Euro area growth outlook 2012

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1 Euro area growth outlook 212 A rising tide lifts all boats 2 December 211 Allan von Mehren Chief Analyst Head of International Macro

2 Five reasons why euro recession will be short 1. US recovery normally leads the Euro area 2. Emerging Markets to drive stronger export growth 3. The recession is due partly to overproduction 4. Fiscal headwind is significant but is not getting stronger 5. Financial headwinds expected to ease slightly during Index % q/q << Composite PMI new orders Euro area GDP >> ,5 1,,5, -,5-1, -1,5-2, -2,5-3, See also Euro area: Five reasons why the euro recession will be short, 19 December 2

3 #1: US recovery normally leads the euro area Global industrial cycle very synchronised due to globalisation The turn in the US industrial cycle signals a turn in the global industrial cycle Normal that US leads the euro area We look for a further rise in the ISM in coming months Euro PMI likely to follow 85 Index Index Euro PMI, total, new orders >> Index 2Q chng, %, AR << ISM manufacturing index << US ISM man, new orders Note: Vertical lines show bottom in ISM US GDP >>

4 #1: US recovery normally leads the euro area Industrial production in the US and euro area is highly correlated The industrial sector is the main swing factor in the euro business cycle The reason is that the amplitude in the industrial sector cycle is much higher than in the service sector This is also evident from the high correlation between GDP growth and export growth, as the industrial sector is very open 15 % 6m, AR US industrial production % 6m, AR Euro industrial production ,8 % Q/Q, AR << Euro GDP %, Q/Q AR,8 -,3-1,3-2,3-3,3 Euro exports >> , 5,, -5, -1, -15, -2, 4

5 #2: Emerging markets to drive stronger export growth Chinese growth to recover in coming quarters Euro PMI has had high correlation with China in recent years Major headwind from food prices has turned into tailwind Has two effects: Real income growth goes up Policy goes from tightening to easing Same effect in most emerging markets Index % q/q AR << Euro, comp. PMI, new orders Forecast China GDP growth>> % 6m, AR % y/y China food inflation >> << CRB food stuff index, 3 month lead ,5 15, 12,5 1, 7,5 5, 2,5, -2,5-5,

6 #2: Emerging markets to drive stronger export growth Importance of emerging markets to the euro area has grown significantly over the past 1 years Asia now buys more than 2% of euro exports, CEE just below 2% US buys only around 1% Slowdown in emerging markets has been an important factor in the euro export slowdown As emerging markets growth recovers it should also lift euro area exports 25, % Export destination, % of total % 22,5 2, 17,5 15, 12,5 1, Asia m chng, AR % Euro exports by destination Asia CEE CEE USA 6m chng, AR % USA , 22,5 2, 17,5 15, 12,5 1,

7 #3: The recession is due partly to inventory build-up Euro area growth outperformed in H1 growing 1.9% vs.8% in US Part of the production rise went to inventories as sales slowed The current decline in production is partly an adjustment to sales But this will be a temporary effect 8 75 Index Std. dev. EUR PMI order-inventory* balance >> 7 65 << EUR PMI, new orders *Stocks of purchases index =1 << German industrial production German factory orders >> , Index Index 52,5 Euro PMI man., stocks of finished goods 5, 47,5 45, 42,5, 37,5 Euro PMI man., stocks of purchases 35, , 52,5 5, 47,5 45, 42,5, 37,5 35, 7

8 #4: Fiscal headwind is significant but is not getting stronger Fiscal policy continues to be tightened in 212 but, contrary to popular belief, the tightening is not getting stronger If anything, it is getting slightly smaller according to current plans Cyclically-adjusted primary bal, % of GDP E 212E Spain -5,1-2,3-1,7 Italy 1,3 2,1 4,1 Greece -3,1 1,5 5,1 Portugal -6,2 -,4 2,8 Ireland -26,2-5,5-3,7 France -3,4-2,1-1,2 Germany -1, 1,1 1,6 Source: EU Commission, Autumn Forecast 211 3, 2,5 % of GDP << Euro area, Change in % points cyclically adj. primary balance 2, 1,5 1,,5, -,5-1, -1,5-2, Effect on GDP growth >> -2,5-3, Source: EU Commission, Autumn Forecast 211 and Danske Markets 3, 2,5 2, 1,5 1,,5, -,5-1, -1,5-2, -2,5-3, 1,5 % of GDP % of GDP 1,,5, -,5-1, -1,5-2, -2,5 Euro area, cyclically adjusted primary balance -3, Source: EU Commission, Autumn Forecast 211 and Danske Markets 1,5 1,,5, -,5-1, -1,5-2, -2,5-3, 8

