be good for markets in 2018?

Profits should thrive but risks of trade disruptions with Mexico and Canada

8

500 1,000 1,500 2,000 01 03 05 07 09 11 13 15 17 19 21 23

+6.5% under House plan

A large impact on US profits

After-tax profits of US corporate, USDbn

Source: BEA, Tax Policy Center, Exane BNP Paribas

Risks of trade related disruption

Trade in USDbn

Source: Commerce Department, Exane BNP Paribas

10 20 30 40 50 60 70 80 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 US vehicles exports to Mexico US vehicles imports from Mexico

Exane BNP Paribas | 10 Questions for 2018

Rate hikes have barely tightened financial conditions so far

Source: OECD, Exane BNP Paribas (5.0) (4.0) (3.0) (2.0) (1.0) 0.0 1.0 2.0 3.0 4.0 5.0 (3.0) (2.0) (1.0) 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 92 94 96 98 00 02 04 06 08 10 12 14 16 18 Real 3mth Tbill FCI (inv.scale, rhs) 1/1 impact of Fed hikes on FCI little impact of Fed hikes on FCI

Will Jerome Powell spoil the party?

Policy normalisation still good news as long as core inflation rises and growth remains strong

9

Exane BNP Paribas | 10 Questions for 2018

(3.0) (2.0) (1.0) 0.0 1.0 2.0 3.0 4.0 1.0 1.1 1.2 1.3 1.4 1.5 1.6 07 08 09 10 11 12 13 14 15 16 17 18 19 EURUSD 2yr real yield (Germany-US) 0.6 0.8 1.0 1.2 1.4 1.6 1.8 EURUSD fair value EURUSD Source: Exane BNP Paribas estimates

Will the USD rise?

The current rebound in USD is mainly tactical (2018 year-end target at 1.20)

10 EURUSD fair value at 1.25 means EURUSD likely to go back to 1.40 over the coming years

Monetary decoupling to support the USD

EURUSD and 2-year real yield spreads between Germany and US

Source: Bloomberg, Exane BNP Paribas estimates Exane BNP Paribas | 10 Questions for 2018

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Portugal Italy Spain Ireland 25 35 45 55 65 75 85 04 05 06 07 08 09 10 11 12 13 14 15 16 17 Support for the Euro in Eurozone countries, % Support for the EU in EU countries, % Brexit Source: Eurobarometer, Exane BNP Paribas estimates

Will European political risk continue to ease?

Limited risks around Italian elections / slow European integration

11 Rising support for the EU and the Eurozone

Support for the Euro and for the EU, %

ECB QE extension aims at “full” sovereign bond normalisation

10-year sovereign spreads

Source: Bloomberg, Exane BNP Paribas estimates

Exane BNP Paribas | 10 Questions for 2018

Brexit : No news, good news?

No agreement before March would significantly raise the likelihood of a NO DEAL outcome

12

A 50 negotiations

Citizens’ rights, exit bill, Northern Ireland

Negotiating a ‘framework for future relations’

Future trade and non- trade relations

Ratifying the withdrawal deal

Vote in UK and European Council and Parliament

Transition period and technical talks

• n FTA

European Commission makes a recommendation to the European Council on ‘sufficient progress’ to start next stage

Oct 2018 29 March 2019

Exit deal agreed and concluded between the UK and EU, and ratification process begins Deadline for ending talks on the UK’s withdrawal terms from the EU

2023? June 2017

EU Council: 14th/15th Dec 22nd/23rd March Exane BNP Paribas | 10 Questions for 2018

Dec 2017- March 2018

(9.0) (7.0) (5.0) (3.0) (1.0) 1.0 3.0 5.0 7.0 9.0 11.0 6.0 8.0 10.0 12.0 14.0 16.0 18.0 20.0 22.0 06 07 08 09 10 11 12 13 14 15 16 17 18 RRR % PPI %y/y (rhs) CPI %y/y (rhs)

Will China tighten policy?

