UNIQA Capital Markets Weekly

Eurozone
•    April sentiment surveys remained bright
•    Euro Area loan demand improving (incl. AUT)
•    ECB: Monetary policy unchanged as the central bank looks though monthly inflation volatility

Eurozone economic sentiment remained upbeat in April (Figure 1). The rise in survey-based indicators has been one of the most significant data developments since the beginning of the year. The composite purchase manager index rose to 56.7 (from 56.4) – the highest value since 2011 before the outbreak of the Euro crisis. The manufacturing PMI reached an all-time high (56.8) and the services index increased to 56.2. Despite election uncertainty, the French composite PMI print was remarkable (57.4 after 56.8). The German PMI results (composite at 56.3 after 57.1) coincided with solid signals from the prominent ifo-business climate indicators also reaching the highest level since 2011.

First estimates for GDP growth in Euro countries were strong in Austria and Spain. Austrian quarterly real GDP increased by 0.6 % in Q1 after 0.5 % during the preceding quarter. According to the Austrian institute of economic research (Wifo), growth was driven by steady household consumption (0.4 % q/q), fixed investment (0.9 % q/q) and a positive contribution from net exports (exports +2.1 %, imports +1.8 %). Hence, the business cycle in Austria is gathering pace and growth is more broad-based among expenditure components than previously. In France, GDP growth was a bit weaker than expected (0.3 % q/q), while the Spanish economy again posted strong expansion (0.8 %) in Q1. Eurozone Q1 GDP will be released on Wednesday 3rd May and growth is projected to have accelerated compared to Q4 2016 (0.4 % q/q) to around 0.6 % quarter-over-quarter change.
According to the quarterly bank lending survey (BLS) that is conducted by the ECB (released last week), loan growth has been supported by eased lending conditions (corporate loans, household loans for house purchase and consumer loans) and increasing demand across all loan categories in the first quarter of 2017 (Figure 2).

Competitive pressure was the main factor contributing to the net easing of credit standards in Q1. The net easing in overall terms and conditions is largely driven by a further narrowing of margins on average loans and the net percentage share of rejected loans decreased further across all loan categories.
Net demand increased particularly for housing loans and also for consumer credit. Banks expect further increases in demand in Q2 2017. Inventories and working capital and the general level of interest rates were positive contributors to demand for enterprise loans, as well as slightly increased demand due to fixed investment. Demand for housing loans is driven by the low general level of interest rates and the favourable housing market prospects. Finally, the low general level of interest rates, spending on durable goods and consumer confidence contributed positively to net demand for consumer credit.
Accordingly, loan growth accelerated in the corporate as well as in the consumer segment in March (Figure 3).

Consumer loans expanded by 4.7 % (y/y), household mortgage loans increased by 3 % and corporate lending accelerated to 1.6 % (from 4.2 %, 2.8 % and 1.4 % previously).
In Austria, demand for enterprise loans increased markedly for the second consecutive quarter (Figure 4). According to the survey results, banks decreased further their margins for corporate credit, while the overall lending standards were mostly unchanged in Q1. Banks note that lending criteria are still tight in Austria from a historical perspective (The survey was first conducted in 2003).

Last Thursday in its governing council (GC) meeting, the European Central Bank (ECB) left its monetary policy stance unchanged. As widely expected, the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.40% respectively. The GC continues to expect the key ECB interest rates to remain at present or lower levels for an extended period of time, and well past the horizon of the net asset purchases. The phrase is commonly referred to as the ECBs main signal about the future course of monetary policy (‘forward guidance’). It was left completely unchanged to previous statements.
President Draghi said that the cyclical recovery of the Euro Area is becoming increasingly solid and that downside risks have further diminished. At the same time, underlying inflation pressures continue to remain subdued and have yet to show a convincing upward trend. The ongoing volatility in headline inflation underlines the need to look through transient developments in inflation, which have no implication for the medium-term outlook for price stability. A very substantial degree of monetary accommodation is still needed for underlying inflation pressures to build up and support headline inflation in the medium term. If the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, the ECB stands ready to increase its asset purchase programme in terms of size and/or duration.
That said, according to the flash estimate (Figure 5), Eurozone inflation rebounded to 1.9 % (y/y) April after the lower outcome in the previous month (1.5 %). (Draghi referred to this kind of volatile short-term inflation trajectory.) The core inflation rate also recovered more than expected to 1.2 % from the low print in March (0.7 %). The outcome in services inflation (part of the less volatile ‘core’ prices) was likely distorted by package holiday pricing around Easter and is therefore expected to revert to a lower level.


Author
Martin Ertl
Chief Economist
UNIQA Capital Markets GmbH

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