Economic Outlook December 2014

Economic Outlook 2

Editorial

To paraphrase a famous expression used during Bill Clinton’s successful 1992 presidential bid against George Bush senior – “It’s the Eurozone, stupid”. This is arguably the best way to describe the current stance in the world’s economy. Against all odds, or perhaps hopes, the Eurozone’s economic woes are back at centre stage. The mood of the most recent IMF annual meeting made that clear: the Eurozone crisis suddenly no longer seems a faded memory as its core economies, even Germany, posted dismal quarterly growth figures. Like the slogan for Clinton’s presidential bid, this acted as a wake up call to a new reality.

Why has this new reality come about? Geopolitical stress in the Ukraine intensified over the summer, as Russia stepped up its military involvement in the eastern part of the country. This triggered a volley of sanctions and countersanctions between the EU (and the US) and Russia. Not only did this hit trade between the two sides, but, perhaps most importantly, also business and household confidence. Indeed, confidence had been critical in the Eurozone’s, recovery but, as it weakened, the fundamental problems were again laid bare, turning the tide. Exceptionally high unemployment, especially in the periphery, and a malfunctioning banking system are the usual suspects, together with a heavy overhang of public and private debt, as we emphasise in this Outlook. What’s more, a new visitor – deflation – came knocking, threatening to compound the Eurozone’s problems.

With hindsight, earlier optimism was misplaced, and may have reflected too much hope and perhaps some

ignorance as well. Still, things are not that bad in the Eurozone, and clearly a return to the 2012 low point of the crisis is not in the cards. The Eurozone now has a much more robust, if imperfect, institutional set up. Help is on the way too. Firstly, the ECB has stepped up its efforts to fight deflationary tendencies, intending to provide ample liquidity to the system if needed. This has global relevance as well, now that the US Federal Reserve (the Fed) has in October ended its quantitative easing programme. Secondly, the ECB, again, finalised the asset quality reviews and stress tests of the Eurozone banking system: a move designed to boost confidence in and the functioning of the banking sector. Thirdly, the economies of the US and Asia Pacific have stayed on track and are expected to stay that way, outweighing the disappointments in Latin America and Eastern Europe. This should provide much needed export demand, which is boosted by the depreciation of the euro against the dollar. Fourthly, if it lasts (and we expect that it will), the current USD 15-20 per barrel lower oil price is welcome, effectively acting as a tax cut for consumers and businesses. Even so, the Eurozone recovery is expected to remain fragile and muted.

Meanwhile, as the economic situation in many Eurozone economies is expected to improve only slowly, credit risks as reflected in payment defaults will also take time to lessen. Moreover, and critically, those defaults generally remain elevated: still much higher than before the 2008 crisis. In that respect, there is still a long way to go.

John Lorié, Chief Economist Atradius

Economic Outlook 3

Table of contents

Executive summary ……….………………….………...………..…….…………. 4

1 The global macroeconomic environment ……………...…….….……. 5

2 Prospects and risks in advanced economies ...………………........ 14 Eurozone ……..…………...…...……..…………….……………………… 14 United States ……..…………...…...……..…………….………………. 20 United Kingdom ……..…………...…...……..…………….…….……… 22 Japan ……..…………...…...……..…………….…………………………….. 23

3 Prospects and risks in emerging economies ...…………….……..… 25 Asia ……..…………...…...……..…………….………………………………. 25 Latin America ……..…………...…...……..…………….……………... 29 Central and Eastern Europe ……..…………...…...……..…….. 32 Middle East and North Africa ...…………….……..……………. 36 Sub-Saharan Africa ……..…………...…...……..…………….…….. 37

4 Implications for the insolvency environment …..…..……….….….. 38

Appendix I: Forecast tables ……..…………...…...……..…………….…….. 43

Economic Outlook 4

Executive summary

Global economic growth was weaker than expected over the past six months, but is forecast to regain some strength next year. However, this depends on conditions in both advanced and emerging markets stabilising or improving.

Key points

The global economy is forecast to expand by 2.7%this year and by 3.2% in 2015.

Economic growth in the United States is expectedto pick up to 3.0% in 2015. The Eurozone isforecast to expand by a modest 0.8% this year and1.2% in 2015.

Latin America and Eastern Europe are expected toexperience slower growth this year – at 1.2% and1.5% respectively – before picking up pace nextyear. Growth in Asia is forecast to remain high at6.1% in 2015.

insolvency conditions will generally improve this year, but in most markets insolvencies remain at a high level.

Risks to the outlook have increased. Geopoliticalrisks, the vulnerable Eurozone economy, changingglobal monetary conditions and slowing Chineseeconomic growth could all adversely impact theglobal economy.

Global economic growth has weakened over the past six months and both the 2014 and 2015 forecasts have been revised downwards. Geopolitical events, disappointing growth in the Eurozone and structural problems in emerging markets have led to lower economic growth. As in 2013, this year’s global expansion will be muted. The global outlook for 2015 is brighter, but hinges on improving conditions across both advanced and emerging markets.

Global trade growth has been disappointing in recent years, and is likely to remain so in the future. Structural changes such as a slowing pace of trade

liberalisation, an end to the era of increasing manufacturing supply chain diversification and growing protectionism lower the potential for trade growth. Global trade is forecast to grow 3.1% this year and 4.0% in 2015.

Economic conditions across advanced markets are mixed. The United States and the United Kingdom are both recovering well, with unemployment falling rapidly. Japan is still struggling to get its economy and inflation rate back on track while the Eurozone economy has stumbled and faces slow or falling economic growth in its largest markets such as France, Italy and even Germany. Low inflation could exacerbate the weak economic conditions but for now economic growth is forecast to improve modestly next year on the back of rising export and domestic demand.

There’s a mixed picture in emerging market economies too. For example, falling commodity prices, rising geopolitical risk and increased government policy risk have hampered economic growth in Brazil, Russia and Turkey. Growth in China, the world’s second largest economy, has also slowed, but remains high. Countries that are progressing with structural reform or where reform prospects have improved, such as Mexico and India, are performing much better and are less vulnerable to negative external shocks.

Insolvency conditions are improving across advanced markets, but with some notable exceptions. A weak economic performance and difficult credit conditions mean that in 2014 insolvencies are forecast to increase in Greece and France while Italy may see insolvencies rise both this year and next. Despite improvement in other Western European markets, the level of insolvencies remains almost twice as high as in 2007. As a result, business conditions are still difficult and credit risk is high.

Economic Outlook 5

1. The global macroeconomicenvironment

Global growth is up, but is lower than envisaged

Earlier this year, the outlook for the global economy was reasonably upbeat. Driven by growth in the United States and, particularly, the recovery in the Eurozone, advanced economies had pushed up global growth. Emerging economies also continued to grow and, while there was no sign of growth accelerating, levels still remained relatively high. Moreover, the difference in growth rates between advanced and emerging economies was shrinking, from 4% by the end of 2012 to 2% by the end of 2013. Global growth was picking up, and it seemed that advanced economies were positioned to lead the pack, for a change.

However, since then it has become clear that this would not last. Growth in advanced economies has receded as US growth sputtered and the Eurozone has been unable to turn the tepid growth of late 2013 into a more robust recovery. Growth in emerging economies remained flat but showed a more divergent picture, with downward pressure on growth in Latin America and Eastern Europe while Asia continued to deliver fairly steady growth (see Chart 1.1).

For the rest of 2014 the overall picture is expected to improve only marginally, as the factors that depressed US growth in the first half of 2014 fade. As a result, 2014 and 2015 are unlikely to live up to the earlier expectations. Forecasts have been revised downwards – something we have seen again and again since the2008 crisis.

Those repeated downward revisions call for a new sense of realism: a realisation of restrained growth in advanced economies while that of emerging economies has perhaps hit a ceiling, just as the difference in growth between advanced and emerging economies seems to have bottomed out around 2%. This Economic Outlook takes a closer look at the underlying factors and emphasises that a prominent legacy of the 2008 crisis – the high levels of public and private debt in the US, the Eurozone and China,

the world’s largest economies – will hinder future growth.

Trade growth remains tepid

In line with the global economy, global trade growth picked up in the second half of 2013 across all regions. But since then global trade growth has weakened, falling back to 4% in June 2014 as a result of much weaker trade growth in Latin America and Asia. 1 In the Eurozone, US and, despite the geopolitical tensions, even Emerging Europe’s, trade growth continued its upward trend (see Chart 1.2). The figures reflect the modest, but less than hoped for, improvement of growth in the advanced economies.

1 This follows the Centre of Dutch Policy Research approach of monthly rolling annual figures, measuring trade volumes (exports plus imports).

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In fact, over the past few years global trade has been growing more slowly than was expected. This was partly due to structural changes, as we discuss in Box 1, and means that trade growth may remain muted for the several years to come.

Debt overhang weighs on global growth

Global economic growth has also been muted in recent years, because of the deleveraging process to reduce debt. Public debt rose rapidly after the financial crisis, but government debt in advanced economies levelled off in 2013. Debt had risen from 80% of GDP in 2008 to over 105% and 95% respectively in the US and the Eurozone, and from 17% to 23% in China. In the US and the Eurozone this was the result of rescue operations by financial institutions and fiscal expansion to keep the economies afloat in the crisis year of 2009. Since then, fiscal consolidation has dragged on economic growth as governments scale back on stimulus (see Chart 1.3). But that process has so far slowed, easing the drag on growth.

While we believe that to be the case, it doesn’t tell the whole story, as it omits the factor of the private debt of firms and households. Private debt to government debt gives the overall debt level in the economy – the complete picture. Consider in this context that, if the government is leveraging, taking on debt, it may very well be that private sector debt is taken over. Thus total leverage in the economy is not affected, and perhaps neither is growth, or at least to a lesser extent than suggested without taking into account private debt. We should therefore look at the overall debt level in the economy to get an accurate view – an approach strongly advocated by, for instance, the Bank of International Settlements (BIS).2

2 See for example BIS Quarterly Review, September 2014.

Total debt in the US and Eurozone has risen fairly rapidly since 2008, from 240% to a level of 260% of GDP in 2013, but seems to have stabilised in 2013 as (de)leveraging in the US and Eurozone was minimal last year (see Chart 1.4). For China, the increase in debt has been remarkably higher since the crisis, from 165% to above 200% of GDP, and leveraging still continued in 2013. This suggests two things. Firstly, since the crisis, the US, the Eurozone and China have been fuelling economic growth with debt: mostly government debt in the US and the Eurozone and private debt in China. Secondly, although overall debt levels are now fairly high, a process of deleveraging has yet to start. That means lower future growth.

Economic Outlook 7

Box 1. Causes of slower trade growth

The global picture of trade growth – of 4% – remains poor compared to the 20 year average trade growth of 5.5%. While global economic growth is also restrained, could it be that higher trade growth could boost economic growth? This issue indeed warrants a closer look than we have taken in previous Economic Outlooks.

We have identified four factors that determine global trade growth.3

Firstly, after the opening of China to international trade, beginning in 1979, and the fall of the Berlin Wall in 1989, production processes began to be fragmented. Manufacturers essentially broke up various stages in the production process and moved parts to developing countries where they saw a benefit: especially to China. The process was helped by improved efficiencies in transport and communication leading to a fragmented global production process and a boost of global trade. 4 It also contributed to global growth as comparative advantages, e.g. the low cost of unskilled labour in China, were exploited. That process may now have slowed, or perhaps even ended: for instance, Chinese labour costs have risen markedly.

Secondly, structural changes are happening in the world economy. The US has become a major energy producer, requiring spectacularly less imports of oil and gas. Moreover, China’s growth, apart from slowing, is likely to become much more internally driven, as foreign markets may already be saturated with Chinese products. As Chinese growth slows it also requires fewer imports, specifically of commodities and energy. Finally, growth is increasingly taking place in services, which are by their nature less traded as emerging economies reach higher stages of development.

Thirdly, rounds of trade liberalisation have taken place during past decades, particularly after the Second World War. Tariffs were reduced, initially among the

3 See Bryson, Jay H., Why Is Global Trade Growing So Slowly?, Special Commentary Wells Fargo Securities, August 25, 2014. 4 Such as bulk transport via sea containers and, for communication, internet applications.

advanced economies and then more globally. These initiatives have resulted in significant increases in trade, with some studies indicating a five percentage point increase in the trade-to-GDP ratio for the post-war period. This factor may have become less important in the new millennium. The last multilateral round of negotiations, the so-called ‘Uruguay Round,’ came into force in 1995, whilst the Doha round, begun in 2001, has yet to be completed.5

Fourthly, protectionism has been on the rise since the 2008 crisis. According to the WTO, in the period from November 2013 to May 2014, G20 members put in place new trade restrictions that far outweighed any trade liberalisation measures.

Trade finance has remained restrained, given the weak state of the European banking sector in particular. An ICC study revealed that 45% of surveyed banks perceive a shortfall of trade finance facilities globally, implying an amount of USD 1.6 trillion worth of transactions, in 2013 alone.6

These factors lead to the likely conclusion that trade growth is structurally lower due to the halting of global fragmentation of production processes and structural changes.

5 Multilateral agreements look distant at this stage, as witnessed by the lack of agreement in the most recent Doha round of negotiations in Bali in December 2013. Several regional initiatives are attempting to fill the gap, such as the Transatlantic Trade and Investment Partnership between the EU and the US. 6 See International Chamber of Commerce, Rethinking Trade and Finance, 2013. The figure is indeed much higher than the USD 25 billion mentioned in previous Economic Outlooks, based on anecdotal evidence.

Economic Outlook 8

Global monetary conditions remain loose and risk appetite (too) high

Global monetary conditions have been loose over recent years, but conditions are changing as the US Fed and European Central Bank (ECB) head in opposite directions. As the US economy recovers, the Fed has ended its quantitative easing programme in October this year and is looking to raise interest rates around mid-2015. The ECB on the other hand is worried about the weak economic growth in the Eurozone and the stubbornly low level of inflation. It has therefore lowered the interest rate in recent months and announced measures to boost its balance sheet in the hope of stimulating lending and the economy (see Chart 1.5).

With the Fed and ECB keeping rates extremely low, and the ECB’s target of balance sheet expansion, global monetary conditions are likely to remain loose for some time yet. That contention is reinforced by the loose, if not expansionary, monetary policy of the Bank of England and Bank of Japan. Liquidity abounds as interest rates remain low and this has driven risk appetite very high. This is clear from the record highs in various stock market indices and by two metrics; the US corporate BBB spread and the implied stock market volatility for the S&P 500 as measured by the VIX index. Both metrics have shown a return to pre-crisis values which, in turn, were already below the 2000-2007 average (see Chart 1.6). It allowed countries such as Greece to tap the bond market earlier this year.

The point to make here is the potential for risk re-assessment by the financial markets. This would imply a move from relatively risky into less risky assets, driving up the price difference between the two. Basically, the risk premium would thus increase. This could impact emerging markets as well as more risky assets in advanced markets, such as low or below investment rated bonds.

The New Fragile Five

Signs of the potential impact on emerging markets of a reassessment of risk were seen in the summer of 2013 and, to a lesser extent, in early 2014. At those times emerging economies were facing sudden capital outflows, leading to depreciation, interest rate hikes and foreign exchange intervention. The ‘Fragile Five’ were named: Brazil, Turkey, India, Indonesia and South Africa, all countries with relatively large current account deficits. Economic growth in these and a few other countries was negatively affected.7

Since then the situation has more or less normalised, with capital flows to emerging economies for 2014 predicted to be at 2013 levels. 8 Following positive policy measures in India and the intensification of the Ukraine conflict, Russia could be considered to have replaced India as a member of what we dub ‘The New Fragile Five’. Meanwhile, it has become clear that structural issues in emerging economies will drive the risk re-assessment that could occur if monetary policy becomes tighter. Those structural issues warrant

7 This was extensively reported in the May EconomicOutlook. 8 The annual 2014 figure, USD 1,162 billion, excludes the exceptional capital outflows from Russia.