Some slight tightening possible around the turn of the year

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Thailand (1997) Brazil (1998) Mexico (1994) South Korea (1997) Russia (1998) Argentina (2001) Turkey (2001) Bulgaria (1996) China 2015 Indonesia (1998) China 2009 China 2020 75 95 115 135 155 175 195 (5.0) 5.0 15.0 25.0 35.0 C r e d / d e p

• s

i t r a t i

• ,

% Net foreign debt, % of bank assets

China can kick the can down the road for a few years (2021=100th anniversary of the Communist Party)

Financial vulnerability indicators, China and EM countries in crisis

Source: Gavekal, Exane BNP Paribas estimates

The Chinese inflation paradox: rising PPI with stable CPI

CPI, PPI and RRR, %

Source: National Bureau of Statistics of China, PBOC, Exane BNP Paribas estimates

Exane BNP Paribas | 10 Questions for 2018

(4) (3) (2) (1) 1 2 3 4 (35) (15) 5 25 45 65 85 105 125 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Net total portfolio flows to EM (USD bn) US real 10-year sovereign rate (rhs) BRIICS real 10-year sovereign rate simple average (rhs)

Will capital flows continue to pour into EM?

Excess real return is a medium-term support for EM

14

The real sovereign spread between US and EM is elevated

Real 10-year government bond yields: US (rhs), BRIICS simple average (rhs), and Net total portfolio flows to EM (USD bn)

Source: Thomson Reuters, National sources, Exane BNP Paribas estimates Exane BNP Paribas | 10 Questions for 2018

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Appendix: Strong late-cycle global growth outlook

US/Latam acceleration; resilient growth elsewhere

Exane BNP Paribas | 10 Questions for 2018

2016 Exane Exane Consensus** Exane Consensus** World* 3.2 3.7 3.7 3.9 3.8 United States 1.5 2.2 2.2 2.4 2.5 Japan 1.0 1.6 1.6 1.3 1.3 South Korea 2.8 3.2 3.1 3.0 2.9 Euro Area* 1.8 2.3 2.2 2.1 1.9 Germany 1.9 2.4 2.0 2.2 2.0 France 1.1 1.8 1.7 1.8 1.7 Italy 0.9 1.5 1.5 1.5 1.2 Spain 3.2 3.0 3.1 2.6 2.5 United Kingdom 1.8 1.6 1.5 1.3 1.4 Central & Eastern Europe* 3.1 4.5 4.7 4.1 3.5 Poland 2.6 4.1 4.1 4.1 3.5 Hungary 2.0 3.6 3.8 3.5 3.4 Turkey 3.2 5.2 5.5 4.5 3.7 Russia

• 0.2

1.7 1.7 2.2 1.9 Latin America*

• 0.9

1.6 1.7 2.7 2.6 Argentina

• 2.2

2.9 2.9 3.4 3.2 Brazil

• 3.6

0.7 0.7 2.6 2.4 Mexico 2.4 2.2 2.1 2.5 2.3 Emerging Asia* 6.4 6.5 6.5 6.5 6.4 China 6.7 6.8 6.8 6.5 6.4 India 7.1 6.7 6.8 7.3 7.5 Indonesia 5.0 5.3 5.1 5.4 5.3 Middle East & North Africa 5.1 2.3 n/a 3.6 n/a Developed countries* 1.7 2.2 2.2 2.2 2.1 Emerging countries* 4.1 4.7 4.7 5.1 4.9 * Forecasts using IMF weights / upgrade / downgrade ** from most recent Consensus Forecasts (Nov 2017) in report on 21/11 % annual growth 2017e 2018e

Yields: not much increase by year-end

FX: Weaker JPY, slightly stronger USD

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FX forecasts Current End-2017 forecast End-2018 forecast

EURUSD 1.18 1.13 1.20 USDJPY 112 115 115 EURGBP 0.89 0.94 0.85 GBPUSD 1.33 1.20 1.41 EURJPY 132 130 138

Rate forecasts Policy Rates 10-yr sovereign

Current End-17 End-18 Current End-17 End-18

US 1.25 1.50 2.25 2.3 2.3 2.5 UK 0.50 0.50 0.75 1.3 1.2 1.2 Germany 0.00 0.00 0.00 0.4 0.4 0.6 Japan