9 #5: Financial headwind to ease slightly during 212 Financial headwind substantial in 211 Bond yields higher, equities lower, credit standards tighter Credit tightening intensifies in short term but expected to decline again in H month LTRO should provide significant help to the banks very cheap funding 8 Credit standards Net bal Enterprises House purchases Consumer credit Net bal ,5 2,5 1,5,5 jan Jan-1 = 1 Eurostoxx financials maj sep jan 1 Euro stoxx 5 maj sep jan 11 maj sep 12 5,5 % % Euro weighted 4,5 1-year gov yield Euro weighted 2-year gov yield ECB refi rate ,5 4,5 3,5 2,5 1,5,5 9

10 Key risk comes from euro debt crisis A key risk to the euro area outlook is the euro debt crisis. A deepening of the crisis could come from: renewed pressure on peripherals for example trigggered by rating downgrades a worsening of the banking crisis leading to a severe credit crunch a high supply of bonds in early 212 running into difficulties (failed auctions). Our main scenario is: muddle through with no clear improvement but also no disaster. 1

11 Summary Euro area in recession in coming quarters Pace of decline to taper off now -> PMI is going to rise Growth to recover slowly from Q2 to 1.5% by end-212 Five reasons: US recovery leads euro China recovers in early 212 inventory adjustment temporary drag fiscal headwind not getting stronger financial headwinds to ease slightly Key downside risk: worsening of euro debt crisis 11

12 Forecasts % y/y Danske Bank Conse nsus OECD Danske Bank Cons ensus OECD USA 1,8 1,8 1,7 2,5 2,1 2, Euro area 1,6 1,7 1,6,3,5,2 Japan -,4 -,8 -,3 3, 1,7 2, China 9,3 9,2 9,3 8,9 8,5 8,5 12

13 Disclosure This presentation has been prepared by Danske Research, a division of Danske Bank A/S ("Danske Bank"). The author of the research report is Allan von Mehren, Chief Analyst. Analyst certification Each research analyst responsible for the content of this presentation certifies that the views expressed in the research report accurately reflect the research analyst s personal view about the financial instruments and issuers covered by the research report. Each responsible research analyst further certifies that no part of the compensation of the research analyst was, is or will be, directly or indirectly, related to the specific recommendations expressed in the research report. Regulation Danske Bank is authorised and subject to regulation by the Danish Financial Supervisory Authority and is subject to the rules and regulation of the relevant regulators in all other jurisdictions where it conducts business. Danske Bank is subject to limited regulation by the Financial Services Authority (UK). Details on the extent of the regulation by the Financial Services Authority are available from Danske Bank upon request. The research reports of Danske Bank are prepared in accordance with the Danish Society of Financial Analysts rules of ethics and the recommendations of the Danish Securities Dealers Association. Conflicts of interest Danske Bank has established procedures to prevent conflicts of interest and to ensure the provision of high-quality research based on research objectivity and independence. These procedures are documented in the research policies of Danske Bank. Employees within the Danske Bank Research Departments have been instructed that any request that might impair the objectivity and independence of research shall be referred to the Research Management and the Compliance Department. Danske Bank Research Departments are organised independently from and do not report to other business areas within Danske Bank. Research analysts are remunerated in part based on the overall profitability of Danske Bank, which includes investment banking revenues, but do not receive bonuses or other remuneration linked to specific corporate finance or debt capital transactions. 13

14 Disclaimer This presentation has been prepared by Danske Markets for information purposes only and should be viewed solely in conjunction with the oral presentation provided by Danske Markets. It is not an offer or solicitation of any offer to purchase or sell any financial instrument. While reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and no liability is accepted for any loss arising from reliance on it. Danske Bank, its affiliates or staff, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives), of any issuer mentioned herein. Danske Markets research analysts are not permitted to invest in securities under coverage in their research sector. This presentation is not intended for retail customers in the UK or any person in the US. Danske Markets is a division of Danske Bank A/S, which is regulated by the FSA for the conduct of designated investment business in the UK and is a member of the London Stock Exchange. Copyright (28) Danske Bank A/S. All rights reserved. This publication is protected by copyright and may not be reproduced in whole or in part without permission. 14

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