Economic Outlook 9

some attention, drawing an investigation by Atradius Economic Research.9

Scoring emerging markets on their vulnerability to capital flight, external financing needs and their policy effectiveness leads to a list of the most vulnerable emerging markets. Table 1.1 summarises the results for the ‘New Fragile Five’.

Table 1.1 Vulnerable emerging markets

Risk of capital flight

External financing

need

Policy effectiveness

Brazil ● ●

Indonesia ●

Russia ●

South Africa

● ● ●

Turkey ● ● ●

Source: Atradius Economic Research

The overall conclusion is that South Africa and Turkey top the list of the countries with the largest structural weaknesses, with Brazil coming close. If we broaden the list to include countries outside the New Fragile Five, we see that Chile, Hungary, Mexico and Poland also score on two of the three indicators. This is broadly in line with conclusions of similar research conducted by the IIF.10 In Chapter 3 we will give more details of the weakness of the various countries that have been exposed by the 2013 mini-crisis. These weaknesses have been a drag on growth in emerging economies, and the New Fragile Five in particular.

Commodity prices continue to fall

China has been a driver of global commodity prices over the past decade and, as Chinese growth has fallen from 12% to 7.5% in recent years, commodity prices have followed suit. Chinese economic growth was also weak in the first half of 2014, forcing the government to provide support. This took the form of a mini-programme targeting railway expansion, reconstruction of poorer urban areas and tax cuts for medium-sized companies announced last Spring. This boosted demand for metals and thereby provided support to metals prices which have risen 2% since

9 Atradius Economic Research, ’Vulnerable Emerging Markets,’ October 2014 10 See IIF, Global Economic Monitor, July 2014.

March; China accounts for 50% of world demand. But it could not prevent a further, indeed significant, slide in the iron ore price (see Chart 1.7). The iron ore market suffers from high inventories and planned additions of capacity to a market already characterised by oversupply. Copper prices remained more or less constant over the period.

As further Chinese government support is expected in case growth falters in 2015, certain commodities will continue to receive support. However, as Chinese growth will gradually become more consumption led,11 commodity markets will have to live with lower demand growth from China. According to the IMF, prices, specifically for iron ore, are expected to remain under pressure in 2015, as overcapacity continues. Futures’ prices support that view.

Oil price plummets

The oil price has been falling rapidly in recent months and, despite the fact that China makes up 20% of world oil demand, the recent fall cannot be attributed to a change in Chinese demand. The oil price fell from USD 114 per barrel Brent in June this year to below USD 90 in October (see Chart 1.8) but this was caused by changes in supply. Now, while some supply disruptions have faded, others remain: from Syria and Iran, for geopolitical reasons, and, for example, Canada and the North Sea for technical reasons. Libya, on the other hand, has more than quadrupled its supply and is heading towards its 2010 level. Iraq too has started to increase its output.

11 Chinese investment still constitutes 45% of GDP, exceptionally high compared to the emerging economies average of 32% and the advanced economies average of 20%.

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Three fundamental factors have also come to the fore. Firstly, US production, mainly from shale deposits, continues to grow. US net oil imports have dropped from 12.5 million barrels per day at its peak in 2005 to 5.5 million in September 2014. Imports from West Africa are particularly affected, while the US has begun to export some of its oil and US oil production now matches that of Saudi Arabia. Secondly, the critical price level at which the US shale oil extraction is profitable has reportedly fallen from USD 90-85 to USD 70 per barrel.12 Thirdly, the role of Saudi Arabia as a swing producer and global price stabiliser is in question since the country stunned OPEC by increasing output in September when it was supposed to cut it back.

Oil futures suggest that prices in the range of USD 85-90 per barrel are on the cards for the Outlook horizon. From that level, risks are slightly higher given geopolitical factors: 1) the unrest caused by the Islamic State in the Middle East region, although until now the Southern Iraqi oil complexes have not been affected and 2) the sanctions imposed on Russia because of its perceived stance in the Ukrainian conflict that are targeted at future oil production.

Lower oil prices as such are good news for the global economy. The rule is that a USD 10 fall in prices translates into 0.5% additional growth. Consumers in importing countries are more likely to spend than those in cash rich exporting countries such as those in the Middle East. The situation in this case may be a little different because of the debt overhang in the Eurozone: consumers may instead be concerned with repaying their debts. While that behaviour may not

12 See The Economist, ‘Cheaper oil: Both symptom and balm,’ 18 October 2014.

immediately help to generate economic growth, it will in the future by reducing the required deleveraging.

Geopolitical tensions have intensified

Over the past six months the geopolitical tension in Ukraine has intensified and the threat of the Islamic State (IS) in Iraq and Syria has become much more pronounced.

To start with IS, the economic impact of its march has been limited to Syria and Iraq. Indeed, when IS fought to control a Northern Iraqi refinery in June, the oil price edged up 5%, but when that faded the oil price started its slide. As the civil war is focused on Northern parts of Syria and Iraq, Southern Iraqi oil complexes have not so far been contested. IS does however now control large parts of Syria and Iraq.

Meanwhile the geopolitical tensions in Eastern Europe have intensified, and so have the tensions between Russia and the US and EU, culminating in a volley of sanctions between the two sides. Since October, the US and the EU have imposed sanctions on a number of firms and individuals related to the Putin government. A ban on the sale of arms and technology for the energy sector has been imposed. Foreign financing of Russian firms and banks is severely restricted and has effectively led to a freeze on lending. Russia, in turn, has imposed sanctions on food imports from the US and the EU. Crucially, energy exports from Russia to the EU have not been affected.

The conflict is having a negative impact on some economies. Despite the sanctions on and by the US, the impact on its economy is relatively low as the ties between the countries are small; e.g. US exports to Russia are only 1% of the total (USD 11 billion), whereas the figure for the EU is 7% (USD 15 billion). As a result, the impact on the EU is much greater, as is that on the Russian economy. This is discussed in detail in Chapter 3.

The potential impact on the EU is three pronged: trade, credit quality and sentiment. Clearly, trade is adversely affected by the sanctions but, while the impact can be considerable at company or even sector level, at country level it will be much lower. Only the Baltics have exports to Russia of more than 5% of GDP, while Russian tourism is important to Cyprus. Bulgaria, Finland and Slovakia have a relatively large share of output sourced in Russia. As the Russian economy

Economic Outlook 11

declines, so does the credit quality of outstanding loans: an issue in particular for Austrian and Swedish banks. Sentiment is negatively affected because of the direct implication on, for instance, exports and increased uncertainty about the economic climate will deter spending by both businesses and households.

The overall picture is arguably that the closer we get to Russia, the greater is the impact. That is evident from Eastern European data showing disappointing growth figures. Moreover, there has been an impact, albeit limited, on the EU’s still feeble economic growth. This may change in the longer term if energy supply is affected by the sanctions.

Forecast

The tone of this Economic Outlook so far has been cautious. Global trade has not reached earlier expectations, the threat of deflation has come closer, the geopolitical situation, particularly in Ukraine, is worsening, and the price of oil and other commodities has fallen. Those are the main changes. Add to this the stepping up of ECB support, Fed ‘tapering’, debt overhang and China’s slowdown. The balance of these determinants is reflected in the somewhat poor results for the first half of 2014. In effect the global forecasts for 2014 and 2015 have been revised downwards for most regions, with the exception of Asia (see Chart 1.9).

As a result, the world economy is now expected to show 2.7% and 3.2% economic growth rates in 2014 and 2015, with all regions expected to contribute. Asia is expected to continue to be the largest contributor, with forecast growth of 4.8% in both years: significantly above the growth rates of Latin America and Eastern Europe at 1.2% and 1.5% respectively in 2014. The US will step up its contribution, to 2.2% in

2014 and a decent 3.1% growth figure in 2015, with the Eurozone considerably lower, but still positive, at 0.8% and 1.2%.

Trade growth changes are also significant. Citing GDP growth revisions, WTO trade growth forecasts have come down from 4.7% to 3.1% for 2014 and from 5.3% to 4.0% for 2015.

Table 1.2 Real GDP growth - Major markets

2011 2012 2013 2014f 2015f

Eurozone 1.5 -0.6 -0.4 0.8 1.2

United States

1.6 2.3 2.2 2.2 3.1

Western Europe

1.5 -0.3 0.1 1.3 1.5

Asia Pacific 4.6 4.6 4.9 4.8 4.8

Latin America

4.2 2.9 2.7 1.2 2.2

Eastern Europe

4.8 2.4 2.1 1.5 2.2

Total 3.1 2.6 2.6 2.7 3.2

Source: Consensus Economics (October 2014)

Risks to the outlook

The baseline scenario rests on a number of assumptions about the major issues that we have already discussed, centring on US monetary policy, Chinese growth, geopolitical risk and Eurozone fragility. But there is also the upward potential of a permanently lower oil price.

Global monetary conditions: With global monetary conditions loose for such a long time, risk aversion amongst investors has become unusually low while there is wide availability of liquidity used to search yield (such as on Greek state bonds). Our last Economic Outlook already indicated that the unwinding of the expansionary US monetary policy should be handled with the utmost care, as misguided financial markets could easily panic and retract funds from risky assets such as in emerging economies, causing a liquidity crunch. This risk is still there, although a number of steps in the Fed tapering process have been taken and the ECB has started to ease conditions further. The probability of the risk occurring is therefore considered low to moderate, as before.

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Eurozone growth: The probability of this risk has risen as disappointing data, more signs of deflation and intensified geopolitical issues with Russia have become evident over the summer period, against a background of already feeble economic growth. In addition, it is clear that mounting debt, public and private, needs to be reduced, and that a process of deleveraging that has yet to start will weigh on future growth. Growth could be further hindered if deflationary tendencies continue. Re-escalation of the sovereign debt crisis still seems distant, but that depends on sufficient liquidity provisioning. The mitigating factor is the ECB’s behaviour, as monetary policy is now being used to address the issue.

Geopolitics I: The Russian slowdown has become almost a matter of fact as sanctions have been stepped up and the Russian economy cannot avoid strong pressure on growth: in particular not in the longer term. Spill-overs to the global economy will be limited, but felt more in countries closer to Russia, as is reflected in current data. However, if sanctions are extended to energy trade, this will have a greater impact on the Russian economy and on the spill-over effects. More importantly, it will drive up energy prices,

although we believe the likelihood of such a scenario to be low as Russia is already feeling the force of the current set of sanctions.

Geopolitics II: The IS surge in the Middle East has created a large region in Syria and Iraq that is now IS territory. However, it does not contain the major oil complexes in Southern Iraq. Further IS territorial expansion will most probably involve states such as Turkey and perhaps expansion further south in Iraq. This will trigger unrest: at first in the oil markets at least, and wider if such a surge is backed up by terrorism in the rest of the world.

China slowdown: Chinese growth has slowed markedly over a relatively short period of time and was disappointing in the first quarter of 2014. Indeed, a package of government stimuli was needed to avoid growth missing the targeted 7.5% for 2014. This highlights that over time a 7.5% growth figure may not be sustainable – and clearly unsustainable with an investment rate of 45% of GDP. Lower growth and rebalancing away from higher investments will have an impact via commodity prices and commodity volumes traded in world markets. A hard landing of

Table 1.3 Risks to the global economic outlook

Risk issue Symptoms Effects Probability Impact

1. Global monetary conditions

Unguided change in US monetary policy. Insufficient liquidity provisioning to provide credit crunch.

Financial market volatility. Capital outflows from specific emerging markets.

low/moderate high

2. Eurozone growth Slowing economic growth. Or persistent decline in the rate of inflation.

Stagnation across the Eurozone. Re-escalation of sovereign debt issues.

low/moderate moderate/high

3. Geopolitics I

Escalating political and social unrest in the Ukraine. Further implementation of US/EU sanctions and Russian counter sanctions, involving energy trade.

Slowdown of Russian economy. Adverse effects on Eurozone and energy prices.

low/moderate moderate

4. Geopolitics II Further surge of IS, global terrorism

Higher energy prices. low low

5. Chinese growth

Signs of a further slowdown in economic activity. Or instability in the banking sector.

Lower Chinese economic growth. Spill-over effects to the rest of the world via trade and commodity price channels.

low high

6. Trade growth Free trade initiatives fail, surge in protectionism and lack of trade finance.

Trade growth significantly lower, lower growth GDP potential.

low low

Source: Atradius Economic Research

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the Chinese economy – of 5% or lower economic growth – will have a significant impact on the rest of the world via these channels. The likelihood of this risk is scaled down to low from moderate as Chinese authorities have again shown their commitment and power to steer growth.

Trade growth: The baseline scenario assumes that the current trade environment will not change significantly. However, if a number of free trade initiatives fail, if the current trend towards more protectionism is reinforced and if trade finance remains constrained or even scarcer, GDP growth will be hit. The impact, however, will not be felt as a shock but will manifest itself over time.

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Economic Outlook 14

2. Prospects and risks in advancedeconomies

Diverging outlook

The economic recovery across advanced markets has taken further hold over the past six months, albeit less so than expected. Those markets are again important drivers of the global economy and a further improvement is forecast for 2015.

The strong and the weak

While overall growth in advanced economies is positive, there are large regional differences. Both the United States and the United Kingdom are on a steady path to economic recovery (see Table 2.1); economic growth has been high and the labour market is steadily improving. Both are also steering towards an exit of their loose monetary policy. Despite the similarities between the US and UK, the UK is still at the beginning of its recovery with the size of the economy only this year surpassing its 2008 peak .

The Eurozone on the other hand is facing a weak and fragile economic recovery. The economy is growing very slowly and investors are increasingly concerned about a possible new recession. Low inflation could undermine the recovery and reform efforts need to be stepped up. Conditions on financial markets have, however, improved over the past six months and economic growth is forecast to gain traction in 2015.

Developments in Japan are mixed. Efforts to push up inflation have had some success, but it remains uncertain whether these will take hold. Reforms have also been implemented, but watered down from previous plans. The economy is showing modest growth and is predicted to continue to do so next year.

Table 2.1 Real GDP growth - Major markets 2011 2012 2013 2014f 2015f

Eurozone 1.6 -0.6 -0.4 0.8 1.2

United States 1.6 2.3 2.2 2.2 3.1

United Kingdom 1.1 0.3 1.7 3.1 2.6

Japan -0.4 1.5 1.5 1.1 1.2

Source: Consensus Economics (October 2014)

Risks abound

As the Eurozone’s performance has been poor, the risks to the outlook have increased over the last six months. In fact, many of the Eurozone’s structural vulnerabilities have not been addressed and are yet to come to the fore again, as forewarned in an Atradius research note in June this year. 13 The Eurozone is facing the risk of further low economic growth, persistent low inflation (or deflation) and renewed tensions of debt sustainability. In the US, the risks have diminished over the past six months but relate to the gradual exit from expansionary monetary policy and its impact on lending and debt service costs.

Eurozone: the recovery remains vulnerable

Economic growth in the Eurozone is 0.4 percentage points weaker than expected. Economic growth remains very low, and some countries are having difficulties escaping contraction. Over the coming years economic conditions are expected to improve, but will remain weak and vulnerable to setbacks.

Disappointing growth

The Eurozone economy contracted in 2013, although the recovery started in the middle of that year. However, the positive momentum seems to have stalled in the second quarter of 2014. The economy did not show any growth over the second quarter, and

13 See ‘Is the euro crisis over?’ Atradius Economic Research – June 2014

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Germany’s economy, the Eurozone’s ‘power house,’ actually contracted. France’s economy stagnated in the same period and Italy’s economy contracted by 0.2%. This has led to a downward revision of the Eurozone 2014 growth forecast (see Table 2.2 for the current forecasts) for all countries except Spain, Greece and Ireland.

