BNP Paribas - Eco Week

					                                                                                                                            /// 19 April 2013 /// 13-16

Summary                                           Italy…looking for a President
Three-speed global growth…                         Political stalemate persists Market reactions have been muted
As usual in early spring, the International
Monetary Fund (IMF) released its “World
                                                  so far, but sentiment could suddenly change
Economic Outlook”. Prospects are not as           Italy is still engulfed it its political crisis.
bright.                                           On April 18 the Italian Parliament began                                ITALY SPREAD
 Overview, page 2                                voting to elect the new President of the           10-year Italian-German yield spread
                                                  Republic as Mr. Napolitano’s term will             600
The week in the US                                end soon (mid-May). The election of a
Optimism is still allowed                         new President is a fundamental step to             500
 Page 3                                          escape from the current political impasse.
                                                  He will have the power to appoint a new            400
The week in the Eurozone                          candidate for trying to form a
Ja, aber…                                                                                            300                                                304
                                                  government. If finding a majority within
 Page 4
                                                  the current Parliament is not possible, the
                                                  President will also have the power to call
France: : Investment under                        new elections. Currently Mr. Napolitano
scrutiny                                          does not have this power as the
The expected soft landing of investment is a      constitution forbids the President to                0                                           17-avr.
central element of our baseline forecast of nil   dissolve the Parliament during his last six              2010       2011         2012          2013
growth in 2013.                                   months in office.
 Focus, page 5                                   The first two voting rounds were                                         Source : Thomson Datastream
                                                  inconclusive. Hopefully, over the week-
Economic indicators                               end, lawmakers will find the right                          THE WEEK ON THE MARKETS
 Page 8                                          candidate to support. Despite two months
                                                  of political uncertainty, market reactions         Week 15-4 13 > 18-4-13
Market overview                                   remain muted. Thanks, indeed, to the                CAC 40                 3 729 } 3 599         -3.5 %
 Page 9                                          complete set of measures adopted by the             S&P 500                1 589 } 1 542         -3.0 %
                                                  Monti’s cabinet, public finances have               Volatility (VIX)        12.1 }     17.6     +5.5 %
                                                  significantly improved over the last                Euribor 3M (%)          0.21 }     0.21      -0.2 bp
                                                  couple of years. This year’s deficit is             Libor $ 3M (%)          0.28 }     0.28      -0.2 bp
                                                  forecast to be below the 3% of GDP                  OAT 10y (%)             1.81 }     1.79      -2.4 bp
                                                  Maastricht threshold, while the structural          Bund 10y (%)            1.26 }     1.24      -2.4 bp
Also in                                           deficit will meet the rules set by the fiscal       US Tr. 10y (%)          1.72 }     1.69      -3.6 bp
                                                  compact. Yet, Italy is playing with fire.           Euro vs dollar          1.31 }     1.31      -0.1 %
                                                  Sentiment could suddenly change. The
                                                                                                      Gold (ounce, $)        1 504 } 1 396         -7.2 %
                                                  debt ratio is extremely high and the
                                                                                                      Oil (Brent, $)         101.7 }     98.3      -3.3 %
                                                  country needs reforms to solve all the
                                                  bottlenecks which have been weighing on
                                                  activity over past years. The sooner the
                                                  political crisis is solved (including calling
                                                  new elections), the better.

                                                                  Jean-Luc Proutat                                       19 avril 2013 – 13-16

Three-speed global growth…
As usual in early spring, the International Monetary Fund (IMF)                  2013 IMF Growth Outlook
released its “World Economic Outlook”. Prospects are not as bright.
World growth is now estimated at 3.3% in 2013, down 3/10ths of a                                                        Weight     October 2012          April 2013
point from last fall’s publication (see table). With the exception of                 Advanced countries                50.1%            +1.5%               +1.2%
Japan, where a massive stimulus plan is being rolled out, all the                     United States                      18.9%             +2.1%              +1.9%
major countries -- both advanced and emerging -- saw their growth                     Japan                               5.6%             +1.2%              +1.6%
rates revised downwards.                                                              Eurozone                           13.7%             +0.2%              -0.3%
                                                                                          Germany                         3.8%             +0.9%              +0.6%
Eurozone: no miracle
Eurozone growth forecasts were adjusted the most. Hopes for a                                France                      2.7%              +0.4%              -0.1%
slight upturn were dashed and growth will remain in decline.                                 Italy                       2.2%              -0.7%              -1.5%
According to the IMF, GDP in the EU-17 will contract 0.3% in 2013                        Spain                            1.7%             -1.3%              -1.6%
following a 0.6% decline in 2012. This feeble showing obviously                       Emerging countries                 49.9%             +5.6%              +5.3%
plays a role in the downward revision of the world growth outlook.                           China                       14.9%             +8.2%              +8.0%
The eurozone can be blamed for a quarter of the decline, even
                                                                                             India                        5.6%             +6.0%              +5.7%
though it accounts for only 14% of world GDP. Some countries, like
Italy and Spain, are clearly mired in recession. Others, like France,                        Brazil                      2.8%              +4.0%              +3.0%
keep flirting with it. According to the IMF, the French economy will                         Russia                      3.0%              +3.8%              +3.4%
contract very slightly this year, by 0.1%. In our scenario, we have                   World                             100.0%             +3.6%              +3.3%
already been warning of zero growth for quite some time now.                         * As share of GDP, in PPP (2012)
                                                                                     Table                                                               Source: IMF
And yet in 2013, the eurozone should have benefited from less fiscal
austerity: the pace of public deficit reduction was cut in half from the
2012 leveli. Spreads on government bonds have also narrowed. The                China: threatening the miracle?
IMF notes, however, that the constraints on activity are also due to            With more than 5% growth in 2013, the emerging regions explain
balance sheet adjustments in the private sphere, and not solely in              most of the expansion in the world economy (together they account
the public sector. Household and corporate debt ratios have not                 for 80% of growth). In the short term, the IMF does not see any signs
fallen as much in the eurozone as in the United States. Debt                    of deterioration: buoyant exports, strong capital inflows and low
reduction efforts are still underway, notably in southern Europe,               spreads are all helping maintain strong growth. Yet thereafter, a
where both credit supply and demand are very depressed. The                     certain number of risks are looming on the horizon, like the rapid
situation is particularly alarming in Spain where the drop-off in               expansion of informal credit in China ii. Little by little, the world’s
corporate lending is accelerating, undermining prospects of a                   second largest economy is becoming one of the most heavily
recovery. Nonetheless, the country has made big efforts to boost                indebted countries in the emerging world. At the end of 2012, the
competitiveness. It is exporting more and has balanced its current              private sector debt ratio hit a record high of 170% of GDP. Shadow
account, an achievement that should convince its European partners,             banking -- non-traditional forms of financing -- reached 40% of GDPiii.
especially Germany, to uphold their commitments: banking union,                 Any excess credit is likely to be concentrated in loans to companies,
direct capital injections or guarantees by the European Stability               which were highly encouraged to invest during the 2008-2009 crisis.
Mechanism (ESM), and ECB financial assistance to States via OMT,                Households, in contrast, still have relatively little debt.
its Outright Monetary Transactions programme.

