bnp paribas ecoweek_14-34-en 10.10.2014

8/11/2019 BNP Paribas Ecoweek_14-34-En 10.10.2014

1/12

/// 10 October 2014 /// 14-34

The latest figures published in Franceand Germany show an unusual economicsituation. There are major concerns inGermany after the publication ofindustrial production and manufacturingorders figures for August. Germanindustrial production fell 4% m/m, thesharpest drop since January 2009, whilemanufacturing orders collapsed by 5.7%m/m. In terms of the growth overhang,industrial production showed a 1.4%decline in Q3 as opposed to a 1.1% fall inQ2. In the past, a quarterly contraction of

around 1% in industrial production hasbeen accompanied by a slight decline inGDP growth. By comparison, France'sperformance which could be described asmediocre no change in industrialproduction and a 0.2% fall inmanufacturing month-on-month looksrespectable. This summer divergencecould suggest that the French economyis becoming more resilient. Germany'sopenness to foreign trade with exportsmaking up half of its GDP makes itstrong during a global upturn, but more

vulnerable than France when globalgrowth is slowing. So far, Frenchdomestic demand has held up well,cushioning the impact of the crisis (seechart). The current situation representsanother important opportunity toencourage Berlin to use its fiscal room formanoeuvre and stimulate its economyduring the meeting between France andGermany's economy and financeministers on 20 October.

SummaryGlobal Weak and uneven Once again the International Monetary Fund

has revised down its world growth forecasts.Page 2

FranceBudget 2015: focus o n spending savingsThe government attempts to meet the twinchallenges of maintaining fiscal consolidationand supporting growth. Page 3

BrazilAnnus economicus horribil is

Activity is sluggish, inflationary pressures donot abate, and the fiscal situation iscontinuing to deteriorate. Regardless of thefinal election results, the new government willface a difficult task.Page 6

Economic indicators Page 8

Market overview Page 9

Also in

The Oak and the ReedThe IMF is worried about the risk of recession in the EurozoneGermany is struggling while France stagnates

GROWTH SPREAD BETWEEN FRANCE & GERMANYFrench GDP (%, y/y) German GDP (%, y/y)

Sources :INSEE, Destatis

THE WEEK ON THE MARKETS

Source : Thomson Datastream

Week 6-10 14 > 9-10-14

CAC 40 4 282 4 141 -3.3 %S&P 500 1 968 1 928 -2.0 %Volatility (VIX) 14.6 18.8 +4.2 %Euribor 3M (%) 0.08 0.08 -0.0 bp

Libor $ 3M (%) 0.23 0.23 -0.3 bpOAT 10y (%) 1.28 1.24 -4.1 bpBund 10y (%) 0.89 0.86 -2.9 bpUS Tr. 10y (%) 2.45 2.33 -12.0 bpEuro vs dollar 1.25 1.27 +1.6 %Gold (ounce, $) 1 194 1 224 +2.5 %Oil (Brent, $) 91.3 90.9 -0.4 %

economic-research.bnpparibas.com


2/12

Frdrique Cerisier 10 October 2014 14-34

2 economic-research.bnpparibas.com

Global / EurozoneWeak and uneven

The IMF has revised down its world growth forecastsagain.

The deterioration is particularly marked in the majoreurozone countries, Japan, Brazil and Russia.

However, the Fund is still a little too optimisticcompared with our own estimates.

The risk that the eurozone will slip back into recession

and/or deflation is presented as one of the main riskfactors for the world economy.

ECB sovereign bond purchases and stimulus throughinfrastructure spending are on the IMFs list of economicpolicy recommendations.

The International Monetary Fund (IMF) has revised down its worldgrowth forecasts. Compared with the July forecasts, the worldwidegrowth rate loses only 0.1 pp this year (to 3.3%), mainly because theimproved outlook for the United States (+0.5 pp) has made up for adownward revision in forecasts for most of the large eurozoneeconomies (-0.3 pp) and Japan (-0.7 pp). As for emerging markets,

the growth forecasts for Russia (-0.5 pp in 2015) and even moreBrazil (-1 pp in 2014 and -0.6 pp in 2015) have been revised downsignificantly. On the other hand, they have been left virtuallyunchanged for India and China. Nonetheless, the IMFs economistsmay still be called optimistic compared with our own estimates (seeTable and October 2014 Perspectives). Particularly for 2015, ourexpectations are almost systematically a little weaker.

All this has led IMF chief economist Olivier Blanchard to call therecovery weak and uneven, and to stress each countrys specificdynamics. In the eurozone in particular, in the centre he contrasts therelatively robust German economy with France, where growth is veryweak, while on the periphery, he contrasts Spain, where the recovery

is consolidating and which is one of the few countries for which theIMF has revised up its forecasts, with Italy, which is still in recessionthis year. However, from an aggregate point of view, the assessmentof the situation in the eurozone overall is increasingly poor. Apartfrom the downward growth forecast revision, the IMFs economistshave developed indicators for each major economic region showingthe risk of recession or deflation over the next few quarters. It is theeurozone which faces the highest risks (at about 30% in each of thetwo cases), and where they have increased significantly comparedwith the April 2014 estimates.

The IMFs economic policy recommendations for the eurozone areclear: i) the ECBs latest measures are welcome, but the central bank

should be ready to buy sovereign assets if inflation expectationscontinue to decline; ii) structural measures are essential to enhancegrowth potential and avoid secular stagnation; iii) the slowdown in

the pace of budget consolidation is a good thing and the deterioration

in the growth outlook should not lead to stronger clean-up measures.However, if deflation risks materialize and monetary policy optionsare depleted [we note the order of priority here], the escape clausesin the fiscal framework may need to be used to respond.

Before things get that far, the IMF points out, as we did last week(What to do with budgetary surpluses? Ecoweek 3/10/14), Germanywould have the resources to fund needed investment in themaintenance and modernisation of its infrastructure. More generally,a full chapter of this edition of the World Economic Outlook isdevoted to this kind of investment. For the IMF, the time isparticularly favourable for restarting public investment, both becauselow interest rates makes funding them very inexpensive, and

because several economies, particularly the eurozone, are sufferingfrom excessively weak demand. Consequently, such investmentcould support growth both in the short term (through a stimuluseffect) and in the medium term (through a classic growth potentialenhancement effect). If well targeted, they could even be self-financing, according to the Funds economists, and not lead to amedium-term increase in indebtedness. In short, the IMF threwanother rock into the already pebble-strewn German pond this week.

