France: Commencing countdown, engines on
Growth accelerated as expected to +0.4% q/q in Q4, after two quarters of near-stagnation (-0.1% in Q2 and +0.2% in Q3). Private consumption growth recovered to +0.6% q/q and corporate investment to +1.5% q/q, after stagnating in Q2 and Q3. Household investment continued its gradual acceleration (+0.9% q/q). Moreover, the main laggard of 2016 showed life in Q4: exports grew by +1.1% q/q. Overall, 2016 was still a year of subpar growth, at +1.1 % (even below the +1.2% in 2015), but there were many exceptional factors weighing on the overall figure (e.g. the bad weather impact on agriculture cut -0.2pp from annual growth). Meanwhile, 2017 had a good start, with consumer and business confidence improving at the same time by magnitudes not seen since September 2015. Moreover, corporate sales prices returned to growth and foreign demand has recovered. This is consistent with our forecast that turnover and export volume growth will accelerate in 2017, to +1.4% and +3.7%, respectively. Euler Hermes expects annual GDP growth to pick up to +1.4%. Elections pose a moderate downside risk, if they generate more uncertainty than answers.
Eurozone: 2016 ended on a positive note
Preliminary estimates indicate that Q4 real GDP grew by +0.5% q/q, in line with expectations, following +0.4% q/q in Q3. The pick-up is expected to have resulted from a boost to new export orders thanks to a weaker EUR, increasing prices which supported firms’ turnover, and a recovery in employment which supported private consumption. Confidence in the manufacturing sector registered its highest quarterly performance of the year which suggests that private investment continued to improve in Q4. Details by countries will be available on 14 February but advance estimates show accelerating growth in France (+0.4% q/q) and Belgium (+0.4%) and steady growth in Austria (+0.5%) and Spain (+0.7%). In 2017, we expect Eurozone GDP growth to remain relatively stable at +1.6%. Despite high uncertainty due to the Brexit process and upcoming elections, the ECB safety net should help maintain resilience. We estimate that elections could cut up to -0.1pp from growth in France and Germany, -0.2pp in the Netherlands and -0.3pp in Italy.
U.S.: Q4 GDP weak, but also sets the stage for a better 2017
Q4 GDP increased at a weak annualized rate of +1.9% q/q, putting full-year growth at +1.6% as we had forecasted. Unfortunately that ties 2011 for the weakest year of the recovery. Net exports took a full
-1.7pp off from total growth, and after stripping out a boost in inventories, real final sales was a very weak +0.9%. Most disappointing though was that consumption only grew +2.5% as consumers are still not spending, despite soaring optimism. Consumer Confidence slipped a bit in January, losing -1.5 points, but it was still just below December’s 113.3 which was a 15-year high. Weak real income growth did not help, gaining only +2.1% y/y, the lowest in three years. Investment grew, however, gaining +10.7% q/q annualized, the second straight gain after three quarters of losses. Similarly core capital goods orders from a separate report rose +0.8%, the third consecutive gain, taking the y/y rate to +2.8%, the first positive in 15 months. Good news in investment will help set the stage for a better 2017 with a forecast GDP growth rate of +2.4%.
Greece: All eyes on the IMF participation in the bailout
The Eurogroup meeting held last Thursday has (i) announced the formal adoption of the short-term debt relief measures that should help reduce Greek debt by 20pp by 2060 from 186% of GDP in 2016; (ii) concluded that there are enough positive drivers (positive growth in 2016, higher fiscal revenues) for a finalization of the second Troika review that will allow the disbursement of the next aid tranche. How¬ever, an agreement on the policy reform package and the medium-term targets between the Europeans and the IMF is still needed. On 6 February, the IMF Board will conclude the Article IV consultation with Greece and should make a decision on its participation in the third bailout. This is im¬portant for the EU countries that continue to judge the IMF participation as “non-negotiable” and will allow the ECB to buy Greek bonds through its QE program. Markets have stressed the importance of the IMF being on board (10-year bond yields up by more than 80bp since the Eurogroup meeting) as a matter of restoring sufficient confidence for Greece’s return to the bond markets post 2018 when the bailout will end. The next Eurogroup meeting is on 20 February.