29
Greece: From vicious to virtuous cycle – Is this time for real? Katharina Utermöhl, Senior Economist Europe Athens, October 17 2017
Greece: From
vicious to
virtuous cycle –
Is this time for
real?
Katharina Utermöhl,
Senior Economist Europe
Athens, October 17 2017
2
1 Global growth outlook: The global economy is
getting its mojo back
2 Greece’s main trade partners: Risks and opportunities
3 Greece: From vicious to virtuous cycle – Is this time for
real?
Agenda
3
-1%
0%
1%
2%
3%
4%
5%
6%
10Q1 11Q1 12Q1 13Q1 14Q1 15Q1 16Q1 17Q1
Others Fragile Four
APAC ex China ex Japan India
Japan Europe
China US
World aggregate
17Q2:+3.7%
The global economy is back to business
Global growth shifted up a gear in Q2 2017 -
especially in the US, the Eurozone, China and
Japan
As a result we revise up our 2017 and 2018
global growth forecasts from +2.9% to +3.0%:
mainly due to upside revisions in Europe
Global GDP growth forecasts (%)
Sources: Bloomberg, Euler Hermes, Allianz Research Sources: IHS, Euler Hermes, Allianz Research
World GDP growth, q/q annualized Fragile four are Brazil, Russia, Turkey and South Africa
4
Global trade is getting its mojo back – but will it
last?
Dollar depreciation is driving values a bit further
up. Volume growth is only back to 2013-14
figures
Short-term indicators confirm that volume
growth should plateau sooner or later
Merchandise trade and Euler Hermes Trade Momentum
Index
Sources: Bloomberg, Euler Hermes, Allianz Research
Global exports of goods and services
Sources: IHS, CPB, Euler Hermes, Allianz Research
3.6%3.7% 2.7% 2.0%
4.2% 3.8%
2.8%
1.8%
-10.3%
-1.9%
7.0%5.7%
-15%
-10%
-5%
0%
5%
10%
13 14 15 16 17 18
Volume Price in local currency Currency impact Value
47
48
49
50
51
52
53
-21
-15
-9
-3
3
9
15
21
27
05 07 09 11 13 15 17
Global Merchandise (goods) trade growth y/y (CPB, left)
EH TMI (right scale)
5
Strong upside surprises from the Eurozone, while
acceleration in Emerging Market was expected
There are good reasons to be bullish on the
Eurozone: Sentiment indicators are above long-
term average
Emerging economies formerly in recession are
back to (low) growth; yet Emerging Markets are
not accelerating broadly speaking
Emerging Markets: Growth per country group
Sources: Bloomberg, Euler Hermes, Allianz Research
Europe: Consumer confidence vs. Business confidence*
Germany
Euro zone
Spain
France
Italy
Netherlands
Portugal
United Kingdom
Greece
-10
-5
0
5
10
15
20
25
30
-30 -10 10 30
Busin
ess c
onfiden
ce
Consumer confidence
* August 2017 value minus the respective average since 1990.
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
07 08 09 10 11 12 13 14 15 16 17 18
Recessionary economies*
Frontier Markets
Bulk of EMs
Brazil, South Africa, Russia and CIS.