United States: a small miracle                                                  i    -0.75% of GDP in 2013 vs. -1.5% in 2012.
As a result, the United States is widening the gap with Europe. US              ii    See IMF, 2013, World Economic Outlook, April 2013, pp. 55-56.
growth will still hold at around 2% in 2013 (1.9% according to the              Our latest issue of “Conjoncture” has an article on credit risk in the emerging
IMF, 2.3% based on our scenario), a small miracle in the light of               countries. See Faure F., Peltier. C. 2013 “Credit risk in the emerging countries: fires
Congressional mismanagement. Failing to reach a budget                          smouldering under the ashes?”, Conjoncture BNP Paribas, n°4.
agreement, Congress ended up letting the sequester take effect, a                 Excluding traditional bank credit: bonds, trust-fund financing, inter-company loans,

series of automatic, across-the-board budget cuts, which combined               etc.
with tax increases at the beginning of the year, will cost the economy
1.75 points of GDP. Yet the sequester is coinciding with a much
stronger environment: house stocks are extremely low, encouraging
housing starts; lending is picking up; corporate margin ratios are high
and returns on investment are at record levels.

                                                                                 Alexandra Estiot                                  19 April 2013 – 13-16

The week in the US
Optimism is still allowed
Next week, it will be confirmed that the first quarter saw the US                              Soft patch
economy holding up quite well the Fiscal Fix. The profile of                                    ▬ ISM manufacturing index ; — Manufacturing output (y/y, %, r.h.s.)
activity growth is however unsupportive for the second quarter.
But we expect this will prove just a temporary slowdown as it will
be followed by a pick-up.

This week, the focus was on the manufacturing sector, with
production data for March and regional surveys for April. The overall
industrial activity kept firmly growing in March, with a 0.4% increase
following a strong 1.1% rebound in February. This lifted the 3-month
annualised pace of growth to 5%, twice the growth rate recorded at
the end of 2012. Energy production was a big contributor, as the
weather was particularly cold in March. As for the manufacturing
sector, the profile was less positive, as production fell 0.1% in March,
however following a 0.9% bounce in February. On a 3-month
annualised basis, manufacturing production slowed down between                                  Chart                                              Source : ISM, Federal Reserve
February and March (from +7.4% to +5.6%), a development that is
likely to endure in Q2. Indeed, after a strong start in early 2013, the                        Next Friday, the advance estimate for Q1 2013 GDP growth will be
ISM manufacturing survey recorded a setback in March, which was                                released, and we expect a strong rebound from the almost standstill
furthermore coming from a 6.4 points drop in the new orders                                    Q4 2012 (+0.4% annualised quarterly rate). Some of the breaks that
component.                                                                                     prevented the US economy from growing at the end of last year will
                                                                                               have eased: after subtracting 1.3 points to overall GDP growth,
The March deterioration of sentiment in the manufacturing sector                               government spending will be a lesser drag (cutting growth by a more
was rather puzzling as regional surveys were better oriented. For                              limited 0.5 point), while the inventory change will have a positive
sure, before that, the ISM was painting a rosier picture than regional                         contribution (+0.8 point, following -1.4 points in Q4 2012).
surveys. It is thus rather difficult to know whether the April mixed                           Meanwhile, private consumption will have accelerated to 2.2% (after
reading of the NEM Index1 will translate into another decline in the                           +1.8%, quarterly annualised rate) while business investment will
national manufacturing index or not. In April, the NEM Index was                               have been as strong as previously (+13%). As for international trade,
down 1.5 points to 50.0, as all but one component deteriorated from                            we expect another positive contribution as exports are growing faster
one month to the other. But not the whole report is bad news. For                              than imports. All in all, we are looking for a strong 3.5% GDP growth.
one thing, inventories are particularly low, with an index reading of
43.9, i.e. the lowest level since December 2009. As the (non-                                  However, this strength will probably have to be paid back with a
component) index for shipments remains more positive, the ratio of                             slowdown in Q2. The magnitude of this slowdown remains uncertain.
the two is low, meaning that production will soon have to be lifted to                         As for now, we expect it to be limited, with growth of around 2%.
meet demand. Additionally, the 6-month forward indices are still                               March underperformance is consistent with risks on that forecast
announcing strong activity ahead, with especially good prospects for                           being larger on the downside than on the upside. The main point to
employment.                                                                                    watch will be consumer spending. Indeed, we still are very confident
                                                                                               that a recovery in business investment is underway, while we already
March was definitely not a strong month, as every single set of data                           factored in big cuts in government spending due to the sequester.
deteriorated over that month, from surveys to hard data either                                 The end of the payroll tax holiday2 hardly hurt consumption at the
covering the business sector or the consumer sector. However, it is                            beginning of the year. Thanks to advance payments of bonuses and
rather difficult to be sure whether this is just a slowdown from a                             dividends in December 2012; households benefited from extra
stronger-than-expected start of the year or the first sign of yet                              savings that allowed them not to cut spending in response to lower
another spring soft patch. What is sure is that Q1 ended on a softer                           take home pay checks. Thus, consumption has no reason to dry up
tone than it began and this will limit the pace of quarterly growth in                         in the months ahead, except for a sudden deterioration in the labour
Q2.                                                                                            market. March data for non-farm payrolls were, to that respect, more
                                                                                               than worrying. But since then, weekly initial claims have been once
                                                                                               more trending downward. This definitely supports some optimism.