IMF and BNPP forecasts

IMF BNPP

GDP growth, % 2013 2014 2015 2014 2015

USA 2.2 2.2 3.1 2.1 2.8

Eurozone -0.4 0.8 1.3 0.7 0.9

Germany 0.5 1.4 1.5 1.4 1.4

France 0.3 0.4 1.0 0.3 0.7

Italy -1.9 -0.2 0.8 -0.3 0.3

Spain -1.2 1.3 1.7 1.2 1.6

Japan 1.5 0.9 0.8 0.8 0.5

UK 1.7 3.2 2.7 3.0 2.8

Brazil 2.5 0.3 1.4 0.0 1.0

Russia 1.3 0.2 0.5 -0.6 -2.5

India 5.0 5.6 6.4 5.4 6.2

China 7.7 7.4 7.1 7.3 6.8

World 3.3 3.3 3.8 3.1 3.4

Table Sources: IMF (WEO, October 2014), BNPP
http://economic-research.bnpparibas.com/Views/Perspectives.aspx?Lang=en-UShttp://economic-research.bnpparibas.com/Views/Perspectives.aspx?Lang=en-UShttp://economic-research.bnpparibas.com/Views/DisplayPublication.aspx?type=document&IdPdf=24839http://economic-research.bnpparibas.com/Views/DisplayPublication.aspx?type=document&IdPdf=24839http://economic-research.bnpparibas.com/Views/DisplayPublication.aspx?type=document&IdPdf=24839http://economic-research.bnpparibas.com/Views/DisplayPublication.aspx?type=document&IdPdf=24839http://economic-research.bnpparibas.com/Views/Perspectives.aspx?Lang=en-US


3/12

Hlne Baudchon 14 October 2014 14-34

France

2015 budget: focus on spending savings

After a widening in 2014, to 4.4% of GDP from 4.1% in2013, the French fiscal deficit would barely dimini sh in2015, to 4.3%. Besides, the target of moving i t back to 3%has been postponed from 2015 to 2017.

Those new government fo recasts are realistic for 2014but they are still on the optimistic side for 2015 andbeyond, despite signi ficant efforts, because GDP growthand spending savings may fall short of the governments

expectations. Besides, the current path of France's publ ic financesresulting from the finance bills is not consistent with thepromises that the government has made regardingEuropean rules.

All the at tention is focused on the EuropeanCommission whose recommendations are awaited by theend of November.

The debate regarding the 2015 has begun. The 2015 finance bill(PLF) and the 2014-2019 public finance planning bill (PLPFP) were

presented in the 1 October cabinet meeting. In the cabinet meetingon Wednesday 8 October, it was the turn of the social securityfinancing bill (PLFSS). France's parliament also started examiningthe PLF this week. Those various documents confirm the mainaspects of the 2015 budget, which had already been announced inthe press, as well as providing some additional information that waspreviously lacking.

The government attempts to meet the twin challenges of maintainingfiscal consolidation and supporting growth. However, weak growthand low inflation, combined with economic policy decisions andmajor methodological changes, are hampering the improvement inthe public finances. The target of reducing the nominal deficit/GDP

ratio to 3% has been pushed back by two years from 2015 to 2017.That creates a third challenge, i.e. getting the European Commissionto accept the slippage in France's schedule.

General frameworkWe now have a full set of updated government economic and fiscalforecasts for 2014-2019 (table 1). They show the impact of recentweak growth, which is continuing the stagnation that has now beengoing on for a little over three years. Growth and inflation forecastshave been reduced substantially, pushing up deficit forecasts.

Growth forecasts are realistic for 2014, but still seem optimistic for2015 and beyond. As France's HCFP (High Council for Public

Finances) has emphasised in its opinion on the PLF and PLFSS, the2015 forecast assumes "a rapid, sustained upturn in activity that isnot borne out by the latest economic indicators", and the risk is

Fiscal consolidation: key figuresGrowth rates in %, ratios as % of GDP

Table 1 Sources: PLF, PLPFP

Economic scenarioGrowth rate (%, except * contributions in % points)

Table 2 Sources: INSEE, BNP Paribas, PLF 2015

2013 2014 2015 2016 2017 2018 2019GDP growth 0,3 0,4 1,0 1,7 1,9 2,0 2,0Potential growth 1,0 1,0 1,1 1,3 1,3 1,2 1,1

Budget balance (1+2+3) -4,1 -4,4 -4,3 -3,8 -2,8 -1,8 -0,8Primary balance -1,9 -2,2 -2,0 -1,4 -0,3Balance needed to stabilise the debt ratio -1,0 -1,1 -1,8 -2,9 -3,4 -3,5 -3,4

Cyclical balance (1) -1,6 -1,9 -2,0 -1,7 -1,4 -0,9 -0,5One-off and temporary measures (2) 0,0 0,0 -0,1 -0,1 0,0 0,0 0,0

Structural balance (3) -2,5 -2,4 -2,2 -1,9 -1,4 -0,9 -0,4

Structural adjustment 1,1 0,1 0,25 0,25 0,5 0,5 0,5Of which structural effort* 1,2 0,4 0,5 0,2 0,4

new income measures 1,4 0,1 0,0 -0,2 -0,2spending savings** -0,2 0,2 0,5 0,4 0,6

Of which non-discretionary component -0,2 -0,1 -0,1 0,0 0,0

Of which new tax credits arrangements 0,0 -0,1 -0,1 0,0 0,1Public debt ratio 92,2 95,3 97,2 98,0 97,3 95,6 92,9

excluding financial support for theEurozone

89,2 92,1 94,0 94,9 94,4 92,7 90,2

Public spending ratio 56,4 56,5 56,1 55,5 54,5

nominal spending growth 2,0 1,4 1,1 1,9 1,8real spending growth 1,3 0,9 0,2 0,5 0,0

Compulsory taxes/GDP ratio 44,7 44,7 44,6 44,5 44,4One-off and temporary measures include tax disputes. *The structural effort is the s tructural adjustment

(i.e. simple change in the structural balance) corrected for non-discretionary elements (including the effect

of the elasticity of income where it differs from its historic value of 1)."New tax credits arrangements"

refer to the change in the difference between the budget cost and the cost in t he national

accounts relating to tax c redits that can be refunded and carried forward after the changeover to

ESA 2010. ** Public spending is accounted for excluding tax credits.