Sources: IHS, Euler Hermes, Allianz Research
6
Inflation should normalize gradually
Wage growth is still below its
pre-crisis trend, except in
Germany
Inflation will exceed +2% in the
US in 2018, but should stay
below +2% in the Eurozone
Headline Inflation Forecasts (y/y, %)
Sources: OECD, Euler Hermes, Allianz Research
Wages (NCU at current prices, y/y period average, %)
Sources: Datastream, Euler Hermes, Allianz Research
Consumer prices (headline, core) vs. oil price (Brent)
0.9%
1.3% 1.2%
1.6%
2.0%1.8%
2.4%
1.4%
2.6%
-1%
-1%
0%
1%
1%
2%
2%
3%
3%
Jap
an
Fra
nce
Italy
Eu
rozone
Chin
a
Germ
any
US
Sp
ain
UK
15 16 17f 18f
Core inflation still trending
downwards; swings in
headline inflation driven by oil
Sources: IHS, Euler Hermes, Allianz Research
3.1%
1.6%
3.1%
3.9%
3.5% 3.5%
1.7%
2.3%
1.2%
1.7%
2.2%
1.8%
0%
1%
1%
2%
2%
3%
3%
4%
4%
5%
Fra
nce
Germ
any
Italy
United K
ingdom
United S
tate
s
Sp
ain
2001 to 2007average
2008 to 2016average
7
Monetary policy normalization is on the horizon
Inflation pressures should intensify: Output gaps
in main economies are persistent, but should
close by 2019
This should go along with monetary policy
normalization. Along with interest rate hikes,
global liquidity will be tapered
Central Banks Balance Sheet monthly changes (USD, bn)
Source: IMF
Output Gaps (% of GDP)
Sources: Euler Hermes, Allianz Research
-10
-8
-6
-4
-2
0
2
4
6
8
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17f 18f 19f
United StatesFranceGermanyItalyUnited KingdomSpain
-75
-25
25
75
125
175
01/17 04/17 07/17 10/17 01/18 04/18 07/18 10/18 01/19 04/19 07/19 10/19
ECB
Fed
BoJ
Flow
Forecasts/assumptions
Flow to turn negativein Q2/Q3 2018
8
1 Global growth outlook: The global economy is getting
its mojo back
2 Greece’s main trade partners: Risks and
opportunities
3 Greece: From vicious to virtuous cycle – Is this time for
real?
Agenda
9
US: Following solid Q2 growth, hurricanes will
weigh on growth momentum in the near term
2018 GDP growth should be helped by fiscal
stimulus – assumed to be to the tune of 1.2% of
GDP.
Short term: Hurricanes to take a toll on output -
disrupting an upward trend in industry.
Industrial production
(indices, base 100=Jan. 2014)
Sources: Euler Hermes, Allianz Research
GDP growth (y/y, %)
Sources: Datastream, Federal Reserve, Euler Hermes, Allianz Research
1.6
2.2
1.7
2.6
2.9
1.5
2.0
2.2
0
1
2
3
4
2011 2012 2013 2014 2015 2016 2017 2018
August m/m % change:
- Industrial production: -0.9
- Manufacturing prod.: -0.3
- Est. Hurricane impact: -0.75pp
10
China: Financial tightening is starting to bear fruit
at the expense of short-term economic dynamics
Financial imbalances start to reduce with more
sustainable credit growth and lower risky credit
flows.
The downside is that credit intensive activity
expenditures are slowing.
Industrial Production and Investment
Sources: IHS, Euler Hermes, Allianz Research
Shadow banking and domestic credit
Sources: IHS, Euler Hermes, Allianz Research
4
6
8
10
12
14
16
15 16 17
Nominal Retail sales (y/y)
Real industrial production (y/y)
Nominal Investment in Fixed Assets in Urban areas (YTD, y/y)
-1000
-500
0
500
1000
1500
2000
2500
3000
0
5
10
15
20
25
30
35
40
05 06 07 08 09 10 11 12 13 14 15 16 17
Shadow Banking (3m summed bn, right)
Domestic Credit (y/y, left)
11
After reaching a peak in January 2017 global
economic policy uncertainty has declined
substantially
Eurozone: Economic momentum accelerated in
line with receding economic policy uncertainty
Composite PMI
Sources: Thomson Reuters Datastream, Allianz Research. Sources: Thomson Reuters Datastream, Allianz Research.
Global economic policy uncertainty
Index (lhs) & CBOE VIX (rhs)
As political uncertainty took a
backseat economic momentum shifted
up another gear
12
Catch-up potential: Investment still below
pre-crisis levels even ten years after
the Global Financial Crisis
Eurozone: GDP growth (%) & growth
contribution of components (pp)
Eurozone: A recovery with strong legs – upswing
supported by all GDP components
Eurozone: GDP and its components
(Index: Q1 2008=100)
1,82,0 2,1
1,8
-3
-2
-1
0
1
2
3
4
5
2015 2016 2017f 2018f
Private consumption Investment
Government spending Export
Import Stocks
GDP real
Sources: Thomson Reuters Datastream, Allianz Research. Sources: Thomson Reuters Datastream, Allianz Research.