Table 2.2 Real GDP growth - Major markets 2011 2012 2013 2014f 2015f

Austria 2.8 0.9 0.4 1.1 1.7

Belgium 1.8 -0.1 0.2 1.1 1.4

France 1.7 0.0 0.3 0.4 0.8

Germany 3.0 0.7 0.4 1.4 1.5

Greece -7.1 -6.4 -3.9 0.2 1.9

Ireland 2.2 0.2 -0.3 4.1 2.6

Italy 0.6 -2.6 -1.8 -0.3 0.5

Netherlands 1.1 -1.3 -0.8 0.7 1.3

Portugal -1.3 -3.2 -1.4 0.9 1.3

Spain 0.4 -1.6 -1.2 1.3 1.9

Eurozone 1.5 -0.6 -0.4 0.8 1.2

Source: Consensus Economics (October 2014)

In line with the disappointing economic growth, all Eurozone economies, with the exceptions of Germany and Malta, face substantial output gaps. This excess capacity weakens the labour market. The unemployment rate remained stubbornly high at 11.5% in August. It stopped rising at the beginning of the year and has been falling slightly over the past months but the downward pressure needed to bring unemployment back in line with pre-crisis levels is lacking. The unemployment rate remains exceptionally high in Greece and Spain at 27.0% and 24.4% respectively (see Chart 2.1). Structural unemployment has also risen steeply over recent years. Many unemployed, particularly in southern countries, have been out of work for a year or longer and/or are between the ages of 15 and 24. As the Euro area economy picks up, the loss of skills threatens to hold back productivity growth for years to come.

The various causes of this low growth

Diverse factors have caused this year’s economic growth to be lower than expected. Many of these factors — low inflation, high debt levels, lack of reform, and geopolitical risks — are difficult to alleviate and will remain a concern for the Eurozone economy throughout next year.

Low inflation is a serious concern.14 Inflation has been falling in the Eurozone since 2011 and reached a record low of 0.3% in September 2014. This is caused by falling energy and food prices, but also by the prolonged weak economic demand and the structural reforms implemented by some member states that reduce wages. Inflation is low in all Eurozone countries while some countries, including Portugal and Spain, are experiencing falling prices (see Chart 2.2). If inflation is low, or if there is deflation, the risk is that businesses and households will postpone spending in the expectation of future lower prices. The direct impact is an increase in the burden of existing debt and a more difficult adjustment path for peripheral countries.

14 See Atradius Economic Research, ‘Deflationary Risk in the Eurozone’, October 2014.

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The real burden of existing debt rises as inflation falls. This works via the denominator of the debt-to-GDP ratio: inflation pushes up nominal GDP, whereas nominal debt remains the same. Persistent low inflation lowers the growth of nominal income used to service debts of consumers, companies and governments. As debts become more difficult to repay and consume a larger proportion of economic agents’ income, consumer spending and business investment are depressed, putting further downward pressure on prices. This is a severe problem for many Eurozone countries as their debts, both public and private, are exceptionally high.

Indeed, the already high public and private debts in several Eurozone countries have been increasing since 2008. For instance, Ireland and Cyprus have combined public and private debt levels of around 400% of GDP, Portugal and Greece have debt exceeding 300% of GDP, while Spain, Italy, and France have a 200% debt-to-GDP ratio (see Chart 2.3). This persistent debt overhang and the forthcoming deleveraging process to address it will be an impediment to domestic demand and potential growth prospects for many years to come.

Some core countries continue to be plagued by mediocre growth and even contraction. In some of these markets this can be attributed to a lack of necessary structural and fiscal reform. France and Italy, the Eurozone’s second and third largest economies, have failed to benefit from the economic upturn thus far, partly because of their resistance to implementing much-needed reforms – particularly those designed to improve cost competitiveness and labour market flexibility.

France’s economy stagnated in the first half of 2014 but, with some growth in exports, is forecast to grow by an overall 0.4% in 2014. Unemployment is still above 10% and inflation, currently at 0.5%, continues to fall. The most pressing problem is the French government’s budget balance. The 2015 budget is expected to have a 4.3% deficit, which the EU will most likely reject as the proposal is way above the 3% deficit limit that it has set. The new, more reform-oriented Prime Minister Manuel Valls may be able to press forward with necessary reforms to trim spending. Proposed policies to reform the labour market, reduce business regulations and open up protected professions will also help promote investment and growth. Rating agency Fitch has placed France’s sovereign credit rating on negative watch, citing uncertainty over France’s structural reforms and the risks to growth and deficit reduction plans.

Italy continues to face serious challenges, with public debt above 130% of GDP, and is experiencing its third recession since 2008. Unemployment is high at 12.7% and, by Eurostat measures, prices are falling. As in France, Italy has a new reform-minded government, led by Prime Minister Matteo Renzi, and, like France, there has been plenty of talk but little action. After taking office in February, Renzi finally began to take action on structural reforms in October. His ‘Jobs Act’ passed a vote of confidence in the Senate. While the lower chamber of parliament is still to approve the bill, it offers hope for more action in the near future. If implemented, the reform will ease restrictions on dismissing workers, cut the number of short-term contracts, and implement a system which increases workers’ protection with seniority. The plan also includes an extension of unemployment benefits and measures to increase the female labour force. Such structural reform is vital if Italy is to convince EU

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authorities to be more flexible regarding the 3% deficit ceiling and to promote growth.

Geopolitical developments have also hit the Eurozone economy. The conflict in Ukraine contributed to the substandard growth in the first half of 2014, primarily through trade relations and European dependence on natural gas. Some Eastern Eurozone countries like the Baltics are completely dependent on Russian natural gas for their energy needs. The Russia-Ukraine conflict has not yet threatened this, but it has raised uncertainty. Western sanctions have contributed to Russia’s sharp economic slowdown leading to reduced demand from Russia for imports. This has had an impact in key Eurozone economies such as Germany, whose economic contraction in the second quarter of 2014 was due partly to a poor manufacturing export performance.

There is some light

Despite most core Eurozone economies losing their competitiveness in recent years, Spain continues its recovery, driven by a strong export performance. This has led to Spain’s first current account surplus in almost three decades (see Chart 2.4). Export- and manufacturing-driven growth is finally boosting the economy as the decline in unemployment accelerates (although from a very high level) and domestic demand and business investment pick up. The transition to broad-based growth can be attributed to extensive structural reforms that the Spanish government has made since the crisis began: reforms to the labour market, banking, and government budgets that have improved labour market and business sector performance and international competitiveness, setting Spain on the road to recovery.

There finally seems to be a light at the end of the tunnel for many peripheral countries, as reforms set in

and macroeconomic indicators seem to be bottoming out and turning around. Greece has most likely seen an end to its six-year recession, unemployment has peaked at 27%, and the fiscal targets set by its troika programme have been met well before the deadline. Although not yet robust, with a large number of downside risks, Greece finally has a positive outlook and may avoid the third bail-out programme that was previously expected.

Both Portugal and Ireland have officially ended their EU/IMF-backed financial and economic reform programmes: Ireland at the end of 2013 and Portugal in early 2014. Portugal has been successful so far in recapitalising its second largest bank and has managed to maintain financial stability overall, as confirmed in Portugal’s asset quality review (AQR) by the ECB released in October. Ireland’s economy is growing at a pace significantly higher than the Eurozone average and is becoming increasingly broad-based. The optimistic forecast for Spain, Greece, Portugal and Ireland remains fragile though, particularly due to their high trade exposure to the rest of the Eurozone.

Despite stagnation, the Eurozone’s financial sector has been resilient. Government bond spreads have narrowed significantly in the past two years and are approaching pre-crisis levels (see Chart 2.5). The results of the ECB’s asset quality review have been generally positive, reinforcing the recovery in the Eurozone’s banking sector. 25 out of 130 of the Eurozone’s biggest banks failed the forward-looking stress tests, with a capital shortfall of EUR 24.6 billion, but 12 of them had already taken the necessary actions. Only the remaining 13 banks under review were deemed unable to survive a financial crisis or severe economic downturn should one occur, and

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none of these is a major European bank. The aim of the review is to identify problem spots and risks, to repair bank balance sheets and create more robust banks to boost public confidence in the sector. This should increase supply and demand for bank credit, boosting economic growth. The conclusion of the AQR and latest stress tests is a milestone towards the Single Supervisory Mechanism (SSM) which will come into effect this month. The credibility of the ECB is key as it will take over supervision of European banking: the first major step in the establishment of the EU banking union.

Additionally, credit conditions may at last be easing. This is apparent from the easing of loan supply conditions for both businesses and households by European banks, which should help to improve demand and contribute to a more robust recovery (see Chart 2.6). Central bank policymakers have also set extremely low interest rates to reduce the real cost of borrowing and increases banks’ capacity to lend. But, as credit conditions are just beginning to ease, they remain extremely tight. Loans made to non-financial corporations in August decreased by 2.2% year-on-year, about the same rate as the prior two months. However, the pace of decline in lending to households is slowing, and the contraction of lending was only 0.4% in August.

What the ECB needs to do

First of all, the ECB should pursue aggressive, probably unconventional, policy measures to get low inflation under control. In September, monetary policymakers slashed the main interest rates to 0.05% and introduced a funding scheme to boost banks’ business lending and a programme to purchase private sector asset-backed securities (see Chart 2.7).

Together, the measures should bring the size of the ECB’s balance sheet back to 2012 levels. This implies that EUR 1 billion will be added to the ECB balance sheet. It is not, however, a full scale quantitative easing programme such as that seen in the US. Such a programme would also include the much bigger market of government bonds. That said, the ECB has hinted that it may consider that if push comes to shove.

Announcements about the programme have already had an impact. In particular, the euro exchange rate weakened against the dollar by around 10% in a three month period (see Chart 2.8). This will provide support for the Eurozone economy via two channels: 1) cheaper exports helping growth and 2) more expensive imports helping inflation. Further support from the programme is expected via bank lending and thus investment and spending. Whether that will help when deleveraging starts is an open question. Furthermore, as President Draghi has stressed, ECB policy alone cannot revive the Eurozone — national economies must implement fiscal reforms to raise growth and inflation.

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Secondly, there have been calls from European politicians for fiscal stimuli to boost the economy. However, the debt levels of many Eurozone countries have risen sharply over recent years, and seven members are still struggling to get their budget deficits below 3%. Thus the only country with room for such stimuli is Germany. Greater investment by Germany could drive a faster recovery in the Eurozone and help rebalancing, particularly by reducing Germany’s current account surplus. But politics make this unlikely, as the German public and policymakers prefer to continue the fiscal consolidation in line with European requirements that they have been practicing for decades. And it is still politically unpopular to spend money to prop up failing countries. Therefore, an expansion of German investment – first and foremost to benefit Germany itself – is more politically feasible, while positive spill-overs will subsequently benefit the Eurozone as a whole.

Part of the German solution is also to raise wages and, unlike higher public investment, there is a willingness to do so. This would make it easier for the peripheral countries to improve their international competitiveness with Germany. Despite wage restraint for the past ten years, wage growth in Germany is indeed higher than in the periphery, but is not stimulated and is only growing at natural rates. However, due to the left’s strong showing in the election, Germany’s first ever minimum wage will be enforced. The minimum wage was set by the Bundestag at EUR 8.50 per hour and will come into effect on 1 January 2015. This should not only raise prices but also boost German demand for imports.

Thirdly, structural policy reform is crucial to improving the potential growth rates of Eurozone economies. This includes tax and product reform, but also pension and health care reform. Some of these, such as raising the retirement age, are relatively easy to implement, but take political will. Labour market reform is also high on the agenda for many countries. First of all, authorities must reduce hiring costs and create more effective youth training programmes which may help in reducing high youth unemployment and lowering unemployment periods. Structural reforms may also assist in rebalancing the Eurozone: for instance, if debtor countries implement more labour market flexibility while creditor economies invest in infrastructure.

Finally, the clean-up of the banking sector may ease lending conditions to small and medium-sized firms (SMEs). Banks’ balance sheets across the Eurozone are laden with bad debts, but the ECB’s asset quality review outcomes should help restore banks’ balance sheets and raise investor confidence in Eurozone banks. International harmonisation of regulations would improve capital market access for firms and more transparency in credit risks would improve SME’s competitiveness. Banking union needs to be completed, which will help to restore credit flows and reduce financial fragmentation, and further progress on a fiscal union should be prioritised.

Brittle, uneven and beset by risks

Overall, the outlook for the Eurozone in 2015 is positive, despite the uneven, worse-than-expected 2014 performance. Economic growth should pick up to a modest 1.2% in 2015. While several core countries are seeing lower growth and some are stalling, peripheral countries are finally seeing a turnaround. Austerity measures and structural reforms have proved successful in economies like Spain and Ireland. But the Eurozone recovery is still vulnerable to low inflation and unsustainable levels of public and private debt.

Persistent low inflation may continue to hold back growth in the Eurozone and maintain vulnerabilities in the economy. Low inflation for a prolonged period of time poses a serious challenge to rebalancing. As peripheral debtor countries implement adjustment programmes to regain competitiveness relative to the traditionally creditor core, low inflation forces those countries to take extreme measures, often to fall into deflation to compete internationally. The threat that persistent low inflation and deflation pose is dramatically exacerbated by the unsustainable levels of debt that many Eurozone member states hold.

The problem of public and private debt overhang in the Eurozone has yet to be resolved: debt levels have continued to grow since 2008 and are expected to peak in 2015. Household and private company debt, particularly in the periphery, continues to impede consumption and investment and bank lending is still extremely cautious. This leaves the economy vulnerable to downward shocks such as a return to risk aversion. Although these severe downside risks persist, vigilant and aggressive policymaking by both the ECB and national policymakers must continue to

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be taken to avoid a shock that may push the Eurozone back into recession and to maintain the moderate growth predicted for 2015.

United States: fast, solid – and unequal

The United States grew at its fastest rate in eight years in the second quarter of 2014 but still faces considerable obstacles to regaining its pre-crisis performance. The steady recovery is expected to stabilise in 2015 as wages and consumer credit increase. Annual real economic growth is forecast to reach 2.1% in 2014 and pick up to 3.1% in 2015.

Recovery taking a firm hold

Despite poor first quarter results due to an unusually harsh winter, the US economy is still recovering strongly. The economy expanded by an annualised 4.2% in the second quarter (see Chart 2.9). While the 2014 annual growth forecast has been revised downwards significantly, to 2.1% from 2.7% six months ago, this is only a result of the poor weather conditions last winter. Overall, the economy is robust and expected to continue gaining momentum.

Economic growth is driven by improvements across all sectors of the economy, indicating a sustainable recovery. The housing recovery remains on track with a surge of 33% more new home sales in August than in the same period last year. Only 8% of total sales in August were from foreclosures and short sales — the lowest level since the housing boom ended. Both real residential and non-residential investment has increased – by 3.5% and 4.7% respectively – in the first quarter of 2014 compared to the same period in 2013. In August, consumer spending increased by 2.6% year-on-year. Consumer and business confidence has

continued to rise and is now at a level not seen since before the recession. Business investment spending is also on the rise, as indicated by a 13% annualised growth in new orders for business equipment since May. As the economy continues to recover, banks have been easing their lending conditions, further boosting investment, particularly by SMEs.

The US current account deficit also fell by 3.8% in the second quarter compared to the first quarter and currently stands at 2.3% of GDP. Slower growth elsewhere is decreasing demand for US exports, and this will make it more difficult for the US to narrow its current account deficit. However, the US’s increasingly flourishing performance in the domestic oil and gas industry is making it one of the world’s leading energy producers and this will keep the current account within bounds.