2013

BNPP Gov. BNPP Gov.GDP 0.4 0.3 0.4 0.7 1.0Consumer spending 0.3 0.2 0.3 0.8 1.3

Public spending** 2.0 1.8 1.2

1.1 0.8

Total investment -0.8 -2.3 -2.4 -0.5 -1.1of which: NFC** -0.6 -0.7 -0.6 1.0 0.9 GG 1.1 -0.5 -0.5 -1.2 -4.3

households -3.1 -8.0 -8.6 -4.2 -3.6Exports 2.4 2.4 2.8 2.8 4.6Imports 1.9 2.4 2.6 3.0 3.6Change in inventories* -0.2 0.3 0.4 0.1 0.0Final domestic demand* 0.5 0.0 0.0 0.6 0.7Net exports* 0.1 0.0 0.0 -0.1 0.3Private-sector payrollemployment

-0.8 -0.2 -0.2 -0.3 0.1

Inflation 0.9 0.6 0.6 0.9 0.9** GG: general government NFC: non-financial corporates

2014 2015



4/12


mainly on the downside. The government is optimistic in its forecastregarding the improvement in the external environment and theresulting benefits for France in terms of exports. The same is true of

domestic demand. Consumer spending is expected to reboundstrongly, but may fall short of the government's forecasts if thepredicted upturn in the labour market fails to materialise. Theforecast recovery in investment, although cautious, could still beoverly optimistic given the very low production capacity utilisationrate, thin margins and the weak demand outlook.

Naturally, the government is counting on a boost from the reformsand various stimulus measures it has introduced. These also formthe basis for our own recovery scenario, and there are othersupporting factors such as the fall in the euro, increased ECBmonetary stimulus, low interest rates and weak inflation. However,we expect those positive factors to have a fairly limited impactoverall. As a result, we expect growth of only 0.7% in 2015 (see table2).

From 2016, the government's forecasts are based on the idea that, judging by the size of the output gap (estimated at -2.7% in 2013),there is plenty of scope to close the gap through faster growth. Thatis the basis for its view that growth will revert to a decent pacestarting in 2016. At the same time, the government has cut itspotential growth assumptions, bringing them into line with those ofthe European Commission, 1 and this will make it easier to close theoutput gap, although the process will not be complete by the end ofthe forecast period in 2019. The HCFP emphasised the fragility ofoutput gap estimates and said that the gap could be smaller,resulting in a greater structural budget deficit. It also remindedobservers that past predictions about closing the gap have neverbeen realised. However, the HCFP believes that the government'spotential growth assumptions are acceptable. 2 We agree.

DetailsUnderlying the 2015 budget, there are some important economicpolicy decisions seeking to reconcile ongoing fiscal consolidationefforts with initiatives to stimulate growth. The announced budgetcuts (EUR50bn over three years including EUR21bn in 2015) willhelp improve the public finances and contribute to create some roomof manoeuvre to finance economic support measures like thecompetitiveness and jobs tax credit (CICE). In addition, despitefailing to meet its previous deficit reduction targets, the governmenthas decided not to tighten more its fiscal policy, in order to avoid therisk of weakening activity any further.

The reason why the PLF and PLFSS are in the spotlight is becausethey are supposed to provide details about the EUR21bn package ofbudget cuts, and convince the European Commission that it iscredible (table 3). However, as the HCFP has stated, the aim ofstabilising the general government payroll (in real terms) assumesnot only full control over the central government payroll, but also acomplete break with past practices among local authorities andhospitals. That is not guaranteed to happen. The sharp reduction in

1Those estimates may be revised in November when forecasts are updated and whenthe changeover to ESA 2010 takes place.2Opinion relating to the PLPFP for 2014-2019.

central government transfers to local authorities will not necessarilylead to an identical reduction in spending. In terms of social securityspending, only the cuts in healthcare and family benefits have a firmfoundation, and all public expenditures are subject to execution risks

or at least adjustments when examined by parliament.On the income side, the main measure concerns low-incomehouseholds, with the scrapping of the lowest income-tax band (5.5%rate applied to incomes of over EUR6,011 per year). That will costEUR3.2bn, taking 3m people out of income tax and reducing tax billsfor another 6m. To concentrate the measure's effect on low-incomehouseholds, the threshold for the next income-tax band (14%) isbeing lowered from EUR11,991 to EUR9,690. However, householdswill face higher green taxes, including an increase in fuel taxes.Companies will benefit from the build-up in the CICE and from thefirst round of tax reductions under the "responsibility pact". However,they will see other taxes increase. Overall, income measures in the

2015 budget cancel each other out, resulting in a zero structuraleffort.

Details of the budget 2015 measuresEUR billion

Table 3 Sources: French government, BNP Paribas

INCOME -5

Households 1Removal of the lowest band of income tax (5.5%) -3,2Housing plan -0,4

Energy transition tax credit -0,2Carbon tax (+2 cents on all fuels from1 January 2015) 2,0

Non-recurrence of the exceptional 2014 income tax cut 1,3Increase in TICPE (domestic energy consumption tax) on diesel (+2 cents from

April 2015)0,8

Increase in pension contributions 0,5Increase in TV licence (+3) 0,05

Companies -5,5Reduction in employer social security contributions (between 1 and 1.6 times the

minimumwage)-4,6

CICE -3,5

Lower contributions for self-employed people -1,0

Removal of the C3S -1,0Removal of "small taxes" (part of the simplification shock) -0,03

Extension of the corporate income surtax 2,0Limited deductibility of interest expenses 1,3

Impact of the Responsability pact on corporate tax 0,8

Increase in pension contributions 0,5SPENDING CUTS 21

Central government 7,7Streamlining of intervention spending 2,4

Optimisation of operational and investment expenditures 2,1

Lower transfers to operators 1,9Payroll restraints (including a freeze on the value of the civil-servant index point) 1,4

Local government - lower transfers 3,7

Social security agencies 9,6Savings frompast reforms (Unedic, pensions, family benefits) + freeze on benefits 4,0

Savings on healthcare spending 3,2 Additional savings arising fromthe forthcoming Unedic agreement and the Arrco-

Agirc reform1,2

Additional savings on family benefits 0,7

Management cost savings 0,5



5/12


All of the structural effort in 2015 is on the expenditure side, equal toa moderate 0.5% of GDP. Although this represents a clear break withFrance's spendthrift past, it will barely reduce the public

spending/GDP ratio, since it will merely slow growth in spendingrelative to its natural trend rate. The method used by the governmentfor both tax and spending adopting a large number of measures,each relative small is intended to limit the drag on growth causedby fiscal tightening. But it makes the government's policy harder tounderstand. In addition, it concerns a sensitive area (publicspending) which, because of its economic importance in France, ishaving many repercussions on activity.