Domestic demand is still the backbone of
the economic upswing, but exports are
adding momentum
13
Upward trend in business expectations
signals robust upswing to continue
Germany: Buoyant upswing, with real GDP
expanding by 2.2% in 2017 and by 2.0% in 2018
Ifo index: Manufacturing (2005=100) Cumulated growth and growth
contributions of different components since 2008*
Refuting common perception: Growth
in recent years powered by consumption,
not by exports. Investment disappoints
Source: Thomson Reuters Datastream. Sources: Thomson Reuters Datastream, Allianz Research, own forecasts.
0
1
2
3
4
5
6
7
8
9
10
11
12
GDP Consumption
expenditure
Gross
investments
Net exports
* Annual average 2017 on annual average 2008
10.9
8.9
1.2 0.8
14
Italy: Favorable cyclical outlook with GDP growth of
1.4% in 2017 and 1.1% in 2018 – but will it last?
2017 GDP growth rate highest since 2010
thanks to ongoing recovery in domestic demand
and favorable export demand.
But structural problems still loom large: To exit
the low-growth/high-debt/fragile-banks trap Italy
is in dire need of more reform.
Potential GDP (%)
Sources: Istat, Datastream, Allianz Research, Euler Hermes Sources: European Commission, Datastream, Allianz Research, Euler Hermes
Italian GDP growth (y/y, %) and business confidence
15
UK: GDP growth will slow to +1.4% in 2017 and
+1.0% in 2018 in line with cooling domestic demand
UK consumers face double-whammy blow: High
inflation and sluggish wage growth put a
squeeze on living standards.
External sector not making up for slowing
domestic demand with exporters responding to
weak Sterling by raising export prices, putting
profit before volume.
Sources: Datastream, Allianz Research, Euler Hermes Sources: Datastream, Allianz Research., Euler Hermes
Headline inflation, retail price inflation, core inflation &
compensation per employee (y/y, in %) GBP/EUR (lhs) & export prices index
(2013 =100, rhs)
16
Emerging Europe: Region continues to surprise
on the upside
Growth in the region as a whole to pick up to +3.1% in 2017 (+1.8% in 2016) as EU members
accelerate (+3.9% in 2017), Turkey rebounds (+5.2%) and Russia has left recession (+1.5%).
Monetary policy in EU member states set to tighten gradually by end-2018.
Monetary policy interest rates
Sources: National sources, IHS, Euler Hermes, Allianz Research
GDP growth in 2016 and 2017 (forecast) and short-term country risk as of Q3 2017
Sources: National sources, IHS, Euler Hermes, Allianz Research
C4
B1 B2 C3
BB1
D4
A1
B2
17
1 Global growth outlook: The global economy is getting
its mojo back
2 Greece’s main trade partners: Risks and opportunities
3 Greece: From vicious to virtuous cycle – Is this
time for real?
Agenda
18
GDP growth (y/y, in %, lhs) & economic
sentiment (rhs)
Sources: Thomson Reuters Datastream, Allianz Research Sources: Thomson Reuters Datastream, Allianz Research
Private consumption is key driver of improving
growth prospects but support from exports
and investment set to strengthen
Economic sentiment has improved
markedly in 2017 reaching the highest level
in 2.5 years pointing at a return to growth
Euler Hermes forecasts
Greece 2015 2016 2017 2018
GDP -0.3 0.0 1.0 2.5
Consumer Spending -0.3 1.4 1.2 3.2
Public Spending 0.0 -2.1 2.1 1.6
Investment -0.2 0.0 0.3 5.8
Stocks * -0.9 0.2 0.3 0.4
Exports 3.1 -1.7 5.0 5.2
Imports 0.3 0.6 6.8 8.1
Net exports * 0.8 -0.7 -0.7 -1.1
Current Account (% of GDP) 0.1 -0.6 -0.9 -0.7
Employment 1.9 1.8 2.7 2.8
Unemployment rate (average) 25.0 23.6 21.6 20.5
Inflation -1.7 -0.8 1.0 1.2
Government balance (% of GDP) -5.9 0.7 -1.5 -0.5
Public debt (% of GDP) 177.4 179.0 176.8 175.2
Change over the period, unless otherwise indicated: * contribution to GDP growth
** euro billions
Greece: Back to growth – Cyclical outlook brightening
with GDP expected to grow by +1.0% in 2017 and +2.5% in 2018
19
Greece: Return of the consumer – Favorable labor
market trend to lend a helping hand to private consumption
Employment (thousands, rhs) &
unemployment rate (%, lhs)
Sources: Thomson Reuters Datastream, Allianz Research Sources: Thomson Reuters Datastream, Allianz Research
Retail sales have posted positive growth for the
past 12 months. Given the sharp rise in
consumer confidence the outlook remains bright
Positive labor market trend to provide
tailwind for private consumption with
unemployment close to a six-year low
Retail sales (lhs) & consumer
confidence (rhs)
20
0.9
1.0
1.1
1.2
1.3
2007 2008 2009 2010 2011 2012 2013 2014 2015
Gross Value Added Prices
Volume Employment
Note:
Relative prices are based on (implicit) price deflators of value-added. tradeables: agriculture, industry, business and financial services,
telecommunications and services related to tourism (transport and accommodation and restaurants). Non-tradeables: else except public
administration and non-market services.
