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We are expecting a slight improvement in economic growth in 2016, with volume GDP growth of 1.3%, compared with 1.2% in 2015 (slightly below the Eurozone average), a rate that should continue through into 2017.
We received the shortest ECB press conference in three years today and, to be honest, we have not learned a lot. We might be happy because the little we got tends to confirm our preview but we would have been happier if Mario Draghi had more clearly confirmed what we feel. Tapering fears are clearly overstated: albeit M. Draghi did not commit to anything, the ECB does not seem to be in the mood for a monetary policy tightening in the near term.
Because of an illegitimate, disturbing and – let us say it – highly contestable monetary-policy framework from the ECB, the economic, financial and political future of Portugal lies in DBRS's hands. On 21 October, DBRS will update its opinion on Portugal. If it downgrades the country's credit rating by one notch then Portuguese bonds will no longer be eligible as collateral at ECB refinancing operations nor for QE. Our base-case scenario is that DBRS will not downgrade Portugal and that it will keep its outlook unchanged (stable).
Highlights: Hungary's sovereign paper "investment grade" rating has been reinstated. What is the nature of the Russian regime? In Egypt, support from multilateral agencies has helped boost reserves, but the conditionalities are painful. Q2 external demand has been saved from recession in South Africa. India has adopted a law designed to unify the tax system for goods and services at national level. Mexico: why is the peso so weak and the key rate so high?
Yesterday, an article by Bloomberg hit the wires and triggered a strong reaction in the markets: according to Bloomberg, the ECB Governing Council is trying to build a consensus towards the fact that QE will have to be tapered. Of course, "the officials asked not to be identified" and, to be honest, the actual content of the article is way less catchy than the headline: it does not say at any point that the ECB's tapering is to be started in the near term. On the contrary, it explains that "they didn't exclude that the program could still be extended at the full pace of 80 billion euros ($90 billion) a month".
The public deficit forecast for 2017 has been set at 2.7% of GDP (3.3% in 2016), with growth forecasts of 1.5% in 2016 and 2017 – slightly higher than the consensus. The public debt ratio is forecast to fall very slightly in 2016 already. The structural effort will again be significant and concentrated on public spending, whose growth in value terms has been markedly slowed. Our own deficit forecast is slightly higher that the government's, at 2.9% of GDP in 2017.
Edition October 25, 2016
France: Growth supportive factors
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