EFTA01459616.pdf

5 February 2016 Focus Europe: Dark clouds, no storm yet We have been regularly highlighting a dichotomy in the euro-area between Figure 4: SIREN-surpiise at r hard-data and the more optimistic surveys since Q2 2015. Firmentiv, however, we see a divergence also within surveys. While the numerous consumer month low confidence indicators published last week surprised on the upside, the Formnioniuotr woatoNd -.4.-914 s Managua minla-dowil-enrn contribution of business confidence was negative. We interpret such a I 0 divergence as a confirmation of a recovery driven by private consumption, 08 boosted by the fall in oil prices. Disappointing global growth along with 0.6 financial market stress may be starting to weigh on business confidence. 04 0: 0.0 We expect oil prices to start gradually recovering. This means less of a drag on -02 headline inflation but a fading cyclical boost to real GDP in the second part of 04 the year. Indeed, we think that the pace of the euro-area recovery will peak in 06 2016. Next year the challenges could intensify unless global growth surprises 418 on the upside. I0 Neat en 14 Inn i4 Mv.15 Jus-16 Sao i5 t>ec-I5 Sour* Onfa• hal ...stuttering credit impulse The credit impulse is a useful cross check on the high frequency data captured in SIREN. The credit impulse tended to either support or signal upside risk Figure 5: Stuttering credit impulse relative to our euro-area domestic demand projections over the past 12 pp of GOP. VW %VW months. The December lending data disappointed. 0 —Garda enpAve • 320 ramp, h s Pnyee democrat demand. Ow 4 It is too early to conclude that the trend is reversing. The monthly credit is I3 1 • highly volatile and seasonality in December is notoriously elevated. Still, there 2 are starting to be signs that risks are moving on the downside. The increasing 0 euro-area financial CDS spreads in recent weeks bears watching if it signals a -1 new bout of uncertainty about the monetary union banks. 4 -6 Leo... .3 43 ce -4 lot 4 The euro area remains vulnerable There are not only conjuncture' reasons to be imneerrod The euro-area is in a -10 2003 2001 2000 2011 2013 7005 2015 better shape than in the previous two recessions, but it is not healed. The sub- Sane Ambit tareAnstelnUtoeutaineSsne optimal European Monetary Union is not strong enough to ride out from a global storm unscathed. The ECB can neither solve structural issues at a country level nor for the union Figure 6: Past five years real GDP as a whole. With only modest exceptions (France), we are pessimistic about outlums versus one-year ahead further material growth-enhancing reforms or further significant integration. expectations arid there are risks of reversal in some cases (Spain, Portugal): Medan aurae Isom 2011.2016 Adualannual GOP • one year ahead consensus lemons There has been e OW OS'S in the peripherals and consensus on France IS Italy 40 = overly gloomy.' However, the peripherals will remain in a vulnerable LarArn -0 6 position beyond the current decade given their elevated nct external debt EMEA -0.7 (Spain. Portugal. Ireland and Greece) and/or the low potential growth (Italy, US Portugal and Greece). -0 5 Japan .04 The recovery came too late to stop the rising of populism. This is an issue Ana ex Japan '02 MI in the two systemic peripherals - Italy and Spain - as well as in core China -0 2 countries, including Cierriumy and France. Euro area -0.1 To become less of a sub-optimal monetary union the euro area needs Germany 0.0 I further integration. But ana-euro sentiment has risen in the core and the France NM 03 periphery. NUM 0 5 • Political uncertainty in Spain will not go away, endangering the country's PP .15 .10 .06 00 05 10 remarkable comeback. A new election is a question of Wet rather than if. • Ferliele. esea estkpan pave GO. 2015name. rope nine nee int INceneeploweeel • Relative to expectations, Italy's GOP has disappointed more than Latin Sea argentegPrete et be Once.8r* America over the past five years (Figure 6). There have been some See "France tabour reform on the right path". page 12 on Focus Europe on 22 Janus)? Deutsche Bank AG/London Page 5 CONFIDENTIAL — PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0120149 CONFIDENTIAL SDNY_GM_00266333 EFTA01459616