The other side of the coinThe fiscal consolidation process is implemented with lots of caution,explaining why it has come to a halt. In 2014, for the first time since2010, the budget deficit will not show a year-on-year decline, and thereduction in 2015 is minimal. The target of reducing the deficit/GDPratio to 3% has been pushed back by two years from 2015 to 2017.The public debt ratio is continuing to rise, and it is not certain that itwill start falling in 2017 as expected. As a result, the symbolic 100%threshold may well be breached one day or another. The structuraldeficit will fall very little between now and 2015, and the medium-term target for reducing has not just been scaled down but alsopostponed (structural deficit of -0.4% in 2019). The HCFP's verdict isthat the path of France's public finances resulting from the PLPFP isnot consistent with the promises that the government has maderegarding European rules. This raises the final problem, i.e. gettingthe budget approved by the European Commission.

For sure, European rules, particularly the timeframe for reducing thedeficit/GDP ratio to below 3%, can be adjusted in "exceptionalcircumstances". As stated in the Eurozone Treaty on Stability, Co-ordination and Governance (TSCG), the phrase "exceptionalcircumstances" refers to "an unusual event outside the control of theContracting Party concerned which has a major impact on thefinancial position of the general government or to periods of severeeconomic downturn". The French government is currently claimingsuch exceptional circumstances, highlighting very weak growth andinflation in both France and the rest of the Eurozone, as well as itsreform efforts, which are supporting growth but proving costly interms of the public finances.

The European Commission will have to give its recommendations onthe basis of all the finance bills submitted by the French government.Its final opinion is awaited by the end of November. In case of a lackof effective action, additional consolidation measures may bedemanded, except if the exceptional circumstances mentioned by theFrench government are accepted by the Commission. The sharpGerman slowdown, the IMF warning about the risk of a Eurozonetriple-dip may help Brussels to be more indulgent.

Complicated situationTo combat criticism of the very limited structural adjustment in 2014 and2015, which will fall short of the level required by European rules, theFrench government is claiming that the adjustment is similar to that targetedby the April 2014 stability programme, provided that certain methodologicaland statistical changes are taken into account (see table below). The firstchange relates to inflation, which is lower than expected, reducing thestructural effort in terms of public spending. Such an effort is made when thethe growth rate of public expenditures in real-terms is lower than the realpotential growth rate. However, the lower the inflation rate, the higher thereal-terms expenditure growth rate, reducing the gap between it and thepotential growth rate.

Besides, the government has also reduced its potential growth estimates,making matters even more complicated. In addition, it has lowered itsestimate regarding the growth elasticity of income, in response to itspersistent weak level. Since that elasticity is below 1 (0.2 in 2013, 0.7 in2014, 0.9 in 2015), it will reduce the non-discretionary component of thestructural adjustment. Finally, the government is taking into account newrules requiring tax credits to be accounted for on the expenditure sideinstead of the income side after the changeover to ESA 2010. The result isanother one-off reduction in the structural adjustment.

Overall, the expected structural adjustments of 0.1 points in 2014 and 0.25points in 2015 would equate to adjustments of 0.8 and 1.0 pointsrespectively on a constant measurement basis. Those adjusted figures arein line with European requirements, since France undertook to improve itsstructural balance by 0.8 points of GDP in 2014 and 2015 as part of the Aprilstability programme. However, France still has to deal with the newsituation. The European Commission's opinion remains to be seen.

Box Sources: BNP Paribas, French government

Structural adjustment: before and after 2014 2015

2015 PLF adjustment 0.1 0.25Treatment of tax credits 0.1 0.1Elasticity of income 0.1 0.1

Assuming no change in inflation relative tothe April 2014 stability programme

0.2 0.3

Revision of potential growth 0.25 0.25 Adju st men t on a co nst an tmeasurement basis

0.8 1.0



6/12

Alexandra Wentzinger 10 October 2014 14-34


Brazil Annus economicus horribilis

The outcome of the presidential elections were verydifferent from what projected by polls. The second round,held on 26 October, will be a traditional fight betweenBrazil's left and right

Activity is sluggish (the economy entered recession inearly 2014), inflationary pressures do not abate, and thefiscal situation is continuing to deteriorate

Regardless of the final election results, the newgovernment will face a difficult task

The second round of the presidential election on 26 October will becontested by the incumbent Dilma Rousseff and social-democrat Acio Neves. In the parliamentary election, the ruling coalition retainsthe majority of seats in the Federal Senate and the Chamber ofDeputies. Regardless of the final election results, the newgovernment will face a difficult task because Brazil has slipped intorecession in the first half of the year, inflationary pressures are aclear worry and the fiscal situation is continuing to deteriorate.

Electoral countdown

The final results of the Brazilian general elections in late October willmark a turning point for the country, whose economic performancehas been very disappointing over the last three years. Brazilianselect not only their president, but also state governors, federal andstate deputies and a third of the Senate. After the first round onSunday 5 October, the race goes on for 14 state governorships (outof 27) and the presidency. The presidential run-off will be betweencurrent incumbent Dilma Rousseff (Workers' Party or PT) and AcioNeves (Brazilian Social Democratic Party or PSDB). Mr Neves is thesurprise second-round candidate, since he had long been trailing therising and consecutively shooting star Marina Silva in the polls. As aresult, the run-off will be a traditional fight between Brazil's left andright, in which Marina Silva may still play a role as kingmaker 1.

Acio Neves is known to the Brazilian public2. He is an economistleading the centre-right "Change, Brazil" coalition, advocating aprogramme of market-oriented reforms, without making any majorchanges to the existing social programmes. His economicprogramme proposals include the operational autonomy of themonetary authority, transparency and reduction in subsidised loans,fiscal transparency and discipline (including the introduction of amore simplified tax system) and the control of inflation (with agradual reduction in the inflation target set by the central bank). Infact, these are longstanding criticisms made against the Rousseffadministration.

