Weekly Export Risk Outlook

Fiscal consolidation is far from over. This was re-affirmed recently by the European Commission economic forecasts, as the worse-than-expected GDP contraction will continue to weigh on public debt/GDP ratios, still expected to be on the rise in 2013, and structural fiscal deficits will adjust at a slower pace than in 2012. Spain and France were noted as countries that will not be able to reach the 3% of GDP threshold in the next two years with current budget plans and they will have to present their adjustment plans to the Commission by April. More generally, political uncertainty that could affect decision making in the eurozone has increased, notably with last weekend’s Italian legislative election results, but also fragile political and social stability in Spain and upcoming German legislative elections in September. Although this is likely to put downward pressure on economic activity in the coming months, we do not expect sovereign tensions to return to 2012 summer levels (with the potential backstop of the ECB/ESM in the wings) and we continue to forecast a gradual stabilisation in activity in the eurozone towards the end of the year

Weakness in the export sector (-2.0% q/q), mainly caused by the eurozone recession, had a considerable impact on overall growth at the end of 2012, with quarterly GDP contracting for the second time since 2009, at -0.6% q/q in Q4 (-0.1% in Q4 2011). Official data show that net exports had a negative effect on growth equivalent to -0.8pps in Q4. In contrast, there was a positive contribution from domestic demand, which contributed +0.2pps to overall GDP growth. However, there were marked differences within the demand components, with household consumption slightly up (+0.1% q/q), investment in construction slightly down (-0.1%) and investment in equipment recording a further marked decline, of -2% (having contracted for five consecutive months). There was a positive contribution of +0.2pps to overall growth resulting from a rise in inventories.

The housing market continues to demonstrate strength. January data include increases in housing permits (+35% y/y), starts (+24%), sales of existing homes (+8.5%) and sales of new homes (+16% mo/mo and +29% y/y). Prices of existing homes were up +11% y/y and of new homes +14%. Housing supply is very tight, with availability of existing homes down to 4.5 months at current rate of sales and new homes down to 4.8 months, both the lowest since 2008. Indeed, housing is currently the brightest spot in the economy. Meanwhile, Fed Chairman Bernanke defended the stance on monetary policy to the Senate Banking Committee, which suggests that there will not be a change in the near-term. With automatic budget cuts due in two days, politics remains divisive, although the cuts amount only to 2.5% of overall spending.

The Economic Sentiment Indicator (ESI) for February was positive overall, indicating increasing confidence for a fourth consecutive month (91.1 from 89.5 in January), contrary to the Composite Output Markit PMI (47.3 in February, down from 48.6). All the components of the ESI, except construction and retail trade, improved, including the industrial sector (by +1.2 to -10.8) and services (by +0.9 to -6.0) and all the big four economies (Germany, France, Italy and Spain) registered a rise in sentiment, particularly Germany (+2.5 to 102). The ESI suggests that activity is likely to stabilise in the eurozone in the ST, although still at weak levels. However, the immediate outlook is clouded by potential political stresses, including in post-election Italy, where recent polls did not deliver a clear verdict.

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