• 0.10
• 0.10
• 0.10

0.0 0.0 0.0

‘Current’ numbers as of 20 November 2017 Source: Bloomberg, Exane BNP Paribas Exane BNP Paribas | 10 Questions for 2018

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Major global political events

2018 28 January Cyprus Presidential election 03 February US End of Yellen's term as Chair of the Federal Reserve Early March China Plenary session of the National People's Congress 18 March Russia Presidential election April or May 2018 Hungary Legislative elections No later than 20 May Italy General elections 27 May Colombia First round of presidential election Within 90 days after 5 June Pakistan Legislative elections 17 June Colombia Second round of presidential election 01 July Mexico General elections On or before 24 August Malaysia Legislative elections 09 September Sweden General elections October Venezuela Presidential election October Luxembourg Parliamentary election 28 October Brazil Presidential election October or November China 3rd plenary session of the 19th Party Congress 06 November US Midterm elections

Exane BNP Paribas | 10 Questions for 2018

FOMC, ECB, BoJ and BoE monetary policy meetings associated with economic projections 18

Main central banks meetings

2018 23 January Japan BoJ meeting and outlook report 08 February UK BoE meeting and inflation report 03 February US End of Yellen's term as Chair of the Federal Reserve 08 March Eurozone ECB meeting and macroeconomic projections 21 March US FOMC meeting press conference 27 April Japan BoJ meeting and outlook report 10 May UK BoE meeting and inflation report 13 June US FOMC meeting press conference 14 June Eurozone ECB meeting and macroeconomic projections 31 July Japan BoJ meeting and outlook report 02 August UK BoE meeting and inflation report 13 September Eurozone ECB meeting and macroeconomic projections 26 September US FOMC meeting press conference 31 October Japan BoJ meeting and outlook report 08 November UK BoE meeting and inflation report 13 December Eurozone ECB meeting and macroeconomic projections 19 December US FOMC meeting press conference

Exane BNP Paribas | 10 Questions for 2018

19

Key political events for Europe

2018 22-23 March EU European Council 28-29 June EU European Council October Brexit Deadline for the Brexit talks 18-19 October EU European Council 13-14 December EU European Council 2019 29 March Brexit Britain formally exits the EU

Exane BNP Paribas | 10 Questions for 2018

DISCLOSURES

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Analyst Certification We, Pierre-Olivier Beffy, Francoise Huang, Jean-Baptiste Pethe, David Tinsley, (authors of or contributors to the report) hereby certify that all of the views expressed in this report accurately reflect our personal view(s) about the company or companies and securities discussed in this report. No part of our compensation was, is, or will be, directly, or indirectly, related to the specific recommendations or views expressed in this research report. Non-US Research Analyst Disclosure The research analysts named below were involved in preparing this research report. Research analysts at Exane Ltd and Exane SA are not associated persons of Exane Inc. and thus are not registered or qualified in the U.S. as research analysts with the Financial Industry Regulatory Authority (FINRA) or the New York Stock Exchange (NYSE). These non-U.S. analysts are not subject to the NASD Rule 2241 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Pierre-Olivier Beffy (Exane Limited), Francoise Huang (Exane Limited), Jean-Baptiste Pethe (Exane SA), David Tinsley (Exane Limited) Exane SA is regulated by the Autorité des Marchés Financiers (AMF) in France, Exane Ltd is authorised and regulated by the Financial Conduct Authority in the United Kingdom, and Exane Inc. is regulated by FINRA and the U.S. Securities and Exchange Commission in the United States. Research Analyst Compensation The research analyst(s) responsible for the preparation of this report receive(s) compensation based upon various factors including overall firm revenues, which may include investment banking activities. Disclosure of the report to the company/ies Companies Disclosures NONE 1 – Sections of this report, with the research summary, target price and rating removed, have been presented to the subject company/ies prior to its distribution, for the sole purpose of verifying the accuracy

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Exane BNP Paribas | 10 Questions for 2018