Greece: Export strategy paying off – Rebalancing
of the economy underway supported by competitiveness gains
Relative size of tradeable to non-
tradeable sector (index: 2010=1)
Nominal unit labor costs per person
employed, Index, 2000 = 100
Sources: Thomson Reuters Datastream, Bank of Greece calculations, Eurostat, Allianz Research.
Unit labor cost adjustments have been
significant after 2009 but momentum has
stalled recently
Tradeable sector is becoming increasingly
more important for the Greek economy
90
100
110
120
130
140
150
2000 2002 2004 2006 2008 2010 2012 2014 2016
Germany Greece Spain
France Italy Portugal
21
11%
7% 6% 5%
4% 3% 3% 3% 2% 1%
0%
2%
4%
6%
8%
10%
12%
Italy
Germ
an
y
Cyp
rus
Bu
lgaria
UK
Ro
ma
nia
Sp
ain
Fra
nce
Ne
the
rla
nds
Po
land
Greece: Export motor heating up thanks to
favorable momentum in traditional key markets
Sources: Chelem, Allianz Research
Greece can expect export gains to the tune
of EUR 3.4 bn in 2018 due to rising demand
from traditional key markets
Additional demand for Greece in EUR mn by country
in 2018 (based on import growth of each partner)
While high-growth markets gained in
importance in recent years, majority of
Greek exports destined to EU countries
8%
5% 4%
3% 3% 2%
1% 1% 1% 1%
0%
2%
4%
6%
8%
10%
Tu
rke
y
Un
ite
d S
tate
s
Eg
yp
t
Leb
ano
n
Sa
udi A
rab
ia
FY
RO
M
Alb
ania
So
uth
Ko
rea
UA
E
Se
rbia
TOP 10 exports destinations outside EU,
% of total exports
TOP 10 exports destinations EU,
% of total exports
Sources: Chelem, Allianz Research
0 100 200 300 400 500
Italy
Germany
Turkey
Cyprus
Bulgaria
USA
Egypt
Spain
Romania
UK
France
22
Greece: Energy, agri-food and chemicals sectors
key drivers of export gains, strong EUR poses downside risk
Sources: Thomson Reuters Datastream, Allianz Research
The appreciation of the EUR vs. other major
currencies since the turn of 2016/17 may
keep a lid on export momentum
USD/EUR (lhs) & Euro nominal effective
exchange rate (EER 19, rhs)
The energy, agri-food and chemicals
sectors to show greatest momentum in
2018
Additional demand for Greece in EUR mn by
sector
Sources: Chelem, Allianz Research
1,551
580
288
205
192
123
109
99
71
64
55
17
0 1000 2000
Energy
Agri-food
Chemicals
Vehicles
Machinery & Equipment
Ferrous
Wood Paper
Commodities (excl. energy)
Electronic
Electric
Non-ferrous
Textile
23
1.9% 2.7% 4.6%
4.9%
9.9%
12.9%
13.8%
42.7%
6.7%
North America
Africa, Near and MiddleEast
Asia and Oceania
South America, centralAmerica and Caribbean
Italy
Germany
Netherlands
Rest of EU
Others in Europe
A new strategy for the agri-food sector
Boost agricultural production efficiency: increase technological sophistication & farm size
Increase manufacturing component of food
supply chain: Move away from bulk towards high-value added products
Focus on branded products: National champions that can weather intense competition in high-income countries while commanding higher premia
Greece: Export opportunity #1 – Overhauling the
agri-food sector’s strategy to unleash its full export capacity
Sources: Chelem, Allianz Research.
