EFTA01459616

5 February 2016 Focus Europe: Dark clouds, no storm yet We have been regularly highlighting a dichotomy in the euro-area between hard-data and the more optimistic surveys since Q2 2015. Firmentiv, however, we see a divergence also within surveys. While the numerous consumer confidence indicators published last week surprised on the upside, the contribution of business confidence was negative. We interpret such a divergence as a confirmation of a recovery driven by private consumption, boosted by the fall in oil prices. Disappointing global growth along with financial market stress may be starting to weigh on business confidence. We expect oil prices to start gradually recovering. This means less of a drag on headline inflation but a fading cyclical boost to real GDP in the second part of the year. Indeed, we think that the pace of the euro-area recovery will peak in 2016. Next year the challenges could intensify unless global growth surprises on the upside. ...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 relative to our euro-area domestic demand projections over the past 12 months. The December lending data disappointed. It is too early to conclude that the trend is reversing. The monthly credit is highly volatile and seasonality in December is notoriously elevated. Still, there are starting to be signs that risks are moving on the downside. The increasing euro-area financial CDS spreads in recent weeks bears watching if it signals a new bout of uncertainty about the monetary union banks. The euro area remains vulnerable There are not only conjuncture' reasons to be imneerrod The euro-area is in a better shape than in the previous two recessions, but it is not healed. The sub- 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 as a whole. With only modest exceptions (France), we are pessimistic about further material growth-enhancing reforms or further significant integration. arid there are risks of reversal in some cases (Spain, Portugal): There has been e OW OS'S in the peripherals and consensus on France IS overly gloomy.' However, the peripherals will remain in a vulnerable position beyond the current decade given their elevated nct external debt (Spain. Portugal. Ireland and Greece) and/or the low potential growth (Italy, Portugal and Greece). The recovery came too late to stop the rising of populism. This is an issue in the two systemic peripherals - Italy and Spain - as well as in core countries, including Cierriumy and France. To become less of a sub-optimal monetary union the euro area needs further integration. But ana-euro sentiment has risen in the core and the periphery. • Political uncertainty in Spain will not go away, endangering the country's remarkable comeback. A new election is a question of Wet rather than if. • Relative to expectations, Italy's GOP has disappointed more than Latin 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)? Figure 4: SIREN-surpiise at r month low Formnioniuotr woatoNd minla-dowil-enrn I 0 08 0.6 04 0: 0.0 -02 04 06 418 I0 en 14 Inn i4 Mv.15 Sour* Onfa• hal -.4.-914 Managua s Jus-16 Neat Sao i5 t>ec-I5 Figure 5: Stuttering credit impulse pp of GOP. VW %VW 0 —Garda enpAve • 320 ramp, h s Pnyee democrat demand. Ow 4 I3 1 • 4 -6 43 -10 2003 Leo... 7005 2001 2000 2011 2 0 -1 .3 ce -4 lot 4 2013 2015 Sane Ambit tareAnstelnUtoeutaineSsne Figure 6: Past five years real GDP outlums versus one-year ahead expectations Medan aurae Isom 2011.2016 Adualannual GOP • one year ahead consensus lemons Italy 40 = LarArn -0 6 EMEA -0.7 -0 5 US Japan .04 Ana ex Japan '02 MI China -02 Euro area -0.1 Germany 0.0 I France NM 03 NUM 0 5 PP .15 .10 .06 00 05 10 • Ferliele. es ea est kpan pave GO. 2015 name. rope nine nee int INceneeploweeel Sea argenteg Prete et be Once. 8r* Deutsche Bank AG/London Page 5 CONFIDENTIAL — PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0120149 CONFIDENTIAL SDNY_GM_00266333 EFTA01459616