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Eurozone Outlook:

Accelerating growth

December 2017

Peter Vanden Houte Chief Economist ING Belgium

€

Economic policy uncertainty has dropped…

23

Nov-16 Jan-17 Mar-17 Jan-17 Nov-16 Jan-17 Jan-17

• 2
• 1

1 2 3 4 5 6 Peak uncertainty* Latest Economic Policy Uncertainty Index

(+ve value = above norm uncertainty)

* Peak was in June 2016 unless stated. Chart shows normalised scores. Source: ING calculations using Baker, Bloom and Davis (2014) data

24

…but there is no shortage of potential worries

25

A Brexit deal will have to include a transition phase

? ? ?

Congestion ahead?

26

• Currently it takes 2 minutes for an EU bound

lorry to board at Dover, but when you introduce customs processing…

• 2 minutes extra = 17 mile queue (Ashford)
• 4 minutes extra = Maidstone
• 6 minutes extra = M25
• 8 minutes extra = Dartford Crossing *
• James Hookman – deputy chief executive of British Freight Transport Association
• That is just from the British side – what will

the French, Dutch and Germans do?

Forth Tees and Hartlepool Hull Grimsby and Immingham Felixstowe Harwich Dover Channel Tunnel London Milford Haven Holyhead Liverpool Belfast

414 4,369 66,264 87,287 8,311 180,163 2,564,994 1,641,638 12,783 33,307 286,003 125,729 153,730

Lorry traffic at selected UK ports

Number of lorries, 2015

Source: Institute for Government

27

Order books signal strenghtening Eurozone growth

Orderbook levels GDP growth yoy %

28

European consumer has more purchasing power

Consumption YoY % Plans to buy durable goods

29

Business investment growth to top 5% in 2018

Capacity utilisation Capital expenditure

30

The dog that didn’t bark

31

Eurozone core inflation will rise only very gradually

32

What to expect from the ECB?

• From January 2018 net asset purchases are intended to

continue at a monthly pace of €30 billion (from €60 billion now)until the end of September 2018, or beyond

• “It's not going to stop suddenly, it's never been our view that

things should stop suddenly.”

• “We'll continue purchasing ample quantities of corporate

bonds”

• “We continue to expect interest rates to remain at present

levels for an extended period of time, and well past the horizon of our net asset purchases”

• QE probably lengthened until the end of 2018, first rate hike in June 2019 at the

earliest? Euribor 3M likely to remain around -0.30% until the end of 2018 . Then gradual increase to 0.20% at the end of 2019.

ECB continues to increase excess liquidity

33

deposit rate ECB Euribor 3M

Euribor 3M is unlikely to become positive before the second half of 2019

Excess liquidity

34

Eurozone bond yields have fallen (too much?)

Impact QE

Credit standards & credit spread in the Eurozone

35

• Though there are still some risks surrounding the outlook, Eurozone growth is definitely

strengthening

• Inflation is rising, albeit very slowly
• ECB will continue with QE and negative interest rates in 2018, 2019 might be a turning point
• Only limited bond yield increase to be expected in 2018
• Credit spreads are at very low levels. This will not last another two years

36

Conclusions

37

Belgium could do much better

@Bvancraeynest

Chief Economist Econopolis

38

Belgian economy is picking up

• 40
• 30
• 20
• 10

10 20

• 5
• 4
• 3
• 2
• 1

1 2 3 4 5 6 Q1 1999 Q1 2001 Q1 2003 Q1 2005 Q1 2007 Q1 2009 Q1 2011 Q1 2013 Q1 2015 Q1 2017

Economic activity in Belgium

Real GDP (annual change in %)

December 2017

39

Modest growth under Michel I

2 4 6 8 10 12 14 16 18 Rom Mal Czr Pol Svn Bul Lat Spa Swe Hun Cro Cyp Lit Neth Est EU EMU Aut Ger Por Lux Fin UK Nor Bel Dk Fra It Swi Gre

Economic growth since Q4 2014

December 2017

Source: Eurostat

40

Belgium held up better during the crisis...