The federal government’s fiscal position has also improved. Congressional Budget Office estimates show a 2014 deficit of 2.8% of GDP, down from 4.1% last year. The rapid decline is attributed to successful fiscal consolidation efforts and higher than expected economic growth. The deficit is forecast to improve slightly next year, to 2.6% of GDP. Nevertheless, public debt remains high with a federal debt level of 102% of GDP in the second quarter of 2014. Sustained economic growth should allow the government to slowly reduce the debt over the coming years although the private sector too has to deal with high debt levels.

The private sector saw a rapid increase in private debt in the decades preceding the financial crisis and it has been slow to fall since then. Non-financial sector private debt reached 161% of GDP in March: 11% points lower than in 2007. High private debt limits the room for an increase in credit, reducing the potential for economic growth. A slow process of deleveraging is expected over the coming years, taking its toll on private spending.

But not everyone is benefitting

With private and public debt so high, economic growth remains comparatively low. Headline growth is also forecast to remain lower than historical post-recession recoveries due to lower population growth and, despite improvements, significant economic slack remains. The IMF predicts an output gap of -3.3% of GDP in 2014, down from -4.1% in 2013.

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The labour market has improved markedly since the Great Recession but it has not yet benefitted the average American. The unemployment rate in September was 5.9%, down from a peak of 10% in 2009, and is forecast to decline gradually to 5.6% by the end of 2015. Conversely, the labour participation rate has failed to improve significantly over the past year. The September participation rate was 62.7%, with an average 62.9% over the last twelve months (see Chart 2.10). The decline in unemployment is due partially to more people leaving the labour force or never joining in the first place, indicating general disillusion with the labour market. One reason may be that the labour market is not tightening enough to push wages up, so that wage growth lags behind the inflation rate. This has led to a relative decline in income for average Americans.

In fact, median household income has fallen, despite the economic recovery. The median income remained flat at USD 51,939 in 2013 – 8% lower than in 2007 – while the wealthiest Americans have seen their pay rise by 14% since 2007. There is also disparity in the growth of wealth, with the rich making the largest gains. As a result, income inequality has risen substantially. This may have a more fundamental cause. Technological change, rising computing power and robotification are feared to have eroded middle income jobs, leaving fewer jobs for more people.15 The government may be forced over the coming years to grapple with rising inequality, while also pursuing structural reform to boost overall economic growth.

To sustain the recovery, the US should implement structural reforms, particularly to the nation’s complex

15 See for example The Economist, “The third great wave”, special report, October 4th 2014.

tax system, which has a lot of exemptions for special interests groups that disproportionately benefit the wealthy. Despite persistent political stagnation, the administration has taken action to curb tax inversions, but the entire tax system should be vigorously reformed: something that may be doable after the 201 midterm elections. Additionally, as growth becomes more robust and the fiscal deficit gets under control, more public investment is needed to address the poor state of the domestic infrastructure. The share of federal investment in infrastructure has been falling and there is currently a trillion dollar funding gap over the next six years.

Fed policy: managing bubbles

Easy monetary policy conditions have raised fears of a new asset price bubble. As a result of quantitative easing by the Fed, bond yields remain extremely low and equity prices are way above historical averages. According to Shiller’s cyclically adjusted price earnings ratio, equities are currently valued at 25.8, way above their typical average of 16.6 (see Chart 2.11). These inflated prices could set the scene for the next financial and economic downturn. Some analysts are therefore calling on the Fed to start raising interest rates sooner rather than later.

In fact the Fed monetary policy remains very cautious. It stopped its bond buying programme in October, after having slowly reduced the programme since January. Now it is expecting to raise the benchmark interest rate by mid-2015, if the economy behaves as forecast. After that, rates are expected to rise only slowly. The Fed is facing a difficult road ahead as it tries to bring monetary policy back to normal levels. Currently, the economy seems to be hooked on cheap credit, with mortgage and business funding at extremely low rates. It remains to be seen how higher

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debt service costs will affect consumer spending and business investment. This also depends on the pace of deleveraging of the current high private debt. A disorderly monetary policy normalisation could undermine the economic recovery.

Box 2. Quantitative Easing in the US

When short-term rates are close to zero and the economy remains weak, quantitative easing (QE), or the purchasing of assets on a large scale by the Central Bank to dramatically increase money supply, may be the only effective monetary policy in the toolbox to boost economic growth. This non-traditional policy was implemented by the Fed through four rounds of QE from 2008 to 2013, injecting USD 2.3 trillion to increase market confidence with ample liquidity. QE works in several ways:

• It sends positive signals to the markets, as theFed’s commitment to do whatever it takesincreases its credibility and raises growth andinflation expectations.

• It reduces the availability of assets, forcinginvestors to find substitutions for theirportfolios, increasing prices and loweringyields.

• It forces investors to resort to more short-term financial assets, which lowers theriskiness of their portfolios, increasing pricesand lowering yields for all maturities.

The success of QE in the US is hotly debated, but the evidence gathered so far shows positive effects. First of all, the common criticisms of QE, such as the distortion of asset prices and the prevention of much needed debt deleveraging, are both potential problems that arise from ultra-easy monetary policy, not QE itself. The recovery of economic activity, with rising nominal GDP and decreasing unemployment as well as close-to-target inflation, indicates the success of QE in the US. The IMF and Fed conclude that QE has successfully lowered yields and that the boost in confidence is the primary driver. Uncertainty and risks remain with the return to normal rates, but the US case confirms that unconventional times may indeed call for unconventional measures.

United Kingdom: recovery gaining strength

The UK economy has continued to grow briskly over the past year and is now in a robust recovery phase, in spite of the slowdown in the Eurozone. Economic growth remains strong and broad-based and is forecast to continue into 2015.

Gathering pace

The economic recovery has crossed all sectors this year, with the manufacturing sector and industry in particular finally picking up steam. Business investment is forecast to grow 9.2% this year and 7.6% in 2015, following a contraction in 2013. Not surprisingly, business confidence has been rising as well. Exports too are forecast to contribute to economic growth this year, despite the strong growth in domestic demand and the weak external economic environment. However, some indicators have fallen in September. Both the services and the manufacturing purchasing managers index (PMI) fell, but continued to point to modest output expansion. The pace of economic growth may thus be slightly lower, starting in the fourth quarter of this year (see Chart 2.12). However, despite the recent slowdown, the outlook remains positive.

The labour market has also improved. Unemployment fell to 6% in August, the lowest level since late 2008 (see Chart 2.13). Still, wage growth remains muted, at just 0.7% in the three months to August. This is the lowest rise since, at the latest, 2001 and is well below the 1.2% inflation rate. But wage growth should pick up due to a 3% increase in the minimum wage from October, which should benefit around a million workers, according to the Low Pay Commission. With

Economic Outlook 23

wage growth expected to rebound, this should boost consumer spending.

Consumers have led the UK’s recovery since 2012. Consumption rose 4.5% in the second quarter of 2014, compared to the same period last year. Household consumption is expected to strengthen to 2.7% in 2014 and to slow slightly to 2.6% in 2015, according to the British Chamber of Commerce. The improving labour market conditions and subdued inflation have supported disposable income which has led to a significant rise in consumer spending, although some of this surge has been financed by lower savings and higher private debt. In the non-financial sector, private debt reached 183% of GDP in the first quarter of 2014. The remarkably high debt levels make households and businesses more sensitive to setbacks such as stagnating growth and interest rate hikes. A reduction in debt will eventually have to happen and this will also suppress spending.

Risks remain

The rebound in the housing sector has been an additional boost to recovery. House prices have been rising, aiding the construction sector and adding to homeowners’ wealth. But the rapid growth in prices may have created a bubble which the Bank of England fears may burst. UK house prices rose by 11.7% annually in August. Prices in London have been skyrocketing, increasing by 19.6% a year in August (see Chart 2.13). To stem the rise, the Bank of England has taken a number of macroprudential measures, effective from October, such as mortgage affordability tests and a cap on the volume of mortgages with a high loan-to-value ratio that UK banks can issue. Thanks to the mortgage market reform in June, the housing market has weakened slightly in the third

quarter and the risk of overheating seems to have receded a little.

Disappointing economic conditions in the Eurozone are also posing a risk to UK growth. Despite the UK so far avoiding negative spill-over effects from the Eurozone, it still remains vulnerable to such effects. Net trade is beginning to drag on growth as demand for UK exports in the Eurozone subsides. UK goods and services may also lose their appeal in the Eurozone due to the appreciation of the pound sterling against the euro: a consequence of the ECB’s monetary policy loosening. In contrast, the Bank of England (BoE) is looking to exit its easy monetary policy conditions.

But the BoE is unlikely to raise rates soon. Given high private debt, consumers and firms are vulnerable to a rise in interest rates that would raise the debt service costs. In addition, inflation remains low at just 1.2% in September and, as long as wage growth remains muted, the BoE will face little pressure to tighten monetary conditions. Current market expectations suggest a rate hike in the first half of 2015. The impact on the economy will be watched closely and the pace of monetary normalisation may have to be adjusted when necessary.

Japan: taking the next step

Japan is struggling to kick-start growth in its stagnating economy. High expectations of a clear break with the trend have been ditched for a more realistic outlook. Economic growth expectations remain modest at 1.1% for 2014 and 1.2% for 2015.

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Leaving deflation behind

The last 35 years have been tumultuous for Japan, to say the least. The Japanese economy experienced significant growth in the first 10 years, while the following 25 years have been marked by stagnant growth and continuous deflation. In December 2012, Prime minister Shinzo Abe came into office and vowed to turn Japan’s contracting and deflationary economy around. The measures Abe devised were introduced as the ’three arrow’ approach, now informally dubbed Abenomics. The arrows consist of 1) drastic monetary easing 2) fiscal policy measures and 3) structural reforms. So where does Japan stand almost two years after Shinzo Abe took office?

The economic picture is mixed. The second quarter of 2014 showed a 6.8% year-on-year GDP contraction. In addition, consumer spending fell by 5.9%. These are hefty hits to an economy already under pressure. However, most of these negative developments can be explained by an income tax increase of 5% to 8% introduced in April 2014: a first step to fiscal consolidation. Another positive sign is that the unemployment rate has dropped to an astonishing 3.8% and job openings now exceed the number of applicants. In addition, the IMF expects an inflation rate of 2.7% for 2014 and 2.0% for 2015, and Japan still maintains a positive current account balance despite massive energy imports.

Abenomics: taking aim

With regard to Abenomics, the first two arrows have been fired. The first arrow, monetary policy with the aim of achieving a 2% annual inflation rate, has taken flight with vigour: the Bank of Japan wants to achieve this goal by doubling the monetary base. The current plan is to broaden the monetary base by JPY 60 to 70 trillion annually. It will do this by spending an additional JPY 50 trillion annually on Japanese government bonds and an additional JPY 30 trillion on exchange traded funds annually.

The second arrow, fiscal expansion, was fired in 2013 when two fiscal expansion packages were launched, but no further plans for fiscal expansions are on the table yet. In addition to short-term fiscal expansion, fiscal reform was introduced to enhance confidence in the sustainability of government debt, which is

expected to reach 243% of GDP in 2014 and is a fundamental problem for Japan. In addition, the expected fiscal deficit is high: 7% for 2014. Nonetheless, this is 1.3% points down on 2013. Sovereign debt is primarily held domestically in Japan and, even though the debt is high, the level is deemed sustainable for the time being. Both the government debt and deficit are expected to slowly decline throughout the current decade.

The third arrow, structural reforms, still lags behind. The planned reforms, however, are ambitious: labour market reform, corporate tax decreases and deregulation. Given Japan’s unique and rigid labour market this will prove an exceptional challenge. To expand the workforce, Japan will try to activate stay-at-home women and will need to tackle problems such as insufficient child care and cultural aspects. In addition, there are plans to introduce special economic zones to avoid local government obstruction. Finally, deregulation is planned, but this will face severe opposition from vested companies and incumbent bureaucrats.

More action is needed

It is decision time for Japan’s policymakers as additional monetary easing might become necessary if the disappointing figures for the second quarter of 2014 dampen inflation. As a major importer of oil, the drop in oil prices is a blessing for Japan. However, this also puts a dent in the inflation rate. Furthermore, another tax hike of 8% to 10% planned for 2015 might need to be postponed to avoid further damage to the economy. Of course, the third arrow, structural reform, is still in the quiver and needs to be fired to secure credibility for Abe’s policies. Nonetheless, Japan is expected to show decent inflation in 2014 and 2015. Moreover, the political situation is solid, despite the resignation of two ministers, and some growth is expected to return. The current account is expected to remain positive well into the future and the government debt and deficit, although high, are heading in the right direction. In all cases, Abe needs to run a tight ship to maintain support from investors and the public for the most ambitious goals the government of Japan has had in 25 years.

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3. Prospects and risks in emergingeconomies Government policies matter

Economic growth has slowed in many emerging markets and growth projections have been revised downward over the past six months. Falling commodity prices, rising geopolitical risks and poor government policy in several countries are weighing negatively on the economy. But economic performance has become increasingly divergent across and within regions, and countries with sound policy frameworks are faring better.

Regional differences

Economic growth in emerging Asia is holding up quite well and growth forecasts have remained unchanged for the past six months. Falling commodity prices are on balance positive for this region and counterbalance the effect of slowing growth in China. The outlook is for stable, high growth in 2015 (see Table 3.1).

Latin American growth slipped this year as commodity exporters are heavily exposed to falling commodity prices, while concerns about macroeconomic policies rose in Argentina and Brazil. Economic conditions in the region are expected to improve somewhat next year, but to remain muted.

Eastern Europe was adversely affected by the escalation of the Russia-Ukraine conflict, with trade and sentiment falling. Concerns also rose over government policy in Turkey. Economic growth is expected to pick up again in 2015.

The Middle East is struggling with the rise of extreme jihadi group Islamic State (IS), while lower oil prices further impede economic performance. Nonetheless, the outlook for economic growth remains fairly positive with a rise in growth forecast for 2015.

Sub-Saharan African countries that are reliant on commodity export are hit by falling prices, while part of West Africa is coping with the largest Ebola

outbreak in history. In general, however, the economic outlook for the region is positive with high growth figures.

Of the largest emerging markets, growth is moderating in China, South Africa and Turkey. Brazil is now in recession and Russia is close to it, while the economic crisis in Argentina (in technical default) is deepening. By contrast, growth is picking up in India, Indonesia, Korea, Mexico and Nigeria.

Table 3.1 Real GDP growth - Regional aggregates 2012 2013 2014f 2015f

Asia (excl. Japan)

6.1 6.2 6.0 6.1

Eastern Europe 2.4 2.1 1.4 2.0

Latin America 2.8 2.7 1.1 2.0

Middle East & North Africa

4.8 2.5 2.8 4.2

Sub-Saharan Africa

4.4 5.1 5.1 5.8

Source: Consensus Economics, IMF WEO (October 2014)

Manifested and remaining risks

There has been a remarkable manifestation of risks over the past six months across the emerging world, and many remain: looming US monetary policy tightening, further geopolitical tensions and structurally lower commodity prices. Countries should implement the right government policies to reduce the impact of these risks and improve their shock resistance. That would also push many emerging markets onto a higher sustainable economic growth path.

Asia: a soft landing in China and high expectations for India and Indonesia

China has been the subject of many recent discussions. Its real estate sector is performing poorly and some Chinese banks and regional governments are in poor shape. However, the question remains: “How grave is

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the situation?” Is a financial crisis or severe deceleration of economic growth (say to less than 4% real GDP growth annually) a likely scenario? Right now, it is not. It is very likely that China’s growth will decelerate, but modestly (see Table 3.2). This will affect global trade dynamics and results in lower commodity prices.