1 Ms Silva has not given any voting recommendations so far.2 Former governor (2003-2010) and senator (2010-2014) of the state of Minas Gerais(Brazil's second-largest state by population and third-largest by GDP) and president ofthe PSDB. He also comes from a family of politicians.

Despite fairly good results in his electoral stronghold and supportfrom some renowned Brazilian economists including ArminioFraga, former president of the Brazilian central bank who is now theco-ordinator of its economic programme Mr Neves faces manychallenges. In particular, he has quite limited scope to expand hiselectoral base, particularly among the working classes who mainlyfavoured the other two candidates. Indeed, this puts him in a weakposition in the run-off. In addition, without a majority in Congress, hiscoalition could struggle to pass the reforms he proposes unless post-election alliances give him a stronger position.

Dilma Rousseff is not proposing any major change in her policies.However, inflationary pressures, the poor state of public services andvarious corruption scandals affecting her political allies andthreatening to engulf Ms Rousseff herself have reduced herpopularity. On the plus side, she has the backing of a politicalcoalition with a solid base, the support of the charismatic and stillhighly popular former president Lula da Silva, and a strong mediapresence 3.

The latest second-round polls give Ms Rousseff 48% of the votingintentions as opposed to 42% for Mr Neves4. In the circumstances,financial market indicators have shown signs of nervousness sinceearly September. The real has fallen by 9%, whereas CDS premiumsand sovereign bond yields have risen (see chart on the next page).

3 Before the first round, each candidate's TV time is proportional to their coalition's

seats in the current Congress, i.e. over 45% for the current president. Between the tworounds, each candidate has equal TV time.4 Datafolha poll of 3 October. Don't knows and abstainers make up 10% of thoseeligible to vote.

First round of the general electionsPresid. : President, CD : Chamber of deputies,

Percentage of votes

Chart 1 Source : O Globo, BNP Paribas.

05

1015202530354045

Presid.* Senate CD* Presid.* Senate CD* Presid.* Senate CD*

Dilma Rousseff (PT+PMDB)

Acio Neves(PSDB+DEM)

Marina Silva(PSB)


7/12

Alexandra Wentzinger 10 October 2014 14-34


Annus economicus horribilis

Following several difficult quarters and a Q1 2014 figure reviseddown from positive to negative, Brazils economy has slipped intorecession in the first half of the year. Indeed, the GDP contracted by0.2% q/q and 0.6% q/q in Q1 and Q2 respectively. Investmentdeclined for the fourth time in a row (-2.8% q/q and -5.3% q/qrespectively) thus being the main culprit of the downturn. In addition,private consumption, which

was already being affected by weak job creation and slower realwage growth, remains weak on the back of rising interest ratesrelated to the monetary tightening (-0.2% q/q and +0.2% q/q in Q1and Q2 respectively). Given the already high levels of householdindebtedness, several corporate sectors have started to gradually beaffected such as the retail and consumer goods producers (includingthe automotive sector) as well as the construction and real estateactivities. In addition, the energy sector has been hit by the early2014 drought (which hampered hydroelectric power generation) onthe one hand and by the subsidised gasoline prices (weighing on theprofitability of Petrobras and the ethanol sector) on the other hand. As a result, we have revised down the GDP growth forecasts for2014 and 2015.

Inflation has remained on the upper bound of the central bank'starget range over the last three months, coming in at 6.5% in August.Inflation in regulated prices5 is continuing to rise (5.1% in Augustversus 1.5% on average in 2013), while non-regulated priceincreases continue to be at around 7% in the last five months.Moreover, regulated prices are likely to continue rising since theincrease in wholesale electricity prices for end-consumers has beenpostponed until 2015. In addition, the highly uncertain economicoutlook, a less favourable external environment and expectations ofa less accommodative US monetary policy are also increasing therisk of the currency depreciation. Inflation expectations (at 6.3% inSeptember) could therefore prompt the central bank to start hikingrates in early 2015.

At the same time, the government has maintained its expansionaryfiscal policy. The primary surplus was 0.9% of GDP in the 12 monthsto August, as opposed to the 2014 target of 1.9%. To post this figure,the government relied again on the creative accounting adjustmentssuch as delaying the payment of mandatory expenditures (mainlysubsidies) and taking into account future dividends and extraordinaryrevenues (such as revenues from concessions and the Refis taxamnesty program). Moreover, transfers from the Treasury to public-sector banks for on-lending rose to above 10% of GDP in August. Asa result, the public deficit is set to deteriorate further, unless theauthorities dip into the sovereign fund in order to improve results atthe end of 2014. To deal with the fiscal slippage, the economy wouldneed a better co-ordination between monetary and fiscal policy. Although fiscal consolidation measures will take a long time toimplement, they could focus on subsidies and tax breaks, efforts tospeed up infrastructure concessions and a better grip on subsidisedloans granted by public-sector banks.

5 Regulated prices are indexed to past changes in the general price indices and relateto goods and services with quite low elasticity

The future is unwrittenRegardless of the election's outcome, the next few months will betricky because of Brazil's low statistical carryover of growth,inflationary pressures and sharply deteriorating public finances.However, when we know the winner of the election and his/hereconomic policies, we will have greater visibility regarding Brazil'smedium-term trajectory.

Government bond yield curve (%) As of 07/18/2014 As of 09/02/2014 As of 10/03/2014

Chart 2 Source : Bloomberg, BNP Paribas .

Economic forecastse : Estimates, forecasts

Table 1 Source : BNP Paribas

10.0

10.5

11.0

11.5

12.0

12.5

13.0

6M 1Y 2Y 3Y 4Y 6Y 8Y 10Y

Activity(annual change % ) 2013 2014 e 2015 eGDP 2.5 0.0 1.0

Gov ernment consumption 2.0 1.2 -0.1

Priv ate consumption 2.6 1.1 0.9

Gross Fix ed Capital Formation 5.2 -5.5 1.1

Ex ports 2.4 3.0 4.2

Imports 8.4 0.8 1.9

Net exports (Cont. To Grow th) -1.0 0.3 0.3

Inflation and unemployment 2013 2014 e 2015 eConsumer prices (annual change %) 6.2 6.3 6.7

Unemploy ment rate (%) 5.4 5.0 5.7

External Trade 2013 2014 e 2015 eCurrent account (% of GDP) -3.6 -3.7 -3.6

Fx reserv es (USD bn) 356 370 380

Public Finances (% of GDP) 2013 2014 e 2015 eFiscal balance (consolidated public sector) -3.3 -4.0 -3.8

Gross public debt (exc l. public companies ) 56.7 59.0 60.0

Fx and Interest rates (1) 2013 2014 e 2015 e

Selic, % 10.0 11.0 13.0USD / BRL 2.36 2.60 2.70


8/12

OECD Team 10 October 2014 14-34

To watch f rom 13 to 17 October 2014

Tuesday 14 October 2014 UNITED KINGDOM: Consumer prices (September)

In August, CPI inflation recorded a slight decrease (from 1.6% y/y in July to 1.5%). In September, it should slightly fall in line with thedecrease in core inflation and food prices.