1The NEM Index is our in-house indicator of the manufacturing sentiment in the North
East of the US. It is built from surveys conducted by the Federal reserve banks of New         2On January 1st, as part of the Fiscal Fix, the payroll tax rate was raised back to its
York and Philadelphia following the method of the ISM, which PMI it tracts quite well.         normal level of 6.2% after a temporary cut to 4.2%

                                                                               Caroline Newhouse                            19 April 2013 – 13-16

The Week in the Eurozone
Ja, aber…
Several advances….                                                                             indicated substantial progress on three key points: 1) the principle of
In Dublin last weekend, the Eurogroup finance ministers reached an                             fairly sharing the outlay of capital injections between countries
agreement on easing the bailout conditions granted to Ireland and                              involved and the European Stability Mechanism (ESM); 2)
Portugal, which will be paid out in full by the end of 2013 and mid-                           management of legacy assets; 3) and the architecture of the
2014, respectively. The Eurogroup also finalised the terms of an                               resolution mechanism. Michel Barnier, European Commissioner in
agreement on the Cyprus rescue package, which should be signed                                 charge of financial services, will present his proposals next June to
soon.                                                                                          try to speed up the implementation of deposit guarantee and bank
                                                                                               resolution mechanisms. The European Directive on the bank
The average maturity of loans granted by the European Financial                                resolution mechanism is to be transposed into national law by 31
Stability Mechanism (EFSM) to Ireland and Portugal were extended                               December 2014, at the latest. The application horizon is set for 1
by 7 years maximum, on condition that the two countries continue to                            January 2018. Numerous voices are now calling for the application
pursue their adjustment programmes scrupulously. The same                                      process to be accelerated. On the fringes of the Eurogroup meeting,
agreement also applies to loans granted under the European                                     Jörg Asmussen, member of the ECB directive committee, stated that
Financial Stability Facility (EFSF). The press release stated that                             it would be preferable to have a single bank resolution mechanism in
Portugal would have to enumerate new spending cuts to offset part                              place by 2015 rather than 2018.
of the savings measures invalidated by the Portuguese Constitutional
Court, which the government had been counting on to reach its                                  In the eyes of the Commission, will this shortened period give banks
deficit reduction targets (see The Week in the Eurozone in EcoWeek                             enough time to adapt the structure of their resources and to facilitate
12 April 2013). A formal agreement should be signed on 12 May. As                              the conversion of debt instruments into equity capital if necessary?
to Ireland, the extension of loan maturities will be approved once the                         Note that Germany, the largest contributor to ESM (EUR 190bn, 27%
Troika has submitted its conclusions as part of the 9th review of                              of the total), does not share this sense of urgency. Finance Minister
Ireland’s adjustment programme. The Cyprus question was also                                   Wolfgang Schaüble says he favours the creation of a simple network
discussed. A formal agreement is to be signed on 24 April calling for                          of national bank resolution authorities, notably in case of cross
EUR 23bn in funding, including EUR 10bn financed by the Troika                                 border bankruptcies. He claims that European treaties would have to
(i.e. EUR 1bn by the IMF and €9bn by the European Stability                                    be revised to create a single bank resolution mechanism. This would
Mechanism) and EUR 13bn by Cyprus. The first tranche is to be paid                             probably mean holding an intergovernmental conference and its
in mid May and the remainder spread out over 3 years.                                          ratification by all member states, in compliance with their respective
                                                                                               constitutional regulations. As to Germany, the Karlsruhe
….. but an unexpected move by Germany                                                          Constitutional Court could be asked to rule on the conformity of the
For the Cyprus crisis, the authorities finally opted for a bail-in by                          law with the Basic Law, which stipulates that fiscal sovereignty must
banks, as opposed to a bail-out in which governments are solicited. If                         remain in the hands of the Bundestag. Note that the Court validated
we can learn but one lesson from the Cyprus crisis, it is the urgent                           the treaty creating ESM in September 2012, on condition that
need for a single bank resolution mechanism 1. According to the IMF                            Germany’s participation was limited to EUR 190bn. Above that
a certain number of eurozone banks is still handicapped by high                                amount, Parliament would have to be consulted.
financing costs, deteriorating asset quality and low profitability. To
strengthen financial stability and reinforce crisis management in the
eurozone, it is now vital to carry through banking union. To do so, the
IMF esteems that a single bank resolution mechanism must be
operational at basically the same time as the single supervision
mechanism. This should go hand in hand with an agreement on a
roadmap, complete with milestones, for setting up a single bank
resolution authority and a joint system of deposit guarantees that is
funded through mutualised resources.