Table 3.2 Real GDP growth - Asia 2012 2013 2014f 2015f

China 7.7 7.7 7.3 7.1

Hong Kong 1.5 2.9 2.3 3.0

India 5.0 4.7 5.6 6.3

Indonesia 6.2 5.8 5.2 5.6

Singapore 1.3 3.9 3.2 3.7

Taiwan 1.5 2.1 3.6 3.6

Source: Consensus Economics (October 2014)

The other two major Asian economies, India and Indonesia, have held elections this year. The winners in both countries are considered pro-business and pro-reform and the expectations raised by both new presidents are high. Both markets seem to have largely shed the gloomy stamp of last year’s taper turbulence when they both experienced significant depreciation of their currencies. International markets are optimistic that both will get their economies back on track, but it is now up to their newly elected leaders to deliver. Any failure to put through structural reforms might result in the positive mood fading away pretty quickly.

China: slowing growth, rising risk

China’s economic growth continues to slow as the authorities’ efforts to curb credit growth and investment growth start to take hold. In the third quarter of this year economic growth slowed to 7.3% from 7.5% in the second quarter (see Chart 3.1). Average economic growth in the first three quarters of 2014 is 7.4%, making it highly likely that the government will marginally miss its 2014 growth target of 7.5%. During the year, the Chinese authorities have shown their intention to meet this growth target. Although the authorities rejected a general stimulus package, targeted stimulus measures have been introduced to reverse the economic slowdown. Fiscal spending on infrastructure, railways, and social housing have been increased and targeted monetary easing measures to support SMEs and the agricultural sector have been introduced. There has been tax relief

for SMEs and some controls on property sales have been relaxed to support the weak property sector.

Reining in credit growth and shadow banking activities is necessary as the investment boom since 2008, accompanied by high credit growth, led to high debt levels for local governments and businesses. Total social financing, a broad measure of credit, increased from 127% of GDP in 2008 to 207% at the beginning of 2014, according to the IMF. The flip side of this enormous increase in credit is a highly leveraged economy. Overall, the debt-to-GDP ratio amounts to 235%. The rapidity of the increase since 2008 (72 percentage points) is rare and comes at the cost of inefficient use of resources resulting in overcapacity in several sectors. The debt is divided between government and corporates with respectively 49% of GDP and 186% of GDP.

An important source of funding in this period has been the increase in shadow banking activities: off-balance sheet activities that have risen owing to heavy regulation of the financial system. Because of the dangers of shadow banking for the financial sector, Chinese authorities have introduced measures to curb them, resulting in lower credit growth.

Local governments had an important role in the investment-driven growth after 2008. Through local government financing vehicles they borrowed, especially via shadow banking, and invested in infrastructure and real estate. At the end of 2013 a national audit showed that local governments had a debt of 32% of GDP. In most cases land or real estate is collateral for the loans. Therefore the situation in the real estate sector is important for the quality of loans, but also for the repayment capacity of local

Economic Outlook 27

governments, as one third of revenues come from land sales.

Chinese companies are highly leveraged, and among the most indebted in the emerging markets: 152% of GDP. As the property sector has been the engine of growth since 2008, this is particularly true of real estate companies and related industries (construction). State-owned enterprises have seen their leverage ratio rising in recent years and this is not restricted to the real estate sector but encompasses state-owned enterprises in mining and utilities as well. It is not all bad news: IMF data suggest private companies outside the real estate and construction sector have deleveraged since 2008.

The vulnerabilities in the financial, corporate and real estate sectors and in local government are interconnected, so a shock in one sector could cause a reaction in the others – especially in the property market.

The authorities are willing and able to prevent a shock triggering a disorderly adjustment in other sectors. Several arguments substantiate this. The government has substantial control over economic and financial activity in the country. Government debt is relatively low and external debt is low. The government has enormous foreign exchange reserves (see Chart 3.2), domestic savings are high and there are still capital controls in place to limit the risk of capital flight.

The challenge for the Chinese authorities is to implement reforms to reduce the vulnerabilities in the economy and to rebalance economic growth in the medium term without overly slowing economic growth.

Slowing economic growth will result in repayment difficulties for highly leveraged companies, but the authorities will step in in the event that increasing defaults threaten financial instability. In addition, the government will continue to introduce targeted stimulus measures to prevent a sharp deceleration of economic growth. The state of the labour market is crucial in this respect as creating enough jobs is vital to preventing social unrest. However, continued reliance on government measures of this kind will only mask the vulnerabilities in the economy and increase the risk of a sharp slowdown in the future.

India: a new business-friendly prime minister

In India’s general elections in April/May the opposition Bharatiya Janata Party (BJP) not only came out as the biggest faction in the House of Representatives, as expected, but also surprisingly won an absolute majority. The new prime minister Narendra Modi had built a strong reputation as a competent administrator and economic reformer during his former position as chief minister of the state of Gujarat. Modi was also the favourite of the international financial markets so that sentiment about India, downbeat during the ‘tapering turmoil’, has much improved. Expectations for the new Modi administration are high and, with his majority in parliament, the chance of putting through reforms are probably better than ever. The Reserve Bank of India is currently led by the well known economist Raghuram Rajan, who has announced far-reaching reform of the financial sector, including the easing of opening new bank branches, financial inclusion of the poor, SMEs and remote areas, and a tougher stance against India’s persistent inflation problem. The stubbornly high inflation (forecast to be 8.4% for 2014) is planned to decrease to 6% annually in the medium term as a result of the new monetary framework.

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As a result, India’s real economic growth is accelerating to an expected 6% this year (see Chart 3.3) and a further slight rise (to 6.4%) is forecast for 2015. Growth will be driven by the resumption of stalled infrastructure projects and, in the medium term, by the growing middle class, high investment, urbanisation and an expected improvement in the business environment.

India’s public debt was traditionally quite high, but has been reduced significantly over the last few years. It currently stands at 50% of GDP and is largely financed domestically. It’s a different story for India’s banks and corporations: the Indian banking sector was a net creditor in 2006, but now it has obligations of USD 156 billion to the rest of the world. The corporate sector also suffers from a debt hangover: the average debt/equity ratio for Indian non-financial companies is 87%, the highest of all emerging markets. However, this is largely domestic debt. India has an external debt ratio of only 20% of GDP, which implies that its external solvency remains strong.

Indonesia: a new reform minded president

Indonesia has held legislative and presidential elections this year. Although the legislative elections were free and fair, the outcome was extreme political fragmentation. Indonesia’s largest party is now the Indonesian Democratic Party of Struggle (PDI-P), but even this party controls only 19% of the seats in the House of Representatives. A coalition of at least four parties is needed to form an absolute majority. This is likely to be an obstacle to structural reform.

Nevertheless, the outcome of the presidential election is more promising. It was won by Joko Widodo, nicknamed Jokowi, the candidate for the PDI-P.

Jokowi had built a reputation as an economic reformer and an opponent of corruption during his previous roles as governor of Jakarta and mayor of Surakarta. As in the case of India, the international financial markets are pleased with Jokowi’s victory. Corruption, vested interests and resource nationalism are persistent obstacles to badly needed structural economic reforms and Jokowi’s presidency is seen as the best chance to address these issues. However, as explained above, he needs the support of smaller parties in the House of Representatives. The defeated presidential candidate Subianto has shown that he will not engage in constructive opposition and it seems that he will do his utmost to undermine Jokowi’s policy making.

Economic growth has been disappointing this year at only 5.4% GDP, partly as a result of the ban on the export of unprocessed minerals and also due to the political uncertainty surrounding the elections. Economic growth is expected to accelerate somewhat in 2015: a figure of 6% is now forecast.

Thailand: political stability restored

Thailand has finally overcome its drawn out political crisis, but not in the way that most people had hoped for. Former prime minister Yingluck Shinawatra was deposed from her position in what was seen by some as a legal coup. As this left a still unclear and unstable political situation, in May the Thai army took power in a military coup. Currently Thailand is governed by the National Council for Peace and Order, headed by General Prayuth.

As a result, the political situation in Thailand has improved significantly and the renewed stability is good news for the short-term economic outlook, with consumer confidence and tourism both improving. Economic growth is expected to accelerate in the rest of this year and throughout 2015. The growth forecast for 2015, at 3.8%, is an improvement on this year’s dismal 2.5%. As for economic policy, the picture is less clear: military officials are not always the best policymakers. Until now the new government’s track record has been mixed: ending former prime minister Yingluck’s costly and inefficient rice purchase programme was clearly the right decision, while expelling thousands of illegal foreign workers, who are often crucial for sectors like construction and fishery, was less well thought through.

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The current situation is only temporary and at some point democracy has to be restored. When that happens, the decade-long tensions between the poor northern rural population and the urban and southern elite will no doubt re-emerge.

Singapore

Singapore is an extremely open economy and therefore vulnerable to the current moderate performance of the global economy. While its manufacturing sector is slowing, Singapore’s economic growth is expected to accelerate again next year driven by, among other things, investment in infrastructure. The economic growth forecast for 2015 is 4.9% – an impressive figure for a high-income country. External debt is only 10% of GDP and Singapore is considered the most creditworthy country in Asia, as reflected by its AAA rating.

South Korea

Like Singapore, South Korea’s economy is very export driven with gross exports measuring 60% of GDP. The Korean government started a moderate fiscal and monetary stimulus programme earlier this year and, in combination with the announced fundamental structural reforms, this is expected to boost the economy next year, with forecast growth of 4%. The structural reforms include an overhaul of public institutions, deregulation of the service sector, promotion of investment and innovation, a reduction in household debt and an increase in labour force participation by women and young people. This is obviously good news, since the Korean economy has struggled to catch up with Asia’s most advanced economies like Japan, Singapore and Taiwan. Household debt in South Korea has traditionally been high: currently standing at 161% of disposable income and still rising. This is regarded as one of the major weaknesses of the Korean economy and the government is right to address it.

Latin America: deceleration continues

In Latin America, economic deceleration continues and economic headwinds are gaining strength. Trade links and a dependence on commodities make this region particularly exposed to the economic slowdown in China and to falling commodity prices. The economies of Chile and - quite unexpectedly - Peru are deteriorating rapidly due to weaker investments and a

slowdown in external demand, while Mexico’s growth remains subdued (see Table 3.3) although its prospects have improved following far reaching structural reforms. Brazil is in technical recession and the crisis in Argentina and Venezuela has deepened. Argentina is in technical default and default risk for Venezuela is extremely high. On a positive note, Colombia’s economy is accelerating and it has overtaken Peru as the region’s star performer.

Table 3.3 Real GDP growth - Latin America 2012 2013 2014f 2015f

Argentina 0.9 2.9 -1.6 -0.7

Brazil 1.0 2.5 0.3 1.0

Chile 5.4 4.1 1.9 3.1

Colombia 4.0 4.7 4.9 4.6

Mexico 3.7 1.1 2.5 3.8

Peru 5.9 5.8 3.3 5.0

Venezuela 5.6 1.3 -3.0 -0.6

Source: Consensus Economics (October 2014)

The region continues to be characterised by diverging economic cycles and inflationary pressures (see Table 3.4): a reflection of the differences in the strength of each country’s policy framework. Those with generally strong policy frameworks – the Pacific Alliance countries of Chile, Colombia, Mexico and Peru – were able to use their exchange rate as a shock absorber and, in the case of Chile, Mexico and Peru, to cut interest rates. By contrast, weakening policies in Brazil under the Rousseff administration have limited its use of the exchange rate as a shock absorber. The economic models of the countries with weak policy frameworks, Argentina and Venezuela, have proved unviable following the end of the commodity super cycle.

Table 3.4 Inflation - Latin America 2012 2013 2014f 2015f

Argentina 25.3 10.9 28.2 28.0

Brazil 5.4 5.9 6.4 6.3

Chile 3.0 3.0 4.5 2.8

Colombia 3.2 1.9 3.3 3.2

Mexico 4.1 4.0 3.9 3.5

Peru 3.7 2.9 3.0 2.7

Venezuela 21.1 52.7 67.9 67.6

Source: Consensus Economics (October 2014)

The recent fall in oil prices exacerbates the rising economic headwinds already battering this region. It

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will increase the pressure on their fiscal and external accounts and could tip Venezuela into default. Furthermore, persistent low oil prices would significantly threaten the sustainability of dollarisation in Ecuador, given its already weak liquidity. It would also reduce the growth outlook for Colombia by exacerbating the negative impact of slowing oil production. And it could cloud the medium-term growth outlook for Argentina, Brazil and Mexico, by tempering investments in Argentina’s shale gas fields and in Brazil’s and Mexico’s ultra-deep water oil fields. Mexico and Colombia are best placed to deal with this issue, as they are less vulnerable to a slowdown in China and will profit from a strengthening of the US economy.

Brazil: muddling through

The economic outlook for Brazil, Latin America’s largest economy, has deteriorated. Its economy has been weak and underperforming since 2011, and it experienced a recession in the first half of 2014, with two successive quarters of GDP contraction (see Chart 3.4). Recent developments underline that Brazil’s earnings capacity and shock resistance is increasingly weighed down by deterioration in policymaking under the Rousseff administration. Those shortcomings add to the downward pressure from an increasingly challenging external environment and from supply side constraints (low investment and savings ratios, weak infrastructure, complex business and regulatory environment). Following Youssef’s victory in October’s elections, she has to prove that she is able and willing to change policies as promised in her campaign.

The deterioration in policymaking is illustrated by an unbalanced macroeconomic policy mix and increased state intervention, particularly in the energy sector.

Inflation has risen to 6.5% and is above the target midpoint of 4.5% (+/- 2 %points). This is raising doubts about the commitment of the central bank to achieve this target. It also limits the use of the exchange rate as a cushion, as currency depreciation would further add to inflation.

Policy inconsistencies have soured business and consumer confidence, which are at lows last seen during the 2009 global crisis, and have undermined competitiveness. It has made the manufacturing sector the ‘Achilles Heel’ of the Brazilian economy. Already weak investments (18% of GDP in 2013) have been contracting since the third quarter of 2013. The contraction in the second quarter of 2014 was particularly large – quarterly 5.3% and yearly 11.3% – and was the worst since 2009. Although this was partly to do with the many holidays declared during the World Cup, persistent low business sentiment in recent months does not bode well for future investment and manufacturing production. Finally, household consumption, Brazil’s main growth engine, is weakening as consumers are reining in their spending in response to high inflation and rising interest rates.

As a result, Brazil has become more vulnerable to changes in market sentiment. This was once again illustrated during the emerging market sell-off last September, amid jitters over future interest rate rises by the Fed. The real suffered the largest depreciation of the major emerging markets – by 9% over a single month. Particularly striking was the comparison with Mexico (see chart 3.5). Higher inflation will weaken the short-term outlook for Brazil’s economy, which is generally expected to continue to underperform next year.

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That said, Brazil’s risk mitigating factors remain strong and are underpinned by a diversified economy, a sound banking system, low external debt and substantial international reserves. Additionally, earnings capacity in the longer term is set to improve due to developments in infrastructure – particularly the energy sector. After the discovery of the huge ‘pre-salt’ oil fields in the Santos basin in 2006, Brazil is set to join the ranks of the ten largest global oil producers by 2015. The planned investments will more than double Brazil’s oil production, to 4.2 million barrels per day in 2020, and could raise net annual oil exports to USD 50 billion (2.5% of 2013 GDP) over the same period from almost zero today.

However, this will all be heavily dependent on investments in the highly complex and capital-intensive deep-water developments. For these to materialise, Brazil will have to improve its business environment. The main challenges for Rousseff are to address growing concerns about policy effectiveness and corruption, and to reactivate the underperforming economy.