EUROZONE: Industr ial produc tion (August) After performing relatively well in July (+1% m/m), available statistics (country national data and survey data) suggest that probablyindustrial production heavily contracted in August.

FRANCE: Consumer prices (September) A decline in consumer prices is expected in September (-0.3% m/m non-seasonally adjusted change). Headline inflation would continue toease on a year-on-year basis (from 0.4% to 0.3%), led by an even weaker core inflation (0.2%) and the fall in energy prices.

Wednesday 15 October 2014 UNITED STATES: Retail Sales (September )

Development in cars and gasoline sales probably cut the monthly increase in retail sales by 0,3pp, while the release of the iPhone 6 willhave supported it. All in all, we're looking for a 0.2% increase.

UNITED KINGDOM: Employment (August)The labour market conditions remain favourable. The pace of increase in employment probably slowed for June to August, while theunemployment rate (at 6.2% at the end of July) may have slightly decreased.



9/12

OECD Team - Statistics 10 October 2014 14-34


Markets overview

The essentialsWeek 6-10 14 > 9-10-14CAC 40 4 282 } 4 141 -3.3 %S&P 500 1 968 } 1 928 -2.0 %

Volatility (VIX) 14.6 } 18.8 +4.2 %Euribor 3M (%) 0.08 } 0.08 -0.0 bp

Libor $ 3M (%) 0.23 } 0.23 -0.3 bp OAT 10y (%) 1.28 } 1.24 -4.1 bp Bund 10y (%) 0.89 } 0.86 -2.9 bp US Tr. 10y (%) 2.45 } 2.33 -12.0 bpEuro vs dollar 1.25 } 1.27 +1.6 %

Gold (ounce, $) 1 194 } 1 224 +2.5 %

Oil (Brent, $) 91.3 } 90.9 -0.4 %

10 y bond yield, OAT vs Bund Euro-dollar CAC 40

1.24

0.860.75

1.25

1.75

2.25

2.75

3.25

2012 2013 2014 09 Oct

1.27

1.20

1.25

1.30

1.35

1.40

2012 2013 2014 09 Oct2 800

3 000

3 200

3 400

3 600

3 800

4 000

4 200

4 400

4 600

4 141

2012 2013 2014 09 Oct

Bunds OAT

Money & Bond MarketsInterest Rates

ECB 0.05 0.25 at 01/01 0.05 at 10/09Eonia -0.02 0.69 at 31/03 -0.05 at 03/10Euribor 3M 0.08 0.35 at 29/04 0.08 at 06/10Euribor 12M 0.33 0.62 at 29/04 0.33 at 09/10

$ FED 0.25 0.25 at 01/01 0.25 at 01/01Libor 3M 0.23 0.25 at 01/01 0.22 at 01/05Libor 12M 0.57 0.59 at 07/01 0.53 at 06/06

BoA 0.50 0.50 at 01/01 0.50 at 01/01Libor 3M 0.56 0.57 at 17/09 0.52 at 30/01

Libor 12M 1.03 1.08 at 05/08 0.88 at 10/02 At 9-10-14

highest 14 lowest 14 Yield (%) AVG 5-7y 0.80 2.04 at 01/01 0.79 at 08/09

Bund 2y -0.05 0.22 at 21/03 -0.07 at 30/09Bund 10y 0.86 1.95 at 02/01 0.86 at 01/10OAT 10y 1.24 2.57 at 01/01 1.24 at 28/08Corp. BBB 1.86 2.82 at 02/01 1.81 at 08/09

$ Treas. 2y 0.45 0.57 at 19/09 0.30 at 26/02Treas. 10y 2.33 3.01 at 01/01 2.33 at 09/10Corp. BBB 3.46 3.91 at 08/01 3.31 at 28/08

Treas. 2y 0.72 1.10 at 02/07 0.44 at 13/03

Treas. 10y 2.26 3.04 at 02/01 2.25 at 08/10 At 9-10-14

highest 14 lowest 14 10y bond yield & spreads6.67% Greece 580 pb2.96% Portugal 209 pb2.29% Italy 143 pb2.05% Spain 119 pb1.67% Ireland 80 pb1.24% France 38 pb1.15% Belgium 29 pb1.10% Austria 24 pb

1.03% Finland 17 pb1.03% Netherland 17 pb0.86% Germany

CommoditiesSpot price in dollars 2014()Oil, Brent 91 91 at 08/10 -11.5%

Gold (ounce) 1 224 1 194 at 03/10 +9.8%Metals, LMEX 3 112 2 920 at 20/03 +6.0%Copper (ton) 6 777 6 439 at 13/03 -0.4%

CRB Foods 426 364 at 02/01 +26.5%wheat (ton) 151 120 at 30/09 -30.5%Corn (ton) 119 110 at 01/10 -19.0%

t 9-10-14 Variations

lowest 14 Oil (Brent, $) Gold (Ounce, $) CRB Foods

90

95

100

105

110

115

120

125

130

91

2012 2013 2014 09 Oct1 170

1 260

1 350

1 440

1 530

1 620

1 710

1 800

1 224

2012 2013 2014 09 Oct360

370380

390

400

410

420

430

440

450460

426

2012 2013 2014 09 Oct

Exchange Rates Equity indices1 =USD 1.27 1.39 at 06/05 1.25 at 03/10 -7.7%GBP 0.79 0.84 at 18/03 0.78 at 01/10 -5.5%CHF 1.21 1.24 at 07/01 1.21 at 28/08 -1.3%JPY 137.18 144.83 at 01/01 135.92 at 05/09 -5.3% AUD 1.44 1.57 at 24/01 1.38 at 05/09 -6.5%CNY 7.79 8.68 at 07/05 7.68 at 03/10 -6.6%BRL 3.04 3.33 at 29/01 2.90 at 04/09 -6.5%RUB 50.95 51.04 at 14/03 45.07 at 07/01 +12.5%INR 77.58 86.47 at 27/01 77.10 at 03/10 -9.0%

