/// 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 200 President will also have the power to call France: : Investment under new elections. Currently Mr. Napolitano scrutiny does not have this power as the 100 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. economic-research.bnpparibas.com Jean-Luc Proutat 19 avril 2013 – 13-16 Overview 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, iii 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. 2 economic-research.bnpparibas.com 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% 3 economic-research.bnpparibas.com 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. 4 economic-research.bnpparibas.com Hélène Baudchon / Cédric Berry 19 April 2013 – 13-16 Focus 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 5 economic-research.bnpparibas.com 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. 6 economic-research.bnpparibas.com 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 technologies”. 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 other. 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 2013. 7 economic-research.bnpparibas.com 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. GERMANY: IFO (April) 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 UNITED STATES: GDP (Q1 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. 8 economic-research.bnpparibas.com 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 Commodities 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% 1 600 480 104 Copper (ton) 7 061 7 048 le 17/04 -10.0% 98 1 500 450 96 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% Variations 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 9 economic-research.bnpparibas.com 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 10 economic-research.bnpparibas.com ECONOMIC RESEARCH DEPARTMENT Philippe d’ARVISENET +33.(0)126.96.36.199.58 firstname.lastname@example.org Chief Economist OECD COUNTRIES Jean-Luc PROUTAT +33.(0)188.8.131.52.32 email@example.com Head Alexandra ESTIOT +33.(0)184.108.40.206.69 firstname.lastname@example.org Deputy Head – Globalisation, United States, Canada Hélène BAUDCHON +33.(0)1.58.16.03.63 email@example.com France, Belgium, Luxembourg Frédérique CERISIER +33.(0)220.127.116.11.52 firstname.lastname@example.org Public finance – European institutions Clemente De LUCIA +33.(0)18.104.22.168.62 email@example.com Euro zone, Italy - Monetary issues - Economic modeling Thibault MERCIER +33.(0)1.57.43.02.91 firstname.lastname@example.org Spain, Portugal, Greece, Ireland Caroline NEWHOUSE +33.(0)22.214.171.124.50 email@example.com Germany, Austria -Supervision of publications Catherine STEPHAN +33.(0)126.96.36.199.89 firstname.lastname@example.org United Kingdom, Switzerland, Nordic Countries – Labour market Raymond VAN DER PUTTEN +33.(0)188.8.131.52.99 email@example.com Japan, Australia, Netherlands - Environment - Pensions Tarik RHARRAB +33.(0)184.108.40.206.56 firstname.lastname@example.org Statistics BANKING ECONOMICS Laurent QUIGNON +33.(0)220.127.116.11.54 email@example.com Head Julie ENJALBERT +33.(0)18.104.22.168.41 firstname.lastname@example.org Ekaterina MOLODOVA +33.(0)22.214.171.124.54 email@example.com Laurent NAHMIAS +33.(0)126.96.36.199.24 firstname.lastname@example.org EMERGING ECONOMIES AND COUNTRY RISK François FAURE +33.(0)1 42 98 79 82 email@example.com Head Christine PELTIER +33.(0)188.8.131.52.27 firstname.lastname@example.org Deputy Head - Methodology, China, Vietnam Stéphane ALBY +33.(0)1.42.98.02.04 email@example.com Africa, French-speaking countries Sylvain BELLEFONTAINE +33.(0)184.108.40.206.77 firstname.lastname@example.org Latin America - Methodology, Turkey Pascal DEVAUX +33.(0)220.127.116.11.51 email@example.com Middle East – Scoring Anna DORBEC +33.(0)18.104.22.168.45 firstname.lastname@example.org Russia and other CIS countries Hélène DROUOT +33.(0)22.214.171.124.00 email@example.com Asia Jean-Loïc GUIEZE +33.(0)126.96.36.199.86 firstname.lastname@example.org Africa, English and Portuguese speaking countries Johanna MELKA +33.(0)1.58.16.05.84 email@example.com Asia – Capital Flows Sara CONFALONIERI +33.(0)188.8.131.52.26 firstname.lastname@example.org Latin America Alexandre VINCENT +33.(0)184.108.40.206.44 email@example.com Central and Eastern Europe Michel BERNARDINI +33.(0)1.42.98.05.71 firstname.lastname@example.org Public Relations Officer OUR PUBLICATIONS The information and opinions contained in this report have been obtained from, or are based on, public sources believed to be reliable, but no representation or warranty, express or implied, is CONJONCTURE made that such information is accurate, complete or up to date and it should not be relied upon as such. 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