Fully exploiting the sector’s comparative
advantage requires updating sectoral
strategy, investment in production & branding
Vast majority of agri-food products cater to EU
market, but Greece could benefit from shifting
focus to high-potentials (USA & Japan)
Agri-food exports, % total
An updated strategy for the agro-food sector
24
More demand expected from reliable traditional markets (Germany, Italy & the Netherlands) but
targeting “emerging markets” (Bulgaria, Romania, Poland) offers great potential
Number of tourists coming to Greece, change
4Q/4Q in Q2 2017, ‘000
Turnover index vs. travel receipts
Sources: IHS, Allianz Research
Greece: Export opportunity #2 – Tourism the
economic safety-net with significant upside potential
Sources: Bank of Greece, Allianz Research.
0
100
200
300
400
500
600
-180
-160
-140
-120
-100
-80
-60
-40
-20
0
CzechRepublic
France Canada Denmark
Sources: Bank of Greece, Allianz Research.
25
Greece: Investment – The only way is up? Boost
from rising capacity utilization & improving demand outlook
Sources: Thomson Reuters Datastream, Allianz Research Sources: Thomson Reuters Datastream, Allianz Research
Capacity utilization has risen markedly in
the past two year with the long-term
average moving in sight
In 2017 investment will make its first
positive growth contribution in a decade
Capacity utilization in industry (%) Growth contribution of investment in
equipment & GDP growth (%)
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
2007 2009 2011 2013 2015 2017
Investment in equipment GDP
26
Greece: Investment – Financing conditions remain
very restrictive given the severe liquidity shortage
Sources: Bank of Greece, Allianz Research Sources: Bank of Greece, Allianz Research
Private sector deposits – a reliable
measurement of sentiment – has seen
inflows since April
With a brief exception at the turn of
2014/15 credit has remained firmly in
negative territory since 2010
Private sector deposits, flows,
EUR million
Credit to Greek non-financial
corporations & consumers, outstanding
amounts, y/y in %
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
Jan
-09
No
v-0
9
Sep
-10
Jul-
11
May
-12
Mar
-13
Jan
-14
No
v-1
4
Sep
-15
Jul-
16
May
-17
Non-financial corporations Consumers
-14000
-7000
0
7000
27
Greece: From short-term growth outlook to long-
term economic success – How to kick-off a virtuous circle?
10yr government bond yield spread
Greece/Germany (in %)
Sources: Thomson Reuters Datastream, Allianz Research.. Source: Allianz Research.
A sustainable recovery of the Greek economy
is conditional on investment – foreign and
domestic: What needs to be done?
Investor sentiment has improved notably,
but a successful return to capital markets
requires additional work
Complete 3rd review on time
& stick to reform path
Deal with NPLs to encourage
return of deposits
Develop & implement
strategic growth plan for Greece
Return to financial markets after
program ends in August 2018
Full abolition of
capital controls
Setting in motion a virtuous circle: Step by step
28
Ease of doing business in 2010
Reco
very
fro
m p
re-c
risis
peak (
20
16
vs 2
00
8,
%)
Greece: The case for a pro-growth strategy – Despite
Herculean reform efforts the business environment still
needs to become friendlier
Business environment & resilience in
the euro area
Most problematic factors of doing
business
Sources: WEF Executive Opinion Survey 2017, Allianz Research .
Eurozone countries with a more favorable
business environment experienced a
stronger economic recovery
Key challenges to tackle: Introducing a
more growth-friendly fiscal policy mix,
keeping a lid on political uncertainty &
restoring the health of the banking sector
Sources: World Bank, Allianz Research.
0 10 20
Restrictive labor regulations
Inefficient capacity to innovate
Inadequate supply ofinfrastructure
Corruption
Access to financing
Government instability
Policy instability
Tax regulations
Inefficient governmentbureaucracy
Tax rates
Thank you for
your attention!
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Euler Hermes Group
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Phone +33 01 84 11 50 50
http://www.eulerhermes.com/economic-research
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