At 9-10-14 Variations

highest 14 lowest 14 Index 2014 2014()CAC 40 4 141 4 595 at 10/06 4 108 at 03/02 -3.6% -3.6%S&P500 1 928 2 011 at 18/09 1 742 at 03/02 +4.3% +13.1%DAX 9 005 10 029 at 03/07 8 995 at 08/10 -5.7% -5.7%Nikkei 15 479 16 374 at 25/09 13 910 at 14/04 -5.0% +0.3%China* 63 68 at 08/09 56 at 20/03 +0.3% +8.7%India* 503 525 at 08/09 385 at 04/02 +21.8% +33.8%

Brazil* 2 350 2 719 at 03/09 1 916 at 03/02 +7.3% +14.8%Russia* 595 787 at 01/01 591 at 14/03 -11.4% -18.0%

At 9-10-14 Variations

highest 14 lowest 14

* MSCI Indices


10/12

10 October 2014 14-34


Most recent articles

OCTOBER 3 October 14-33 Eurozone: The ECB details QE without assessing any figureGermany: What to do with budgetary surplusesRussia: Rising headwinds

SEPTEMBER 26 September 14-32 United-States: Forget the dots, the SLACK is what mattersEurozone: Inflation, low for a whileFrance: No more and no lessJapan: Abenomics shift investment portfolios

19 September 14-31 United-States : Read her lipsEuro Area : TLTRO : tepid at first, faster thereafterEuro Area : A tour of the peripheryNetherlands : Less austerity in 2015 Budget

12 September 14-30 United States: Tempory slowdownEurozone: Back to work on fiscal policyUnited Kingdom: A No vote is better than a Disunited Kingdom

5 September 14-29 Emerging countries: One risk can hide anotherEurozone: The ECB acts againGermany: Summers gentle resuming France: A turbulent end to the summer

JULY 25 July 14-28 United States: A large but insufficient reboundEurozone: No rest in AugustEurozone: Inflation and credit dynamics still subduedIreland: An islands potential

18 July 14-27 Germany: A dab on the brakesItaly: How binding is the debt rule?China: Mind the property market !

11 July 14-26 Eurozone : Time to adjust the fiscal effort ?France : The scope of the possible

4 July 14-25 United States : In recovery is our trustEurozone : Rebounding but not convincingUnited Kingdom : The Bank of England is on the look-outJapan : Trapped into deficits ?

JUNE 27 June 14-24 Overview Non parallel trajectoriesThe week in the USThe week in the EurozoneEmerging markets : persisting downside risks on the road to recovery

20 June 14-23 Overview Southern Europe : catch-up timeThe week in the US

The week in the Eurozone13 June 14-22 Overview To be in or out?The week in the Eurozone

6 June 14-21 Overview

Focus

The ECB plays hardThe week in the USThe week in the EurozoneUK: growth comes to aid of public finances

MAY 30 May 14-20 Overview

Focus 1Focus 2Focus 3

Cloudy spell clearing ? The week in the USThe week in the EurozoneEuropean elections, somewhat more than a harmless warningItalian banks : cost of risk remains the driving factorIndia : what to expect from the new government ?


11/12

William DE VIJLDER +33.(0)1.55.77.47.31 [email protected] Economist

Jean-Luc PROUTAT +33.(0)1.58.16.73.32 [email protected]

Alexandra ESTIOT +33.(0)1.58.16.81.69 [email protected] Head Globalisation, United States, Canada

Hlne BAUDCHON +33.(0)1.58.16.03.63 [email protected], Belgium, Luxembourg

Frdrique CERISIER +33.(0)1.43.16.95.52 [email protected] finance European institutions

Clemente De LUCIA +33.(0)1.42.98.27.62 [email protected] zone, Italy - Monetary issues - Economic modeling

Thibault MERCIER +33.(0)1.57.43.02.91 [email protected], Portugal, Greece, Ireland

Caroline NEWHOUSE +33.(0)1.43.16.95.50 [email protected], Austria -Supervision of publications

Catherine STEPHAN +33.(0)1.55.77.71.89 [email protected] Kingdom, Switzerland, Nordic Countries Labour market

Raymond VAN DER PUTTEN +33.(0)1.42.98.53.99 [email protected], Australia, Netherlands - Environment Pensions

Laurent QUIGNON +33.(0)1.42.98.56.54 [email protected]

Delphine CAVALIER +33.(0)1.43.16.95.41 [email protected] Cline CHOULET +33.(0)1.43.16.95.54 [email protected] Laurent NAHMIAS +33.(0)1.42.98.44.24 [email protected]

Franois FAURE +33.(0)1 42 98 79 82 [email protected]

Christine PELTIER +33.(0)1.42.98.56.27 [email protected] Head - Methodology, China, Vietnam

Stphane ALBY +33.(0)1.42.98.02.04 [email protected] Africa, French-speaking countries

Sylvain BELLEFONTAINE +33.(0)1.42.98.26.77 [email protected] America - Methodology, Turkey

Sara CONFALONIERI +33.(0)1.42.98.74.26 [email protected] Africa, English and Portuguese speaking countries

Pascal DEVAUX +33.(0)1.43.16.95.51 [email protected] East Scoring

Anna DORBEC +33.(0)1.42.98.48.45 [email protected], Hungary, Poland, Czech Republic, Slovakia

Hlne DROUOT +33.(0)1.42.98.33.00 [email protected] Asia

Johanna MELKA +33.(0)1.58.16.05.84 [email protected] Asia Capital Flows

Ekaterina MOLODOVA +33.(0)1.42.98.48.45 [email protected] and other CIS countries

Alexandra WENTZINGER +33 (0)1 55 77 80 60 [email protected] Africa, Brazil

EMERGING ECONOMIES AND COUNTRY RISK

OECD COUNTRIES

Michel BERNARDINI +33.(0)1.42.98.05.71 [email protected] Relations Officer

ECONOMIC RESEARCH DEPARTMENT

Tarik RHARRAB +33.(0)1.43.16.95.56 [email protected]

BANKING ECONOMICS
mailto:[email protected]:[email protected]