Faced with this urgent need, negotiations have continued within the
Eurogroup. The press release at the end of the Dublin summit

1 The resolution mechanism is part of the remedial section banking union, since it
involves giving the European Stability Mechanism the power to inject capital directly
into distressed banks. This is the fourth pillar of banking union, along with the Single
Supervision Mechanism (SSM), a single rulebook and pre-funded deposit guarantee
schemes. For more information see Laurent Quignon, “The challenges of banking
union” in Conjoncture, February 2013.

                                                        Hélène Baudchon / Cédric Berry                        19 April 2013 – 13-16

France: Investment under scrutiny

■ From mid-2010 to the end of 2011, the investment rate                        Decoupling is unlikely to last
                                                                              In % of value added of non-financial companies
of non-financial companies picked up strongly,                                — Investment rate (rhs); ▬ Profit margin ratio (lhs)
supported by the economic recovery.
■ Since then, the recovery has faltered and growth has
stalled. The strong performance of non-residential
investment is therefore in the hot seat now and under
close scrutiny. So far, the downturn has been mild and
there are no early warning signs of a hard landing.
■ The investment resilience is all the more surprising
than, in the meantime, the profit margin ratio has fallen
back to its mid-eighties low.
■ The reason why of this decoupling is that the profit
margin ratio is only one determinant of investment                            Chart 1                                                 Source: INSEE
among others. Accommodative monetary and financial
conditions and the need to replace and modernise the                          slightly so far, from 20.4% in late 2011 to 19.9% in Q4 2012. Non-
capital stock have been and should continue to be                             residential investment contracted at an annualised average rate of
supportive factors.                                                           only 0.5% in real terms in 2012, a mild and relatively recent
                                                                              contraction compared to the rest of the Eurozone. In Italy, for
■ Any correction in investment is also likely to be                           example, investment declined 9% in 2012 after contracting 1% in
buffered by the positive effects of the competitiveness                       2011. And in Germany, investment was down 4% even though
pact.                                                                         companies are in a much better financial situation.

■ The expected soft landing of investment is a central                        Moreover, there are not (yet) any early warning signals of a harder
element of our baseline forecast of nil growth in 2013.                       landing ahead. According to the January 2013 INSEE survey on
                                                                              investment trends in the industry, investment is expected to remain
                                                                              flat this year (in nominal terms), whereas the previous survey in
An impressive dynamism…                                                       October 2012 forecasted a slight decline.
In the face of the subprime crisis followed by the European sovereign
debt crisis, France has proved to be fairly resilient. The 2009               …decoupled from the low level of the profit margin ratio
recession was not as drastic as in the rest of the Eurozone (-3.1%            This investment dynamic would not be so surprising if it had not been
vs. -4.3%). The 2010-11 recovery was about similar (an annual                 accompanied by a decline in the profit margin ratio (Chart 1). Such a
average growth of 1.6%). Lastly, the downturn in 2012 was limited to          decoupling is unusual, especially since the investment rate, at about
zero growth in France, while the rest of the Eurozone experienced             20%, has recovered virtually all of the ground lost in 2008-2009 and
another decline in GDP of 0.5%. The resilience of French growth is            is now close to its pre-crisis all-time high. In contrast, the profit
only partially attributable to strong household consumption: corporate        margin ratio of NFC dropped to 27.9% in 2012, the lowest level since
investment also proved to be remarkably dynamic, contributing on              the mid-1980s. Besides, standing below 30%, the French NFC profit
average a third of growth in 2010 and 2011, equal to that of                  margin ratio is the lowest of the Eurozone.
household consumption. After the severe drop-off in investment in
2008-2009, a lot of catching up was needed to make up lost ground.            The profit margin ratio has fallen sharply, from an average of 30% in
Most of the gap was closed illustrating the idea that a severe                2010 to 27.7% in Q4 2012. This decline can be attributed to several
contraction fosters a more vigorous pick-up (V shaped recovery).              factors, each of which contributed to the decrease at one moment or
                                                                              another. Let us first review a few definitions before looking more
Since mid-2011, despite the economic stagnation and the                       closely at the details. The profit margin ratio is the gross operating
deterioration in business confidence, the resilience of investment has        profit (GOP) over value added (VA). GOP is the difference between
also been remarkable. This incidentally explains why French growth            value added and production costs. It is an indicator of gross profit
has been verging on recession but without truly digging into it. At           and the main revenue of NFC before taxes. Production costs are
year-end 2012, the downturn in investment was still mild. The                 comprised of the cost of labour (wages plus employers’ social
investment rate of non-financial corporates (NFC) has only fallen             contributions) and production-related taxes net of operating

                                                                      Hélène Baudchon / Cédric Berry                                   19 April 2013 – 13-16

subsidies. The profit margin ratio picked up briefly in 2010, but this
was due to sharp tax cuts in the first quarter of that year1 as well as
                                                                                               Investment and production capacity
to VA growth, which briefly outpaced the increase in the labour cost.                         utilisation
By Q4 2010, however, the profit margin ratio resumed its decline as                               — Investment rate (% of value added, rhs); ▬ Production bottlenecks (lhs)
the growth rate of labour cost exceeded that of VA, which slowed,
presenting a classic example of cost rigidity squeezing margins. In
Q4 2012, the decline in the profit margin ratio also feels the blunt of
budget restrictions and tighter fiscal measures2.