Argentina and Venezuela: crisis deepening

Years of economic mismanagement and business unfriendly policies in commodity-dependent Argentina and Venezuela have raised credit risks to extremely high levels. Authorities in both countries are running out of options as the economic crisis deepens, with the economy contracting, inflation exploding, and official reserves dwindling. Meanwhile, the external environment is becoming increasingly challenging. Falling prices for their main commodities – soybeans for Argentina and oil for Venezuela – are adding to their woes. Social unrest is mounting, raising already high risks to political stability.

Argentina’s efforts to improve its relations with international investors earlier this year – it cleared arrears with the Paris Club – were derailed by its failure to reach a deal with the hold-out creditors and its default on restructured bonds at the end of July. While did make the July payment to its trustee bank in New York, that payment did not reach bondholders due to legal injunctions. At the end of September, the Argentine government missed another coupon payment on its restructured bonds. This highlights the difficulties Argentina faces in servicing its debt after the ruling of the US Supreme Court in June that effectively prohibited Argentina from making

payments to the restructured bond holders without also paying the hold-outs in full. Low reserves continue to weigh negatively on the outlook as they increase the risk of uncontrolled devaluation and protracted default. We do not expect any major changes in the outlook until after the presidential elections in October 2015, when a new administration will come to power.

Also in Venezuela, there is increased concern over uncontrolled devaluation and credit default following the recent sharp fall in oil prices. Its deep economic imbalances are worsened by the government’s policies of rising spending, printing more money and tightening foreign exchange controls. This will only reinforce the vicious circle of stagflation and shortages of goods, and will add to mounting devaluation pressures and growing debt arrears with the private sector. Market sentiment deteriorated sharply after President Maduro reshuffled his economic team and further delayed market-friendly policy adjustments. No significant adjustments are to be expected until after the legislative elections in December 2015.

The deepening crisis in Venezuela and the associated fall in oil production creates a challenging environment for the PetroCaribe members, particularly for those with weak shock absorbing capacity. Most vulnerable to a disruption of the cheap oil supply from Venezuela would be the high-risk countries of Cuba, Jamaica, and Nicaragua. But Bahamas and Honduras would also be affected in view of their tight liquidity position.

Mexico: prospects brighten

The economic outlook for Mexico is improving following six quarters of sluggish economic growth that reflected depressed domestic demand (averaging 1.3% in 2013 and 1.7% in the first half of 2014). Mexico’s economic growth is expected to pick up thanks to its links to higher US growth, accommodative monetary and fiscal policies, and the approval of all major structural reforms (energy, finance, fiscal, and telecommunications).

Mexico’s credit risk profile is set to improve in the longer term following the approval of these structural reforms, which address most of the country’s structural weaknesses: low earnings capacity, limited fiscal flexibility and high dependency on volatile

Economic Outlook 32

portfolio capital inflows. Last August, Congress passed the secondary legislation for the landmark energy reform. This allows the implementation of the constitutional changes that were passed in December 2013, putting an end to a 75 year monopoly of state oil company Pemex and enabling foreigners to invest in the energy sector. The reforms, if effectively executed, will boost productivity, increase investment and competitiveness, and raise potential economic growth to 4-5% from its current low 3-3.5%.

That said, the degree to which the reforms will positively impact the risk profile depends on implementation and on how market participants respond to the rules of a more competitive environment, and will be a lengthy process – especially for the controversial energy reforms. In the run-up to mid-term elections in 2015, popular protests led by the left are expected to increase. And although it is not expected that these protests will reverse the reforms, they could derail their implementation. Furthermore, increasing corruption and drug-related violence will continue to weigh negatively on Mexico’s earnings capacity.

But risks will be counterbalanced by Mexico’s prudent macroeconomic policies, a flexible exchange rate regime, solid internal and external balances, and good access to international capital markets, underpinned by access to an IMF Flexible Credit Line (which has so far not been used and expires end-2014). These factors support Mexico’s ability to withstand shocks, as witnessed by an, on-balance, stable exchange rate this year.

Colombia, Chile and Peru

Within the other Pacific Alliance member countries and Chile, Colombia and Peru, Colombia overtook Peru’s position as the region’s strongest performer. Colombia’s credit worthiness has improved as the country is banking on a strong policy framework, structural reforms, including labour and tax reforms and improvements in its security situation. The June 2014 election was one of the most peaceful in decades. The re-election of President Juan Manuel Santos has raised hopes of a conclusion to the peace negotiations with the FARC guerrillas. Recent slower activity in mining and the oil sector was counterbalanced by strong construction activity. To prevent the economy from overheating, the central bank recently raised interest rates.

The economies of both Chile and Peru are struggling with short-term challenges stemming from the end of the global commodity boom and from heightened political pressures, which are deterring domestic demand. In Chile, these stem from public discontent with tax reforms introduced by President Michelle Bachelet, who took office last March. In Peru, public discontent is growing because of the many cabinet changes. But, overall, both countries have solid fundamentals and a strong shock absorbing capacity that will help them to cope with the current economic slowdown. Moreover, interest rate cuts in both Chile and Peru will support future economic growth.

Central and Eastern Europe: rising risks

The growth outlook for Central and Eastern Europe has weakened because of the intensification of the Russia-Ukraine conflict, new rounds of economic sanctions on Russia and slower growth in the Eurozone. The region is also highly vulnerable to changes in risk perception, given high private sector debt financed abroad and/or in foreign currency in many countries. This is raising credit risk although, within this region, divergences in developments and risks are significant and growing.

Table 3.5 Real GDP growth - Eastern Europe 2012 2013 2014f 2015f

Czech Republic

-0.7 -0.7 2.5 2.5

Hungary -1.7 1.1 3.1 2.2

Poland 2.0 1.6 3.1 3.3

Romania 0.5 3.5 2.2 3.1

Russia 4.5 1.3 0.2 0.4

Turkey 2.1 4.1 2.9 3.4

Ukraine 0.3 0.0 -7.7 -1.1

Source: Consensus Economics (October 2014)

Growth forecasts for the region as a whole have been revised downwards to 1.4% in 2014 and 2% in 2015. Stagnation in Russia, the region’s largest country, and the collapse of the Ukrainian economy are the main reasons. The rest of the region has so far been little affected by the Russia-Ukraine conflict other than through direct trade losses; however, some face other problems. This is particularly true for Turkey and Romania, which contracted on a quarterly basis in the second quarter – in Romania’s case, pushing the economy into technical recession. In both countries domestic demand is weak in contrast to Czech

Economic Outlook 33

Republic, Hungary and Poland. Interest rate cuts in these countries are supporting economic growth.

Table 3.6 Inflation - Eastern Europe 2012 2013 2014f 2015f

Czech Republic

3.5 1.4 0.5 1.8

Hungary 5.7 1.7 0.1 2.3

Poland 3.7 0.9 0.2 1.3

Romania 3.4 4.0 1.4 2.6

Russia 5.1 6.5 8.0 6.2

Turkey 9.0 7.5 8.9 7.1

Ukraine 0.6 -0.3 11.0 11.1

Source: Consensus Economics (October 2014)

Meanwhile, divergence in inflation is also growing across the region (see Table 3.6). Whereas inflation forecasts have been significantly revised downward for Czech Republic, Hungary, Poland and Romania, those for Russia, Turkey and Ukraine have been revised upwards. This reflects significant currency depreciation (see Chart 3.6) and highlights these countries’ vulnerability to shocks.

High inflation and currency depreciation will continue to depress domestic demand in Russia, Turkey and Ukraine and will restrain their economic growth. For Russia, the sharp fall in oil prices also poses challenges. Growth in the other countries in the region will generally be stable. The exception is Hungary, where temporary factors supporting growth will fade, while there is little room for the government to employ fiscal stimulus measures because of its high debts. In addition, the already very high private sector debt (see Chart 3.7) limits the effectiveness of loose monetary policies.

Russia: strong fundamentals as recession threats mount

The popular standing of president Putin has increased significantly since the confrontation with the US and EU over Ukraine: his approval rating is now at an all-time high of 85% following an all-time low before the crisis. Nationalistic sentiment is high, helped by aggressive propaganda by state-controlled media. This strategy will be crucial in maintaining Putin’s approval ratings once sanctions start to affect income over the longer period. Opposition has been marginalised, with Putin talking about a “fifth column” and a “disparate bunch of national traitors” sowing discord inside Russia, in a speech related to the Crimea annexation. Hardliners were effectively given licence to attack liberals and a further crack down was made on independent media and non-governmental organisations. Parliamentary elections will not provide solace. They are due in December 2016 and, as things stand, United Russia is expected to retain power. Wavering support for the party would lead to a more ‘managed election’ process to consolidate power of the elite and vested interest.

The volley of sanctions exchanged between Russia and the EU-US over Ukraine has pushed relations to a post-cold war low. Still, neither a full blown Russian invasion in Ukraine, nor EU-US military involvement above delivery of military services and equipment is on the cards. Trade sanctions may be increased as Russia continues to support pro-Russian separatism in Ukraine, and Russia is again likely to respond with countersanctions.

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International sanctions, and the threat of more, are no ‘paper tiger.’ They have pushed up the cost of financing, caused capital outflows and put pressure on the rouble, resulting in higher inflation and pressure on consumption (see Chart 3.8). The Moscow stock exchange continues to lose value, dropping 20% in the first nine months of 2014 (see Chart 3.9). Business confidence and investment have both fallen. The impact of the import ban on EU food has aggravated inflationary tendencies as the Russian economy is already at full capacity. The central bank was forced to raise the official rate by 2.5% to defend the rouble and fend off further inflationary tendencies.

Whilst the Ukraine crisis has had an impact, it merely highlights the already weakening economic situation that we have reported earlier. In 2013 it was clear that Russia had embarked on a lower growth path: achieving 1.3% growth in 2013. The Russian economy grew 1.1% in the first half of 2014, with net trade and consumption both positive, but with shrinking investment. This is primarily due to the oil price which was fairly high in the first part of 2014. However, investment is badly needed to modernise and diversify the Russian economy, which fell in the first half of

2014 as foreign borrowing plummeted and capital flight mounted.

Nevertheless, while growth is fairly dismal, macro fundamentals are strong. Unemployment is very low at 5-6%. The government deficit ended at only 1.3% of GDP for 2013. The current account surplus more than halved in 2013: from USD 71 billion (3.6% of GDP) in 2012 to USD 32.8 billion (1.6%), with higher oil and gas earnings and lower imports the determining factors. Capital outflows spiked in the first half of 2014 to USD 87 billion, with the first quarter level at USD 62 billion – larger than the current account surplus. As a result,reserves declined by USD 42 billion from USD 467 billion (-8.3%). The external position remains strong – external debt was 34% of GDP by the end of 2013 – and public debt is extremely low at 8% of GDP.

Assuming Russia’s continuing support for the Ukrainian separatists, growth forecasts for 2014 and 2015 are 0.2% and 0.7% and have been revised downward several times since the beginning of the crisis. Inflation is expected to reach 8% in 2014 and 7.9% in 2015. The government deficit is expected to improve to 0.5% in 2014 but to worsen to 2.1% in 2015 as fiscal pressure increases. The current account deficit is also expected to improve this year, to 3% of GDP. Capital outflows are expected to reach USD 100 billion (up from USD 65 billion in 2013).

There are risks to this scenario, if Russia steps up its involvement in Ukraine and/or further EU-US sanctions are imposed. In that event, energy trade sanctions may be on the cards, with an impact not only on Russia but also on the global economy, as discussed in Chapter 1. In addition, and perhaps more pressingly, the current oil price level of below USD 90 per barrel will have an impact as yet undetermined, as the Russian government is using a USD 100 per barrel assumption.

Ukraine: in political and economic crisis

Ukraine has been in perpetual crisis since November 2013, when the then president Yanukovich chose a USD 15 billion deal over an association agreement with the European Union. Months of riots ensued. On 2 March 2014, Vladimir Putin put boots on the ground in the Crimea province – home to many ethnic Russians. The peninsula was annexed and Crimea may be forever lost to Ukraine.

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The riots and the increasing tension between Russia and Ukraine left the country’s economy in collapse. Government finances took a hit: government debt increased 17.4 percentage points and the budget deficit is expected to be 5.8% this year. The economy is forecast to contract 6.5% this year and investment has plummeted by 16%. Imports and exports are both down and consumer and producer confidence has slipped. Large capital outflows, combined with a declining oil price, have led to a strong depreciation of the Hryvnia which was pegged to the dollar until May this year. This has in turn led to an expected inflation rate of 11.4%.

The Ukrainian government is determined, however, to revive the economy, with the help of the IMF. In March, Ukraine reached agreement on a USD 17 billion support package, addressing the exchange rate, banking stability, country governance, energy policy and fiscal policy. In addition, September saw the signing of the association agreement with the European Union. Unfortunately, the agreement will not come into full effect before late 2015. Even worse, the Donetsk and Luhansk regions have acquired autonomy and self-governance for at least three years. Inevitably, this gives Russia enormous opportunity to strengthen its ties. While Ukraine has lost a lot in 2014, the government can finally afford to shift focus to economic recovery now that ceasefire agreements with Russia seem to hold. This will be a challenge, given the deplorable state of Ukraine’s economy.

The coming months are vital for Ukraine. President Poroshenko won the October parliamentary elections, but less convincingly than expected. And there are more risks. Capital outflow has caused the Hryvnya to depreciate by almost 40%, making it very vulnerable to shocks, which together with energy tariffs has also caused high inflation. Modest economic growth of 1% is expected for 2015. However, inflation is expected to rise to 14%. The fiscal deficit is expected to be a little smaller in 2015, at 3.9% of GDP, with the current account balance remaining negative at -2.5% of GDP.

Turkey: in the line of fire

Developments in recent months once again underline the vulnerability of the Turkish economy to shifts in market sentiment. The lira was among the currencies worst hit by the emerging market sell-off between August and September, losing almost 8% in value since August (see Chart 3.10). This not only reflected

concerns about the Turkish growth outlook, large gross external financing needs, heavy reliance on volatile portfolio capital inflows and relatively weak international liquidity, but also rising policy and geopolitical risks.

Uncertainty about Turkish economic policy is growing after the central bank cut interest rates in the run up to August’s presidential elections, despite above-target inflation (over 9% versus target of 5%) and currency depreciation (see Table 3.7). This raised doubts about the independence of the central bank.

Meanwhile, geopolitical risks significantly increased from an already high level following the rapid gains of the jihadi group Islamic State (IS) in neighbouring Iraq and Syria. The ambivalence of Turkey in the US-led coalition against IS has raised tensions with the US and the EU. This ambivalence has much to do with the Turkish internal political situation and particularly the hostility between the ruling AKP and Kurdistan Workers’ party, or PKK. For Recep Tayyip Erdogan, who became the first directly elected president in August after having been prime minister since 2003, “the PKK is the same as IS.” The fight against IS adds to geopolitical tensions arising from the escalating conflict in Iraq, Turkey’s second largest trade partner,

Table 3.7 Key indicators - Turkey 2012 2013 2014f 2015f

Real GDP (% change) 2.1 4.1 2.9 3.4

Inflation (% change) 8.9 7.5 8.9 7.1

Private sector credit (% change)

18.8 34.2 21.0 19.0

Current account (% GDP) -6.0 -7.9 -5.8 -5.7

Portfolio investments stock (% reserves)

178.6 152.0 156.2 153.4

Gross external debt (% GDP) 48.5 52.8 55.3 55.6

Net external debt (% xgs) 93.8 106.8 105.3 113.1

Source: Consensus Economics, own estimates (October 2014)

Economic Outlook 36

and a stand-off between Russia and the EU/US over the Ukraine crisis.