12/12

CONJONCTUREStructural or in the news flow, two issues analysed in depth

EMERGING Analyses and forecasts for a selection of emerging economies

PERSPECTIVES Analyses and forecasts for the main countries, emerging ordeveloped

ECOFLASHData releases, major economic events. Our detailed views

ECOWEEKWeekly economic news and much more

ECOTVIn this monthly webTV, our economists make sense of economicnews

ECOTV WEEKWhat is the main event this week? The answer is in your twominutes of economy

You can read and watch our analyseson Eco news, our iPad and Android application

http://economic-research.bnpparibas.com

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, ismade that such information is accurate, complete or up to date and it should not be relied upon assuch. This report does not constitute an offer or solicitation to buy or sell any securities or otherinvestment. Information and opinions contained in the report are published for the assistance ofrecipients, but are not to be relied upon as authoritative or taken in substitution for the exercise of judgement by any recipient, are subject to change without notice and not intended to provide thesole basis of any evaluation of the instruments discussed herein. Any reference to past performanceshould not be taken as an indication of future performance. To the fullest extent permitted by law, noBNP Paribas group company accepts any liability whatsoever (including in negligence) for any director consequential loss arising from any use of or reliance on material contained in this report. Allestimates and opinions included in this report are made as of the date of this report. Unlessotherwise indicated in this report there is no intention to update this report. BNP Paribas SA and itsaffiliates (collectively BNP Paribas) may make a market in, or may, as principal or agent, buy orsell securities of any issuer or person mentioned in this report or derivatives thereon. BNP Paribasmay have a financial interest in any issuer or person mentioned in this report, including a long orshort position in their securities and/or options, futures or other derivative instruments basedthereon. Prices, yields and other similar information included in this report are included forinformation purposes. Numerous factors will affect market pricing and there is no certainty thattransactions could be executed at these prices. BNP Paribas, including its officers and employeesmay serve or have served as an officer, director or in an advisory capacity for any person mentionedin this report. BNP Paribas may, from time to time, solicit, perform or have performed investmentbanking, underwriting or other services (including acting as adviser, manager, underwriter or lender)within the last 12 months for any person referred to in this report. BNP Paribas may be a party to anagreement with any person relating to the production of this report. BNP Paribas, may to the extentpermitted by law, have acted upon or used the information contained herein, or the research or

analysis on which it was based, before its publication. BNP Paribas may receive or intend to seekcompensation for investment banking services in the next three months from or in relation to anyperson mentioned in this report. Any person mentioned in this report may have been provided withsections of this report prior to its publication in order to verify its factual accuracy.

BNP Paribas is incorporated in France with limited liability. Registered Office 16 Boulevard desItaliens, 75009 Paris. This report was produced by a BNP Paribas group company. This report is forthe use of intended recipients and may not be reproduced (in whole or in part) or delivered ortransmitted to any other person without the prior written consent of BNP Paribas. By accepting thisdocument you agree to be bound by the foregoing limitations.

Certain countries within the European Economic Area:

This report is solely prepared for professional clients. It is not intended for retail clients and shouldnot be passed on to any such persons. This report has been approved for publication in the UnitedKingdom by BNP Paribas London Branch. BNP Paribas London Branch is authorised andsupervised by the Autorit de Contrle Prudentiel and authorised and subject to limited regulationby the Financial Services Authority. Details of the extent of our authorisation and regulation by theFinancial Services Authority are available from us on request.

This report has been approved for publication in France by BNP Paribas SA, incorporated in Francewith Limited Liability and is authorised by the Autorit de Contrle Prudentiel (ACP) and regulatedby the Autorit des Marchs Financiers (AMF) whose head office is 16, Boulevard des Italiens75009 Paris, France.

This report is being distributed in Germany either by BNP Paribas London Branch or by BNPParibas Niederlassung Frankfurt am Main , a branch of BNP Paribas S.A. whose head office is inParis, France. BNP Paribas S.A. Niederlassung Frankfurt am Main, Europa Allee 12, 60327Frankfurt is authorised and supervised by the Autorit de Contrle Prudentiel and it is authorisedand subject to limited regulation by the Bundesanstalt fr Finanzdienstleistungsaufsicht (BaFin).

United States: This report is being distributed to US persons by BNP Paribas Securities Corp., or bya subsidiary or affiliate of BNP Paribas that is not registered as a US broker-dealer to US majorinstitutional investors only.BNP Paribas Securities Corp., a subsidiary of BNP Paribas, is a broker-dealer registered with the U.S. Securities and Exchange Commission and a member of theFinancial Industry Regulatory Authority and other principal exchanges. BNP Paribas SecuritiesCorp. accepts responsibility for the content of a report prepared by another non-U.S. affiliate onlywhen distributed to U.S. persons by BNP Paribas Securities Corp.

Japan: This report is being distributed to Japanese based firms by BNP Paribas Securities (Japan)Limited or by a subsidiary or affiliate of BNP Paribas not registered as a financial instruments firm inJapan, to certain financial institutions defined by article 17-3, item 1 of the Financial Instruments andExchange Law Enforcement Order. BNP Paribas Securities (Japan) Limited is a financialinstruments firm registered according to the Financial Instruments and Exchange Law of Japan anda member of the Japan Securities Dealers Association and the Financial Futures Association ofJapan. BNP Paribas Securities (Japan) Limited accepts responsibility for the content of a reportprepared by another non-Japan affiliate only when distributed to Japanese based firms by BNPParibas Securities (Japan) Limited. Some of the foreign securities stated on this report are notdisclosed according to the Financial Instruments and Exchange Law of Japan.

Hong Kong: This report is being distributed in Hong Kong by BNP Paribas Hong Kong Branch, abranch of BNP Paribas whose head office is in Paris, France. BNP Paribas Hong Kong Branch isregistered as a Licensed Bank under the Banking Ordinance and regulated by the Hong KongMonetary Authority. BNP Paribas Hong Kong Branch is also a Registered Institution regulated bythe Securities and Futures Commission for the conduct of Regulated Activity Types 1, 4 and 6 underthe Securities and Futures Ordinance.

Some or all the information reported in this document may already have been published on

https://globalmarkets.bnpparibas.com

BNP Paribas (2014). All rights reserved.

OUR PUBLICATIONS
https://globalmarkets.bnpparibas.com/https://globalmarkets.bnpparibas.com/https://globalmarkets.bnpparibas.com/

bnp paribas ecoweek_14-34-en 10.10.2014

Documents