Often incriminated in the loss of competitiveness of the French
economy, the low profit margin ratio does not look to be that much a
problem. In fact, it is truly the Achilles heel of the French economy,
but the profit margin ratio is not the sole determinant of investment
and its weakness has been circumvented by a decline in financing
from cash flow and an increase in debt.

One determinant among others
Non-residential investment depends from numerous other factors                                    Chart 2                                                                     Source: INSEE
than the profit margin ratio. These other determinants are demand
prospects, business confidence, tensions on production capacity,                              Investment need
financing conditions and financial constraints, the cost of capital and                       Investments are also discounted for wear and tear: the higher the
its obsolescence. By mid-2009, with business sentiment surveys                                capital depreciation rate, the higher the cost of capital. As the capital
showing the first signs of an upturn and hinting at recovery, all these                       stock is known to be quite old, investment is boosted by the need to
factors were looking upbeat and supported the upturn in the                                   replace obsolete equipment. In the industrial sector, the share of
investment rate.                                                                              replacement investment is indeed growing, according to an INSEE
                                                                                              survey3. This share began to rise in 2007, from 26% to an estimated
The industry production capacity utilisation rate picked up quickly                           30% in 2013, compared to an average of 25% between 1992 and
and sharply, regaining 12 points in two years, from an all-time low of                        2006. This trend reflects the increasing age of capital, estimated at
71% in mid-2009 to 83.5% in mid-2011. Granted, this is still below                            17-18 years4, while the average lifespan of capital is estimated at
the level at which production capacity begins to trigger tensions,                            about 15 years5.
creating a pressing need to invest more in capacity. However such
investments are well justified regarding the build-up of production                           Another characteristic is more surprising and worrisome: this is the
bottlenecks, i.e. the rising share of companies using all their                               downward trend in the share of modernisation investment, from 27%
production capacity (Chart 2).                                                                in 1992 to an estimated 23% in 2013, and the change in the nature of
                                                                                              this kind of investment. According to the same INSEE survey cited
Another support factor for investment is the change in the relative                           above, the share of investment for energy savings has increased
cost of capital/labour. Nominal wages of NFC increased by a                                   sharply (from 3% in 1992 to 8% in 2013) to the detriment of
cumulative 8.6% between 2007 and 2011, but the investment                                     investment in automation (from 16% to 8%). This is problematic in so
deflator rose only 6.2%. The cost of capital does not only depend on                          far as automation is a major source of productivity and
the price of investment. Taken as a whole, the other components of                            competitiveness gains. This is why France is often criticised for its
the cost of capital have also evolved favourably. Investment bears an                         lag in the use of robots, notably compared to Germany. Moreover,
opportunity cost, since the amount invested could have been placed                            according to the EU 2010 innovation survey, innovation in France is
in other financial products with a corresponding yield. The higher this                       more organisation-related than technological6. The crisis is partly to
yield, the higher the opportunity cost, and therefore the cost of                             blame: there are fewer companies in industry and finance, which
capital. Yet the benchmark rate – the yield on 10-year government                             have a high technological innovation rate; and the marketing and
bonds – declined over the period, from a little over 4% in 2007 to less                       organisation innovations needed to face up to the crisis are not as
than 3% in 2011 and less than 2% in 2012. The cost of corporate                               costly.
credit followed a similar trend: from slightly over 5% in 2008, it has
held below 3% since mid-2012. The low level of interest rates is
positive for the profitability of investments projects, especially since
returns are squeezed by the pressure on profits.
                                                                                              3 Industry investment accounts for a quarter of total non-residential investment.
                                                                                              4 Estimated by the Syndicat des machines et techniques de production (Symop),
1 The business tax was transformed into a “regional economic contribution”.                   based on a joint study conducted with the Ministry of Industry in 1999 and updated by
2 Higher employer contributions (due to the end of exemptions on overtime work and            Symop in 2011.
higher pension contributions to finance the return to a retirement age of 60 for long         5 A. Sylvain, “Loi de mortalité et durées de vie des équipements dans l’industrie”,

careers); and a sharp increase in production-related taxes due to a big increase in the       Bulletin de la Banque de France, n°111, March 2003.
social welfare flat rate (an employer contribution concerning exempted employees’             6 A. Bouvier, “Innover pour résister à la crise ou se développer à l’export”, INSEE

compensation), from 8% to 20% on 1 August 2012.                                               Première, n°1420, October 2012.

                                                                 Hélène Baudchon / Cédric Berry                        19 April 2013 – 13-16

From a quantitative point of view, the upturn in the investment rate
despite the fall in the profit margin ratio is remarkable. From a
                                                                                        Less financing from cash flow; more debt
                                                                                        In % of value added of non-financial companies (NFC)
qualitative perspective, however, investment seems to be more
                                                                                        — Financing from cash flow (rhs); ▬ Debt ratio (lhs)
defensive than offensive, and is concentrated in the hands of big
companies. The expected productivity and competitiveness gains as
well as the support for potential growth are thus limited. This is why
big hopes are placed in the competitiveness pact to revitalise the
creation machine7. And as Louis Gallois said in his own report on
competitiveness: “there are no out-dated industries, only out-dated