December 2017

85 90 95 100 105 110 115 Q1 2008 Q1 2010 Q1 2012 Q1 2014 Q1 2016

Real GDP

Bel Ger Fra Neth It Aut Fin

Index (Q1 1999 = 100)

Source: Eurostat

41

Unusual confidence gap in Belgium versus the Eurozone

• 35
• 30
• 25
• 20
• 15
• 10
• 5

5 10 15 60 70 80 90 100 110 120 Jan/03 Jan/05 Jan/07 Jan/09 Jan/11 Jan/13 Jan/15 Jan/17

Business confidence

Eurozone (EC) Belgium (NBB, rhs)

December 2017

42

Brexit risk?

1 2 3 4 5 6 7 8 Bel Irl Neth Svk Czr Hun Ger Pol Dk Swe Lat Por Spa Est Fra Mal Fin Svn It Aut Lux Bul Cyp Gre Cro

Goods exports to the UK

December 2017

Source: IMF DOTS

As a % of GDP (average of the past 5 years)

43

Labour market tightness?

2 4 6 8 10 12 14 6,0 6,5 7,0 7,5 8,0 8,5 9,0 9,5 10,0 10,5 Q1 1995 Q1 1997 Q1 1999 Q1 2001 Q1 2003 Q1 2005 Q1 2007 Q1 2009 Q1 2011 Q1 2013 Q1 2015 Q1 2017

Labour market

Unemployment rate (in %)

December 2017

Source: NBB

44 December 2017

Policy uncertainty?

45

Strong moves by Michel I

• Raising official retirement age
• Cutting taxes on labour
• Corporate tax reform
• Limiting wage handicap
• Spending cuts

46

Strong moves: jobs, jobs, jobs?

0,1 0,2 0,3 0,4 0,5 0,6 0,7 0,8 0,9

Q1 1983-Q1 1992 Q2 1993-Q4 2000 Q3 2003- Q1 2008 Q2 2009-Q1- 2012 Q4 2014-

Job growth in expansions

December 2017

Job growth per % of economic growth

47 December 2017

48

Fiscal nonsense in taxation

0,0 0,5 1,0 1,5 2,0 2,5 3,0 3,5 4,0 4,5 UK Fra Bel Can Lux US Isr Kor Jap Aus It Ice Spa Irl NZ Gre O… Dk Swi Pol Fin H… Por N… Nor S… Ger Svn Aut Czr Svk Est M…

Total revenue from taxes on property

Source: OECD

As a % of GDP (2014)

49

Financial challenges for the Belgian government

• Current structural deficit: 1.5% gdp
• Aging: 3.2% (HRF) – 5.2% gdp (EC)
• Need for investment: 1 to 2% gdp
• Spending on defense: 1% gdp

Financial effort of 8.2% of GDP, or 36 bn in today’s euros

December 2017

50

We’re not working enough...

December 2017

Source: Eurostat

15 20 25 30 35 40 45

Just a little over 1 in 4 Belgians works in the private sector

Employment in the private sector (in % of total population, 2015)

51

Source: OECD

Aut Bel Fra Ger Gre Irl It Neth NZ Spa Swe Swi

50 55 60 65 70 75 80 85 15 20 25 30 35 40 45 50 55 60

Employment rate 15- to 64-year olds (in %) Tax on labour (single, average income, as a % of labour cost)

Taxes and employment

High taxes and limited employment

52

Lack of flexibility in the labour market

December 2017

Source: World Economic Forum

53

Outlook Belgian economy

• 2018: decent economic growth
• Inflation to ease slightly
• Belgium remains insufficiently prepared for

upcoming challenges

• Risk of 1.5 years of policy inactivity

54

@Bvancraeynest

Chief Economist Econopolis

Belgium could do much better

55

PANEL DISCUSSION

• Pierre Olivier Beffy (Exane BNP Paribas)
• Peter Vanden Houte (ING)
• Bart Van Craeynest (Econopolis)

Moderator: Pr.Dr. Bruno Colmant (Degroof Petercam)