Next to (geo)political challenges, Turkey faces significant economic challenges. Economic growth slowed considerably in the second quarter, to an annualised 2.1%, as the earlier higher lending rates and a depreciated currency constrained private consumption and investment. Future growth will be supported by an accommodative fiscal policy, the recent interest rate cuts and a pick-up in foreign demand following the weakening of the lira. Inflation will moderate, but will stay above target, reflecting the exchange-rate pass-through (the percentage change, in local currency, of import prices resulting from a one percent change in the exchange rate between the exporting and importing countries) and premature monetary easing. The current account deficit, although decreasing, will stay high, at over 5% of GDP.

Turkish future earnings capacity is constrained by a number of factors: macroeconomic imbalances related to high credit growth, high inflation and a large external deficit and structural issues related to its low savings rate and weaknesses in competitiveness and its business environment. All of these limit foreign direct investment. Without macroeconomic policies and structural reforms to address these issues, medium term annual economic growth is set to level off at about 3-3.5%. Before the next general elections – in June 2015 – no major policy changes in thisdirection can be expected. In the meantime, Turkey’s sizeable external debt and heavy reliance on volatile portfolio capital inflows will keep it highly vulnerable to changes in market sentiment.

MENA: geopolitical risks on the rise

The outlook for the Middle East and North Africa is affected by increased geopolitical risks. Since the Arab Spring 2011, rivalries and sectarian tensions have arisen, resulting in a sharpening of divisions in the region. Collapsed authoritarian regimes have led to chaos in Libya and civil war in Syria, while in Egypt an authoritarian regime has been re-installed, dimming hopes of more democratic freedom. Only in Tunisia were internal tensions managed peacefully. Indeed Tunisia has the best chance of a more open and democratic society. The region’s biggest problem at present is the rise of IS in Syria and Iraq.

Table 3.8 Real GDP growth - MENA 2012 2013 2014f 2015f

Egypt 2.2 2.1 1.5 3.6

Morocco 2.7 4.4 2.5 4.7

Qatar 6.2 6.5 6.0 6.8

Saudi Arabia 5.8 4.0 4.4 4.4

Tunisia 3.9 2.3 2.5 4.4

UAE 4.7 5.2 4.4 4.5

Source: IHS (October 2014)

The unrest in these two countries is spilling over, specifically to Lebanon and Jordan. In Lebanon it has deepened the sectarian tensions and the inflow of refugees, 27.2% of the population, is having a major economic impact. The same goes for Jordan, where the inflow of refugees represents 9.5% of the population. Overall, economic growth in the MENA has been subdued by the tensions in the region.

In spite of the turbulence in the region, the oil price has declined. Fortunately, the vast majority of Iraq’s oil reserves (117 billion barrels) lie in the south of the country, firmly under the control of the Iraqi government. Oil-exporting countries in the region have increased their government spending in recent years to prevent social unrest This increase in public investment and wages has supported economic growth in these countries. As a result, the fiscal break-even oil price has risen sharply in some countries (see Chart 3.11). In the short term, however, they have enough financial resources to cushion themselves against a decline in oil revenues due to a low oil price. If the oil price stays low for a prolonged time, fiscal spending will have to be restrained.

Economic Outlook 37

Sub-Saharan Africa: continued high growth

Economic growth in Sub-Saharan Africa remains high. As well as increasing activity in the services sector, much-needed investments in the infrastructure is one of the main engines of economic growth in this region. Most countries have been helped by high commodity prices in previous years, but this also means that they are vulnerable to a decline in commodity prices. For those for which China is a main export destination, a Chinese economic slowdown will be a problem.

Table 3.9 Real GDP growth – Sub-Saharan Africa 2012 2013 2014f 2015f

Ghana 8.8 7.1 4.5 5.1

Kenya 4.6 4.7 5.0 5.7

Nigeria 6.7 7.3 6.8 6.7

South Africa 2.5 1.9 1.4 3.3

Source: IHS (October 2014)

There are also some domestic vulnerabilities. In some countries fiscal debt has risen and, despite high oil prices, fiscal deficits have been recorded in some oil-exporting countries. Profiting from low risk aversion, Sub-Saharan African countries have raised a record sum on international capital markets this year – almost USD 7 billion. For some, like Ivory Coast, Kenya and Rwanda, this was their first venture into those capital markets. However, despite the positive sentiment and progress in the region, caution is needed. Many countries still have weak institutions, widespread poverty and some have a history of political unrest.

The positive outlook for Africa is overshadowed by the Ebola outbreak in West Africa. The worst affected countries are Guinea, Sierra Leone and Liberia. While the human tragedy is paramount, the economic impact is also large. Economic growth is expected to decelerate in these countries, with marked fiscal impact. If the Ebola outbreak is not contained soon, it will spread to neighbouring countries and already some, such as Gambia and Senegal, are feeling the impact through a drop in tourism.

Nigeria: high, but vulnerable, growth

The largest economy in Africa is showing high economic growth figures thanks to its dynamic services sector. However, for its export and government revenues it is still very dependent on oil

and is therefore highly vulnerable to a sustained period with low oil prices. The oil sector has already been hit by declining oil production due to instability in the oil-producing regions and oil theft. Deteriorating security, mainly in the northeast where Boko Haram is active, needs to be kept under observation, while the presidential elections in February 2015 may give rise to increased political tensions and unrest.

South Africa: still fragile

The South African economy is in a difficult situation. Like India and Indonesia, it was named one of the ‘fragile five’ economies in 2013. But, unlike them, it still deserves this label. South Africa is vulnerable to a further roll back of the US expansive monetary policy. There is considerable foreign portfolio capital in the country and it has a large external financing requirement. Long-term economic growth has been disappointing and, because of its dependence on exporting commodities, is vulnerable to economic slowdown in China and the associated drop in commodity prices. To add to South Africa’s problems, the domestic economy is not doing well. During the first two quarters of 2014 the mining sector was plagued by mass strikes which later spread to the automotive industry. This has all resulted in dismal economic growth of just 1.4% this year (0.7% on a per capita basis). For next year, a slightly higher growth rate of 3.3% is forecast, barring more labour unrest. South Africa’s foreign debt was only 14% of GDP in 2007 but has risen rapidly since then. It currently stands at 41% of GDP, largely due to the government’s prolonged fiscal stimulus programme. Fortunately, the government has announced that it will limit spending growth and raise taxes next year. However, this will naturally affect growth. Households in South Africa have tended to be highly indebted, but this has improved somewhat: after peaking at 82% of disposable income in 2008 it now stands at 74%.

South Africa remains a country to monitor closely. Further exchange rate volatility is not unlikely since the country is vulnerable to external shocks. The government is right to address the ever increasing (but still manageable) public debt but economic growth may not meet expectations, especially if labour unrest resurfaces.

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Economic Outlook 38

4. Implications for the insolvencyenvironment A gradually improving insolvency environment

The insolvency environment has slowly improved this year, even though numbers remain high. This improvement is the result of better economic conditions across advanced markets and more favourable credit conditions, and is likely to continue into 2015.

Mixed results in 2013

2013 saw a mixed picture of insolvencies across advanced economies. Nine countries experienced an improvement, while in twelve the number increased (see Chart 4.1). That increase took place mainly in Eurozone member states, as the region grappled with economic contraction. There was however some improvement towards the end of 2013.

Insolvencies expected to decrease in 2014

The insolvency environment in advanced markets is improving. Although there are mixed predictions for the Eurozone, most of the biggest advanced economies forecast falling insolvencies. Indeed, economic growth has truly returned in 2014, with the exception of Italy, where a small contraction is still expected. A protracted fall in insolvencies is also expected for 2015, except again for Italy. However, this expected improvement is from high insolvency levels. The updated insolvency forecasts for 2014 among a selection of countries are shown in Table 4.1.

The current projections suggest fewer insolvencies for 2014 than in 2013 and the preliminary projections for 2015 show very stable levels. As for 2014, we expect stable or falling insolvencies in all countries except France and Italy. Both these countries are struggling with lower investor and consumer confidence and a lack of implemented structural reforms. On the other hand, Denmark, Japan, the United States and Spain are expected to see the largest reduction in insolvencies. In the case of Spain, this is likely to have a bottoming-out effect combined with a return of some confidence.

Table 4.1 Insolvency growth (annual percentage change) 2012 2013 2014f 2015f

Australia 1 4 -13 0 Austria 3 -10 -2 -3 Belgium 4 11 -2 0 Canada -12 -2 0 0 Denmark 0 -9 -17 -5 Finland 0 6 0 0 France 3 2 4 0 Germany -6 -7 -4 -5 Ireland 3 -19 -6 0 Italy 14 16 10 10 Japan -5 -11 -10 -10 Luxembourg 8 2 -10 -10 Netherlands 21 10 - 0 New Zealand -8 -13 -2 5 Norway -12 20 0 3 Portugal 42 8 -5 -5 Spain 38 10 -15 0 Sweden 7 4 -6 0 Switzerland 3 -5 -4 -5 United Kingdom -4 -7 -3 0 United States -16 -17 -11 0

Source: National bureaus, Atradius Economic Research

Insolvency levels remain high

The insolvency growth forecasts in Table 4.1 shows that 2014 has seen fewer insolvencies in the 22 markets covered than in 2013, although 2015 shows little further improvement. Nonetheless, levels remain very high, reaching record levels in recent years that

Economic Outlook 39

this year’s improvement will not counter. For this reason, the forecast improvement is best viewed in a longer time perspective. Chart 4.2 plots aggregate insolvency levels indexed for 2007. This shows that the number of business failures is still high. The only exception is the Asia-Pacific region, where the level of insolvencies has fallen below that of 2007.

We expect overall insolvencies for all regions to decrease slightly in 2014, but the new forecasts for 2015 show a slowdown in this improvement or even a rise in the Eurozone periphery where the insolvency index is expected to rise to 370 (see Chart 4.2).

The other advanced markets shown are all doing better than the Eurozone. The UK and the US have had elevated levels but are now only 16% and 5% respectively above 2007 levels. The US saw a steep increase until 2009 but since then numbers have fallen. The UK also saw a rise until 2009, albeit not as steeply as in the US, after which the number have fallen apart from a slight surge in 2011.

The Nordic countries together register 50% higher insolvencies than in 2007. This level has decreased gradually since 2011, but only slowly.

In contrast, insolvencies in the Eurozone have continued to rise steadily since 2007: now numbering twice as many as then, despite an expected improvement this year. The poor insolvency dynamics in the Eurozone aggregate have been driven mainly by the Eurozone periphery, where insolvencies are still 3.6 times higher than in 2007. But of the many insolvencies in France, Belgium, Denmark also raised the overall Eurozone level and the situation is set to worsen this year in Italy, France and Greece.

Our expectations for the insolvency environment in advanced markets is a direct consequence of the state of the world economy as described in the preceding

chapters. Growth in advanced countries in general has been disappointing, and even more so in the Eurozone – and the absence of growth will be reflected inupward pressure on insolvency rates.

Insolvencies: level and trend

A more schematic overview of insolvencies in advanced markets is shown in Figure 4.1. All countries expected to see heightened insolvencies this year are found in the top segment of the grid. As previously mentioned, France, Greece and Italy are the only three countries where insolvencies are expected to increase further in 2014, albeit slightly. As the lower segment of the grid shows, the bulk of countries included in the forecast are expected to see an improvement (i.e. a drop in insolvency growth of around of more than 2%).

Deteriorat ing France, Greece,

Italy

Stable Austria, Canada,

New ZealandFinland, Norway Belgium

Improving Germany, Japan,

Sweden, Switzerland

Australia, The Netherlands,

United Kingdom, United States

Denmark, Ireland, Luxembourg,

Portugal, Spain

Low Average High

Figure 4.1 Insolvency matrix for 2014

The horizontal axis in Figure 4.1 depicts the absolute level of defaults in a cross-country comparative context (i.e. whether the frequency of defaults in a country is assessed as low, average or high). As such, all countries that are perceived as markets characterised with comparatively high default frequencies are to be found in the right-hand segment. France Greece and Italy will therefore experience deterioration from already high default levels in cross-country comparison.

This classification provides a high-level overview of trends in insolvency risk across some of our most important markets for short-term credit insurance. This summary suggests that we may expect frequency risk to decrease in five markets currently characterised by high default rates: Denmark, Ireland, Luxembourg, Portugal and Spain. Similarly, we expect

Economic Outlook 40

frequency risk to level off in four ‘average’ default-type markets: Australia, the Netherlands, the United Kingdom and the United States. Finally, Germany, Japan, Sweden and Switzerland still show improvement even though their insolvency levels are already low.

External credit risk indicators also improve

Domestic credit to private sector refers to financial resources provided to the private sector by financial corporations such as monetary authorities and deposit money banks. Loosened borrowing conditions allow businesses to borrow more – or more cheaply – putting downward pressure on insolvency rates. Because domestic credit is the main channel through which changes in the money supply are regulated, central banks regulate the level of lending by changing interest rates on borrowing, but also by changing the interest rates on deposits (which, for example, are negative for deposits at the ECB). As such, the level of credit growth is the result of monetary policy, provided that the transmission mechanism from central bank interest rates to private borrowing works.

As we can see, the levels of domestic credit take different paths. Nonetheless, the four countries depicted in Chart 4.3 all have higher levels of credit than in 2008 (in nominal terms). Whereas the US and Japan show clearly upward trends, the trend is downward for the UK, while it is almost flat for Germany. Clearly, the quantitative easing policy in the US and Japan is working, as credit has increased markedly throughout 2013 and until at least the third quarter of this year. However, credit is declining in the UK. Even though consumer confidence is up and consumption credit is growing by nearly 5% per year, lending to businesses is still negative in the UK. Firms are still deleveraging while consumers have started to

borrow again. In Germany, credit growth has been rising since the fourth quarter of 2013 after a significant drop in the third quarter. The first half of this year saw modest increases in credit, although the effect of the negative growth in Germany in the second (and possibly third) quarter of 2014 are not as yet visible.

Better credit conditions for large firms

Default expectations among large firms have calmed through 2014. Stabilisation is very evident as the expected default frequencies (EDFs) have converged and lost much of their volatility. Indeed, default expectations across large firms have not been as calm as they have been in the first eight months of 2014 since 2007 (see Chart 4.4).16

Parallel to the convergence of the EDFs, Credit Default Swap (CDS) spreads, an external benchmark for the degree of perceived credit risk, have continued to narrow over the past year (see Chart 4.5). Earlier this year and for the first time since the middle of 2010, the default premium for European investment grade credit has converged with US default premiums, meaning that default risks are now estimated to be equal.

16 The Expected Default Frequency (EDF) tracks default risk among stock listed companies. Combining balance sheet and stock market information for a particular firm yields a 1-year default forecast. The median EDF, as referred to in the charts below, represents the 50th percentile in the total country aggregate of firms.

Economic Outlook 41

The current CDS levels are higher than they were before the crisis. This means that the perceived default risk is still higher, evidenced by still high actual default rates.

As a further sign of the continuing difficult insolvency environment, global default rates among companies rated by Standard & Poor’s fell only slightly in 2013, to 1.04% (see Chart 4.6). For reference, the rate in 2007 was 0.37%. Further improvement in these 2014 figures is expected.

Emerging market business failures

Emerging economies continue to struggle. Vulnerabilities to capital outflow, lower commodity prices and slow growth in advanced markets all suppress economic growth in emerging markets. The current low growth rates imply that emerging markets are operating below what may be considered trend growth (see Chart 4.7). In advanced markets growth is picking up above trend, albeit from a low level.