The means justify the end
The prospects for demand may be strong and capital costs may be
low, but companies will not invest unless they have the resources to
finance their investments. Financing can be either internal (through
cash flow) and/or external (bank loans and/or bond issues).
                                                                                        Chart 3                                  Sources: INSEE, Bank of France
In 2010, the upturn in investment was initially accompanied by an
improvement in corporate finances (increase in the profit margin                        a progressive recovery in the latter. Concerning the upturn in the
ratio, rebuilding of cash-flows). Indeed, most of the upturn in the                     profit margin ratio, for sure the deteriorated business confidence and
investment rate occurred that year. By year-end 2010, the                               the current context of rising taxes make it difficult but not impossible.
investment rate was already near 20%, and it barely increased much
in 2011, ending the year at 20.4%. However, this improvement in the                     The profit margin ratio can be (has to be) strengthened by an
NFCs financial shape did not last long: by the end of 2010, the profit                  increase in productivity gains and a moderation in wages inflation,
margin ratio resumed its decline, pulling down the corporate saving                     two tools of the responsibility of firms. Besides, the EUR 20 bn of the
rate. Fewer saving and more investment mean a greater financing                         tax credit embedded in the competitiveness pact may not directly
gap and the financing from cash flow lost all of the ground it had just                 increase the profit margin ratio but they will undoubtedly improve the
regained, dropping from 82% in 2010 to 65% in 2012, which like the                      financial shape of firms by increasing profits after tax.
margin ratio is extremely low.
                                                                                        Concerning the decline in the investment rate, this new type of
Companies picked up the slack by resorting to debt. The debt ratio of                   reduction in employers’ charges is precisely one of the elements
NFC (as a percentage of value added) levelled off briefly at a little                   contributing to cushion the blow. The tax credit is indeed aimed at
under 130% in early 2010, but began rising again to 135% in mid-                        boosting investment among other things. In addition to this direct
2012. This high debt ratio was supported mainly by an increase in                       positive effect of the competitiveness pact key measure, investment
market financing, which stepped in for bank borrowing as soon as                        should benefit as well from the measures in favour of non-cost
the later began to slow. A denominator effect was also at work, since                   competitiveness. The job security agreement may also indirectly help
value added did not rise as fast as debt. The increase in debt, and                     thanks to a more flexible fine-tuning of the workforce and the
therefore in the investment rate, is in fact mainly supported by major                  increased capacity to weather bad economic times. Investment
companies, who have access to market financing. Affiliated SMEs                         should also continue to benefit from the accommodative monetary
also benefit indirectly when their holding companies redistribute part                  and financial conditions and the need to replace and modernise the
of the loans taken on. In contrast, independent SMEs are dependent                      capital stock. Last, the resilience to the downside of investment that
on bank lending, and are thus more exposed to its slowdown.                             we have seen so far is good news. If it has not yet collapsed despite
                                                                                        adverse conditions, there are good chances it will not in the future
Towards a likely soft landing                                                           and that the adjustment will remain limited.
The diversification of financial resources helped circumvent the
problem of the declining profit margin ratio and supported                              The investment soft landing we expect is a central element of our
investment. Yet its rebound is not based on a strong footing and is                     baseline forecast of nil growth in 2013. That is we expect another
vulnerable to a severe correction. In addition to the deterioration in                  year of economic stagnation and not a lasting contraction. If
corporate balance sheets, the economic downturn threatens to ruin                       investment does not crash, if its decline remains, let’s say, below 5%,
the construction. The question is not whether but by how much                           this will be the sign that, globally, the economy does not collapse
investment will fall.                                                                   either and that, as expected, headwinds and tailwinds offset each
According to our forecasts, the most likely scenario is a soft landing
one with a smooth reconciliation between the investment rate and
the profit margin ratio. We expect a limited decline in the former and

7See H. Baudchon, “In search of lost competitiveness”, Conjoncture, n°2, February

                                                                  OECD Team                                19 April 2013 – 13-16

To watch from 22 to 26 April 2013
Tuesday 23 April 2013
EUROZONE: PMI surveys, (flash estimates, April)
         The Composite PMI for activity decreased to 46.5 in March, down for the second month in a row. Forward-looking components of the
         survey suggest that more deterioration is likely in April
FRANCE: INSEE business confidence surveys (April)
         The business confidence survey in the services sector is likely to post a technical rebound in April, after two consecutive months of sharp
         decline. In the industry sector, even a stable survey as in March would be considered as good news.

Wednesday 24 April 2013
UNITED STATES: Durable goods (March)
       After a strong increase in February, new orders for capital goods are likely to have suffered a setback, as we expect them to have declined
       by about 3%. However, core capital goods remained robust, even if growing slightly more slowly
UNITED KINGDOM: GDP (Q1 2013) (1st estimate)
       GDP, down by 0.3% q/q in Q4 2012, was subject to a correction after the one-off Olympics. It may have slightly increased in Q1 2013
       despite the weakness of external and domestic demand.
       In March, the IFO index corrected somewhat down following a marked expansion in February. In April, the downward correction is likely to
      continue and could even be larger, due to the fall in the expectation index in particular.

Friday 26 April 2013
       We are looking for a marked acceleration in GDP growth, from 0.4% to 3.5%, as the inventory change and government spending have
       been a lesser drag on activity, while consumption accelerated and business investment remained dynamic
JAPAN: Consumer Prices (March, Tokyo: April)
       Inflation may have declined again in March to -0.8%. However, it is expected to rise due to higher energy prices in line with the
       depreciation of the yen and rising crude oil prices.

                                                                      OECD Team - Statistics (1)                              19 April 2013 – 13-16

Markets overview
The essentials
Week 15-4 13 > 18-4-13                                       10 y bond yield, OAT vs Bund            Euro-dollar                        CAC 40
  CAC 40                 3 729 } 3 599            -3.5 %    4.00                        1.52                                           4 200
                                                                                         1.48                                           4 000
  S&P 500                1 589 } 1 542            -3.0 %    3.50
                                                                                         1.44                                           3 800
  Volatility (VIX)           12.1 }     17.6      +5.5 %
                                                             3.00                        1.40                                           3 600                         3 599
  Euribor 3M (%)             0.21 }     0.21      -0.2 bp
                                                                                         1.36                                           3 400
  Libor $ 3M (%)             0.28 }     0.28      -0.2 bp   2.50
                                                                                         1.32                   1.31                    3 200
  OAT 10y (%)                1.81 }     1.79      -2.4 bp   2.00                        1.28
                                                                                    1.79 1.24                                           3 000
  Bund 10y (%)               1.26 }     1.24      -2.4 bp
                                                             1.50                                                                       2 800
  US Tr. 10y (%)             1.72 }     1.69      -3.6 bp                          1.24 1.20
  Euro vs dollar             1.31 }     1.31      -0.1 %    1.00               18 Apr   1.16               18 Apr                      2 600                      18 Apr
  Gold (ounce, $)        1 504 } 1 396            -7.2 %       2010 2011 2012 2013         2010 2011 2012 2013                            2010 2011 2012 2013
  Oil (Brent, $)         101.7 }        98.3      -3.3 %    ─ Bunds              ▬ OAT

 Money & Bond Markets
Interest Rates                  highest 13        lowest 13   Yield (%)                    highest 13       lowest 13      10y bond yield & spreads
€ ECB                 0.75     0.75 le 01/01    0.75 le 01/01 € AVG 5-7y           1.87   2.30   07/02    1.87    18/04    11.42%                   Greece     1018 pb
  Eonia               0.08     0.13 le 01/01    0.06 le 27/02   Bund 2y            0.02   0.28   30/01   -0.02    28/03    6.13%                    Portugal   489 pb
  Euribor 3M          0.21     0.23 le 01/02    0.19 le 01/01   Bund 10y           1.24   1.68   13/02    1.22    05/04    4.66%                    Spain      342 pb
  Euribor 12M         0.53     0.62 le 01/02    0.53 le 18/04   OAT 10y            1.79   2.30   30/01    1.74    08/04    4.29%                    Italy      305 pb
$ FED                 0.25     0.25    le 01/01 0.25 le 01/01   Corp. BBB          2.87   3.42   05/02    2.86    17/04
                                                                                                                           3.75%                    Ireland    251 pb
  Libor 3M            0.28     0.31    le 01/01 0.28 le 17/04 $ Treas. 2y          0.23 0.28        25/01 0.23     12/04
                                                                                                                           2.02%                    Belgium    77 pb
  Libor 12M           0.72     0.84    le 01/01 0.72 le 17/04   Treas. 10y         1.69 2.06        11/03 1.69     18/04
                                                                                                                           1.79%                    France     55 pb
£ BoA                 0.50     0.50    le 01/01 0.50 le 01/01   Corp. BBB          3.12 3.36        11/03 3.12     12/04
                                                                                                                           1.65%                    Netherlands41 pb
  Libor 3M            0.50     0.52    le 01/01 0.50 le 17/04 £ Treas. 2y          0.20 0.52        04/01 0.18     05/04
  Libor 12M           0.90     1.02    le 04/01 0.90 le 18/04                                                              1.57%                    Austria    32 pb
                                                                Treas. 10y         1.67 2.22        13/02 1.64     05/04
At 18-4-13                                                     At 18-4-13                                                  1.44%                    Finland    20 pb
                                                                                                                           1.24%                    Germany

Spot price in dollars            lowest 13         2013(€)   Oil (Brent, $)                          Gold (Once, $)                     CRB Foods ($)
Oil, Brent              98        98 le 17/04       -10.2%   128                                      1 900                              540
                                                             120                                      1 800                              510
Gold (ounce)          1 396    1 359 le 15/04       -15.3%   112                                      1 700
Metals, LMEX          3 111    3 099 le 17/04        -9.2%                                            1 600                              480
Copper (ton)          7 061    7 048 le 17/04       -10.0%                                     98     1 500                              450
                                                                                                      1 400                     1 396    420
CRB Foods              409       401 le 27/02        -2.7%   88                                                                                                         409
                                                                                                      1 300
w heat (ton)           267       248 le 01/04        -4.5%   80                                                                          390
                                                                                                      1 200
Corn (ton)             256       254 le 05/04        -5.6%                                                                               360
                                                             72                                       1 100
At 18-4-13                                      Variations
                                                             64                           18 Apr      1 000                 18 Apr       330                       18 Apr
                                                                   2010 2011 2012 2013                   2010 2011 2012 2013                   2010 2011 2012 2013

Exchange Rates                                                        Equity indices
1€ =                highest 13       lowest 13                        Index     High 13         Low 13        2013 2013(€)
 USD     1.31       1.37 le 01/02   1.28 le 27/03 -0.8% CAC 40        3 599 3 872 le 14/03 3 599 le 17/04 -1.1%       -1.1%
 GBP     0.86       0.87 le 12/03   0.81 le 03/01 +5.5% S&P500        1 542 1 593 le 11/04 1 426 le 01/01 +8.1% +8.9%
 CHF     1.22       1.25 le 28/01   1.21 le 01/01 +0.8% DAX           7 474 8 058 le 14/03 7 474 le 18/04 -1.8%       -1.8%
 JPY 128.50       130.67 le 11/04 113.72 le 03/01 +12.7%
                                                           Nikkei    13 220 13 549 le 11/04 10 395 le 01/01 +27.2% +12.8%
 AUD     1.27       1.32 le 01/02   1.22 le 27/03 -0.1%
                                                           China*        57     66 le 22/01     57 le 18/04 -8.6%     -8.0%
 CNY     8.09       8.53 le 01/02   7.94 le 27/03 -1.6%
                                                           India*       424    451 le 31/01    404 le 09/04 -2.7%     -0.6%
 BRL     2.64       2.74 le 25/01   2.53 le 08/03 -2.3%
                                                           Brazil*    2 570 2 842 le 03/01 2 570 le 18/04 -7.3%       -5.0%
 RUB 41.37         41.37 le 18/04 39.60 le 03/01 +2.7%
                                                           Russia*      719    863 le 28/01    719 le 17/04 -8.4% -10.3%
 INR    70.74      73.12 le 11/01 69.50 le 27/03 -2.1%
At 18-4-13                                     Variations At 18-4-13