Growth expectations have shifted in the last half year. and have been downgraded sharply across a number of important markets. Since May the economic growth forecast for 2014 has fallen by a further 1.5 percentage points, and is now 2.3 percentage points lower than a year ago (see Chart 4.8). For Chile the corresponding figure is -1.7 percentage points. The prospect for Turkey has increased by 0.2, but this is still 1.5 percentage points lower than a year ago. The expectation for Russia has been decreased by another 1.3 percentage points, with expected growth in 2014 down by a considerable 2.6%.

The large markets in emerging Asia – China and India – are maintaining their growth rates fairly well, asdescribed in Chapter 3. That these markets seem resillient can have a cushioning effect for Asia’s growth rates.

Loosening credit conditions

Insolvency dynamics are not determined only by GDP growth performance – they are also influenced by the prevailing credit conditions and firms’ access to finance.

Economic Outlook 42

The second quarter of 2014 brought the first easing since 2007 of credit standards for businesses in the Eurozone, according to the ECB’s bank lending survey, although credit standards are still tight. Banks report that improvements in funding costs and balance sheet repairs have contributed to this easing. For the rest of the year, the ECB expects further easing but, while its loose monetary policy makes a further easing likely, this also has the potential to suppress insolvency growth.

In the second quarter of 2014 credit conditions also eased in emerging markets, according to the Institute of International Finance’s lending survey of emerging market banks. In particular, the emerging markets in Europe saw a significant easing. Demand recovered and the geopolitical risks were contained. However, Asia saw a sharp increase following mixed projections of China’s economic performance. Latin America also saw a tightening in the second quarter of 2014 – the result of a weak corporate sector outlook.

Risks to the insolvency projections

The insolvency environment in advanced markets is improving marginally. Held back by lagging economic growth, the Eurozone has seen a slower decrease than the US and the UK. In the Eurozone most countries

already face elevated insolvency levels and the slow recovery is hindering improvement.

Our projections are based on the assumption that economic growth will push through in 2015. In addition, easing credit conditions and loose monetary policy in the US, the Eurozone and Japan all support a return to more moderate insolvency growth levels. However, in view of the somewhat worsening outlook than earlier in the year, the drop in insolvencies is unlikely to accelerate across advanced markets. There are a number of factors at work to support this view. Political uncertainties in Italy and France, an array of emerging markets issues, and the geopolitical issues in the Ukraine and the Middle East put pressure on consumer and investor confidence.

For emerging markets, there is reason to expect increasing business failures. Growth expectations are lower and therefore there is a greater likelihood of an increasing number of business failures. In addition, increased geopolitical risk also impacts emerging economies.

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Economic Outlook 43

Appendix I: Forecast tables

Table A1 Macroeconomic headline figures - Developed markets

GDP growth (%)

Inflation (%)

Budget balance (% of GDP)

Current account (% of GDP)

Export growth (%)

2013 2014 2015 2013 2014 2015 2013 2014 2015 2013 2014 2015 2013 2014 2015

Australia 2.3 3.0 2.7 2.4 2.8 2.6 -1.3 -2.0 -0.3 -3.3 -3.3 -5.0 6.6 6.2 5.1

Austria 0.3 0.9 1.5 2.0 1.5 1.7 -1.5 -1.5 -1.1 2.7 3.6 3.4 2.4 2.3 3.0

Belgium 0.2 1.0 1.4 1.1 0.4 1.0 -2.7 -1.5 -1.2 -1.6 -0.7 -0.7 1.9 2.9 4.0

Canada 2.0 2.3 2.6 0.9 1.9 1.7 -3.0 -1.3 -0.7 -3.2 -2.4 -2.0 2.2 5.4 6.6

Denmark -0.1 0.7 1.6 0.8 0.7 1.5 -0.9 -1.0 -0.6 7.1 7.5 7.9 1.2 1.0 3.2

Finland -1.2 -0.3 1.2 1.3 0.6 1.2 -2.5 -2.8 -2.1 -1.0 -0.7 -1.1 -1.7 0.3 3.4

France 0.4 0.4 0.8 1.5 0.7 1.3 -4.2 -3.4 -2.9 -1.3 -1.4 -1.1 2.4 2.5 2.9

Germany 0.2 1.4 1.6 1.5 1.1 1.4 0.3 0.4 0.4 6.9 6.7 6.6 1.7 3.3 2.7

Greece -3.9 0.1 1.7 0.9 0.6 1.3 -12.7 -2.4 -2.4 0.8 0.8 0.9 1.8 3.3 3.1

Ireland 0.2 4.7 2.9 1.5 1.0 1.6 -7.0 -2.7 -1.9 4.4 6.0 5.6 1.1 10.0 3.8

Italy -1.8 -0.4 0.4 -0.9 -0.9 0.2 -2.8 -2.5 -2.1 1.0 1.7 1.7 0.0 1.6 1.3

Japan 1.5 1.0 1.1 0.5 0.3 0.9 -9.2 -5.5 -5.0 0.7 0.4 0.3 1.5 7.1 5.2

Luxembourg 2.1 2.5 1.9 1.2 0.2 0.7 0.1 0.0 -0.1 5.5 5.0 4.7 2.6 3.5 3.8

Netherlands -0.7 0.7 1.4 0.4 2.9 2.3 -2.9 -2.5 -2.3 9.7 10.0 10.3 2.2 4.0 5.0

New Zealand 2.5 3.1 2.8 1.7 0.8 1.9 -2.8 -0.5 0.2 -3.5 -3.5 -5.8 1.1 2.9 3.2

Norway 0.7 1.4 1.0 2.5 1.1 1.5 11.1 9.3 8.5 11.1 8.8 8.3 -3.3 -0.4 1.5

Portugal -1.4 0.8 1.3 1.1 1.7 2.5 -5.0 -3.0 -2.4 0.5 0.5 1.3 6.4 2.3 3.3

Spain -1.2 1.2 1.7 2.1 2.0 2.2 -7.1 -4.5 -4.0 0.8 0.7 1.0 4.9 3.0 4.2

Sweden 1.5 1.9 1.7 0.3 -0.2 0.7 -1.4 -0.6 0.2 6.2 6.0 5.8 -0.5 1.9 2.0

Switzerland 1.9 1.5 1.7 1.4 -0.1 0.4 0.5 0.4 0.5 13.5 12.8 12.2 15.4 -10.1 2.3

United Kingdom 1.7 3.1 2.8 0.0 -0.2 0.9 -5.3 -3.9 -2.8 -4.2 -4.6 -3.9 0.5 -0.4 5.2

United States 2.2 2.3 2.7 -0.2 0.0 0.3 -4.7 -3.7 -3.4 -2.4 -2.2 -2.0 3.0 3.1 3.6

Eurozone -0.4 0.8 1.2 2.6 1.5 1.7 -2.9 -2.0 -1.7 2.7 2.9 3.0 2.0 3.2 3.2

European Union 0.1 1.3 1.6 1.5 1.8 1.4 -3.1 -2.3 -1.8 1.7 1.6 1.7 2.0 3.0 3.6

Source: IHS

Note: IHS forecasts for 2014 and 2015 (Data edge 2014 Q2). Date of forecast 15 October 2014. These forecast values are provided as an indication of direction, representative of one vendor’s view only. The values in the table may therefore differ from the Consensus values quoted throughout the report.

Economic Outlook 44

Table A2 Macroeconomic indicators - Developed markets

Private cons. (%)

Fixed inv. (%)

Gov. cons. (%)

Retail sales (%)

Industrial prod. (%)

2013 2014 2015 2013 2014 2015 2013 2014 2015 2013 2014 2015 2013 2014 2015

Australia 2.0 2.4 3.1 -1.4 -0.2 1.6 1.1 1.1 -0.5 0.9 2.2 2.9 3.6 4.4 2.3

Austria 0.1 0.4 1.1 -0.8 0.3 3.0 2.1 1.7 1.1 -0.6 -0.1 0.3 0.4 0.9 2.5

Belgium 0.8 1.2 1.4 -1.4 3.8 2.3 0.6 0.1 0.4 -0.1 0.2 0.8 0.8 2.7 2.3

Canada 2.4 2.7 2.6 0.0 -0.5 2.7 0.6 0.6 1.6 2.2 2.9 2.5 1.9 3.7 1.5

Denmark 0.2 0.5 1.4 0.6 1.7 3.3 0.1 1.1 1.7 -2.3 -0.5 -0.2 0.8 -0.1 1.6

Finland -0.7 0.1 0.7 -4.9 -2.8 2.7 1.5 0.1 0.5 -2.4 -1.2 1.2 -3.6 -2.4 3.1

France 0.3 0.1 0.7 -0.8 -2.1 0.1 2.0 1.4 0.3 0.2 0.8 0.9 -0.7 -0.7 0.9

Germany 0.9 1.2 2.1 -0.6 3.0 3.5 0.7 0.9 1.2 0.2 1.1 0.5 0.1 1.0 1.8

Greece -6.0 0.1 0.7 -12.8 -1.8 3.2 -4.1 -0.7 -1.4 -7.7 0.2 1.3 -3.2 -1.3 2.6

Ireland -0.8 1.2 1.7 -1.8 11.0 6.6 1.3 4.4 1.6 0.2 6.1 3.6 -2.2 14.5 1.5

Italy -2.6 0.0 0.2 -4.6 -1.7 -0.2 -0.8 0.4 0.0 -3.2 -1.2 -0.4 -3.1 -0.4 0.9

Japan 2.0 -0.4 1.2 2.7 5.5 0.6 2.0 0.9 -0.2 0.6 -1.2 2.0 -0.6 2.0 3.3

Luxembourg 1.8 1.7 2.4 -4.3 4.6 5.6 4.3 1.0 2.0 12.5 10.7 0.5 -3.3 5.6 2.5

Netherlands -1.6 -0.2 0.4 -3.9 0.9 1.5 -0.2 0.3 1.8 -4.5 -0.8 0.5 0.5 -1.3 1.5

New Zealand 3.3 3.2 2.9 9.6 8.6 7.9 1.0 2.6 0.7 2.4 2.3 3.0 1.3 3.3 2.7

Norway 2.2 2.2 2.4 8.4 -0.2 -0.1 1.9 2.2 2.2 0.3 1.2 0.9 -4.9 2.1 2.2

Portugal -1.4 1.4 0.6 -6.3 1.5 2.7 -2.0 0.1 0.6 -2.5 -0.9 1.0 0.4 2.1 2.3

Spain -2.1 2.1 1.9 -5.1 0.2 1.0 -2.3 1.2 -0.9 -3.7 0.4 0.9 -1.6 1.5 1.3

Sweden 2.2 2.9 2.2 -0.1 4.1 3.7 1.6 1.3 1.6 2.2 3.3 2.6 -4.7 -1.6 1.8

Switzerland 2.2 0.8 1.6 1.8 0.4 3.3 1.4 0.5 0.8 0.9 0.1 1.4 0.8 2.9 3.1

United Kingdom 1.6 2.1 2.7 3.2 8.7 7.3 0.7 0.9 0.2 0.0 1.8 2.7 -0.1 2.3 2.4

United States 2.4 2.3 2.8 2.7 4.0 5.9 -1.3 0.0 0.2 2.7 2.3 2.9 2.9 3.9 2.8

Eurozone -0.6 0.7 1.2 -2.4 0.4 1.7 0.3 0.9 0.6 - - - -0.9 0.6 1.5

European Union -0.1 1.1 1.6 -1.5 1.8 2.8 0.5 0.9 0.6 - - - -0.6 1.0 2.0

Source: IHS

Note: IHS Global Insight forecasts for 2014 and 2015 (Data edge 2014 Q2). Date of forecast, 15 October 2014. These forecast values are provided as an indication of direction, representative of one vendor’s view only. The values in the table may therefore differ from the Consensus values quoted throughout the report.

Economic Outlook 45

Table A3 Macroeconomic headline figures - Emerging markets

GDP growth (%)

Inflation (%)

Current account (% of GDP)

Private cons. (%)

Export growth (%)

2013 2014 2015 2013 2014 2015 2013 2014 2015 2013 2014 2015 2013 2014 2015

Asia Pacific* 5.9 5.8 5.9 3.8 3.3 3.5 1.5 2.5 2.5 5.2 5.2 5.7 6.4 5.1 6.8

ASEAN 5.1 4.6 5.1 4.2 4.2 4.9 2.2 3.1 3.1 4.5 4.3 4.8 3.8 3.8 5.7

China 7.7 7.3 7.1 2.6 2.2 2.5 2.0 3.4 3.7 7.6 7.4 7.5 8.6 6.3 7.2

Hong Kong 2.9 2.3 3.1 4.3 3.8 3.5 1.9 2.6 3.0 4.3 1.7 2.7 6.4 2.3 6.0

Taiwan 2.1 3.5 3.8 0.8 1.3 1.5 11.8 12.7 12.3 2.0 2.4 2.7 3.8 4.9 6.7

India 5.0 5.5 6.2 10.1 8.0 7.6 -2.5 -2.4 -2.5 4.8 5.0 6.0 8.4 4.9 6.6

Singapore 3.9 2.9 4.2 2.4 1.6 3.7 18.3 19.4 18.3 2.6 2.3 3.1 3.6 3.6 6.0

Latin America 3.1 0.5 1.6 8.3 11.1 10.6 -2.7 -2.8 -3.0 3.1 1.6 1.9 1.3 0.7 2.6

Argentina 2.9 -1.4 -0.8 10.6 25.5 41.8 -0.8 -1.5 -2.2 4.4 -1.4 0.4 -4.2 -4.8 -1.7

Brazil 2.5 -0.1 1.0 6.2 6.3 5.4 -3.6 -3.6 -3.6 1.9 1.2 1.1 2.5 2.7 3.8

Mexico 1.1 2.4 4.0 3.8 4.0 3.9 -2.1 -2.0 -1.7 2.5 2.5 3.6 1.2 6.9 4.5

CIS 2.0 0.0 1.5 6.4 7.7 7.5 0.9 2.4 2.1 6.4 1.1 2.6 1.6 2.0 2.3

Czech Republic -0.7 2.4 2.9 1.4 0.4 1.9 -1.4 -1.0 -1.8 0.4 1.4 2.6 0.3 7.2 4.8

Hungary 1.2 3.1 2.7 1.7 0.4 2.9 3.1 3.0 2.5 0.0 1.2 1.5 5.3 5.7 3.5

Poland 1.5 3.1 3.2 0.9 0.2 1.5 -1.3 -1.4 -1.8 0.8 2.9 3.4 4.7 5.0 5.4

Russia 1.3 -0.5 0.5 6.8 7.4 7.6 1.6 3.1 2.3 4.7 0.6 2.5 4.2 1.4 3.9

Turkey 4.1 2.9 3.4 7.5 8.9 6.6 -7.9 -5.7 -5.7 5.3 1.8 3.1 -0.3 5.9 5.0

Africa 3.7 3.5 5.5 7.0 7.0 7.5 -2.8 -3.4 -3.4 11.4 3.4 4.6 -10.2 1.8 6.3

South Africa 1.9 1.4 3.3 5.8 6.0 5.6 -5.8 -5.7 -6.1 2.6 2.0 3.1 4.2 2.8 5.3

MENA 2.5 2.8 4.2 8.3 5.5 5.8 10.6 8.3 6.7 2.3 3.2 4.1 2.1 3.7 4.4

BRIC 5.7 5.0 5.4 4.7 4.1 4.1 0.6 1.7 1.8 5.4 4.7 5.2 7.4 5.1 6.4

World 2.6 2.7 3.2 3.0 3.1 3.1 - - - 2.7 2.3 3.0 3.2 3.5 4.7

Source: IHS

Note: * Excluding Japan

Note: IHS Global Insight forecasts for 2014 and 2015 (Data edge 2014 Q2). Date of forecast, 15 October 2014. These forecast values are provided as an indication of direction, representative of one vendor’s view only. The values in the table may therefore differ from the Consensus values quoted throughout the report.

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