(1) Informations: Tarik Rharrab (2) 95.56 ; Veary Bou (2) 05.27 ; Patrick Capeillere (2) 95.57                                                    * MSCI Indices

                                                                                       19 April 2013 – 13-16

Most recent articles
APRIL      12 April      13-15   Overview        Southern discomfort
                                                 The week in the US
                                                 The week in the Eurozone
                                                 United States : A small step or a giant Leap ?
           5 April       13-14   Overview        A little help from Germany ?
                                                 The week in the US
                                                 The week in the Eurozone
                                                 Japan : Firms keep watching their wallets
MARCH      29 March      13-13   Overview        Enrich thy neighbour
                                                 The week in the US
                                                 The week in the Eurozone
                                                 UK : change as usual
                                                 Cyprus : last-minute deal
           22 March      13-12   Overview        Cyprus looking for plan B
                                                 The week in the US
                                                 The week in the Eurozone
           15 March      13-11   Overview        Change of focus
                                                 The week in the US
                                                 The week in the Eurozone
                                                 France, winter times
           8 March       13-10   Overview        Eurozone : What are the current issues ?
                                                 The week in the US
                                                 The week in the Eurozone
           1 March       13-09   Overview        Italy : after the elections
                                                 The week in the US
                                                 The week in the Eurozone
                                                 Portuguese banks : looking back on a transition year
FEBRUARY   22 February   13-08   Overview        Another step towards fiscal union
                                                 The week in the US
                                                 The week in the Eurozone
           15 February   13-07   Overview        Sharing a smaller piece of cake is tricky
                                                 The week in the US
                                                 The week in the Eurozone
                                 Focus 1         Netherlands, housing market weighs on economy
                                 Focus 2         Romania, need for reforms
           8 February    13-06   Overview        Loosening of collective game in Europe
                                                 The week in the US
                                                 The week in the Eurozone
                                                 Euro-dollar, what does PPP say
                                                 The US fiscal situation, cliff, fix and fight
           1 February    13-05   Overview        Doves guide the world
                                                 The week in the US
                                                 The week in the Eurozone
                                 Focus           British banks still under pressure
JANUARY    25 January    13-04   Overview        Are you serious ?
                                                 The week in the US
                                                 The week in the Eurozone
                                                 Germany : Lower Saxony elections do not settle anything
                                                 Japan : Stepping up the combat against deflation
                                                 Greek banks regain their composure

                         Philippe d’ARVISENET                      +33.(0)
                         Chief Economist

  Jean-Luc PROUTAT                                                   +33.(0)
  Alexandra ESTIOT                                                   +33.(0)
  Deputy Head – Globalisation, United States, Canada
  Hélène BAUDCHON                                                    +33.(0)
  France, Belgium, Luxembourg
  Frédérique CERISIER                                                +33.(0)
  Public finance – European institutions
  Clemente De LUCIA                                                  +33.(0)
  Euro zone, Italy - Monetary issues - Economic modeling
  Thibault MERCIER                                                   +33.(0)
  Spain, Portugal, Greece, Ireland
  Caroline NEWHOUSE                                                  +33.(0)
  Germany, Austria -Supervision of publications
  Catherine STEPHAN                                                  +33.(0)
  United Kingdom, Switzerland, Nordic Countries – Labour market
  Raymond VAN DER PUTTEN                                             +33.(0)
  Japan, Australia, Netherlands - Environment - Pensions

                    Tarik RHARRAB                                  +33.(0)    

          Laurent QUIGNON                                         +33.(0)   
          Julie ENJALBERT                                         +33.(0)     
          Ekaterina MOLODOVA                                      +33.(0)
          Laurent NAHMIAS                                         +33.(0)  

  François FAURE                                                  +33.(0)1 42 98 79 82     
  Christine PELTIER                                               +33.(0)    
  Deputy Head - Methodology, China, Vietnam
  Stéphane ALBY                                                   +33.(0)     
  Africa, French-speaking countries
  Sylvain BELLEFONTAINE                                           +33.(0)
  Latin America - Methodology, Turkey
  Pascal DEVAUX                                                   +33.(0)    
  Middle East – Scoring
  Anna DORBEC                                                     +33.(0)      
  Russia and other CIS countries
  Hélène DROUOT                                                   +33.(0)     
  Jean-Loïc GUIEZE                                                +33.(0)    
  Africa, English and Portuguese speaking countries
  Johanna MELKA                                                   +33.(0)    
  Asia – Capital Flows
  Sara CONFALONIERI                                               +33.(0)  
  Latin America
  Alexandre VINCENT                                               +33.(0) 
  Central and Eastern Europe

         Michel BERNARDINI                                        +33.(0)  
         Public Relations Officer

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Description: Political stalemate persists Market reactions have been muted so far, but sentiment could suddenly change