Research papers

In this page you can download a few papers on the current economic scenario produced by the Economics & Fixed Income/FX team of UniCredit Research.

All research papers are available to institutional investors through the restricted-access website.

Euro Compass – Economics & Fixed Income/FX monthly/quarterly

It provides in-depth analysis as far as ECB-watching is concerned, suggesting strategies to play on the Euribor curve and on major exchange rates. It has a dedicated section on inflation developments both in the short and medium term, a focus section with more detailed analysis on relevant issues and topics in the eurozone and tables with Macro/FI/FX forecast.

July 2010 - Stressed but not distressed

-- Eurozone GDP likely rose strongly in 2Q, by at least 0.6% qoq. The rebound mostly reflects an export-driven surge in IP, while construction activity bounced back after the cold winter. Private consumption remains the weak spot. GDP growth should slow substantially in 2H, probably to 1% annualized, but the risk of a double-dip recession is low.
-- While we await results of the stress test to be published on 23 July, we elaborate on recent dynamics of aggregated balance sheets of the eurozone banking system, highlighting some of the differences across national banking sectors. We show that the recent banking crisis has provided incentives to significantly improve the quality of banks’ balance sheets. However, the difficult heritage of the crisis in terms of credit losses and weak economic prospects will keep weighing on banks’ profitability in the coming two years. In this context, remnants of fears regarding the potential impact of the sovereign debt crisis could persist.
-- Since the beginning of the year, Greece has significantly squeezed primary and capital expenditure, exceeding the target for the general government deficit agreed with the EU/IMF. Against these resolute fiscal consolidation steps and persistent financial woes, it is not surprising that the domestic economy has been hit severely. Growth indicators suggest that the recession is indeed deepening, but the GDP contraction should not be more severe than projected by the IMF.
-- The June inflation slowdown should be short lived, and consumer prices will probably accelerate again in July. Energy remains the main source of volatility. Food prices, despite being up only 0.2% yoy, have entered a moderate upward trajectory that seems increasingly well established.
-- The recent upward trend in short-term rates doesn’t worry the ECB, given that the move is fully driven by a drop in excess liquidity as banks are bidding less funds than the ones expiring. We analyze two possible scenarios for interbank rates and the ECB strategy after the publication of the stress test results.
-- Growth momentum in the UK probably accelerated in 2Q, but this is likely to be a cyclical peak, as growth should decelerate in the second half of the year. The fiscal tightening will negatively affect GDP over the next few years, although it won’t derail the recovery. Against this backdrop, it is unlikely that the BoE will hike rates before the end of the year and we are postponing the start of the tightening cycle to 1Q 2011.
-- FI: The summer months are usually characterized by reduced activity and low traded volumes. Seasonality suggests that this is a good time to invest in FI but, with yields very low, statistical evidence should be taken with a pinch of salt. Also, stress test results will be a key driver affecting FI returns in the near term.
-- FX: Fears that the US recovery may prove more sluggish than expected offered the EUR-USD temporary relief, but the global risk picture remains cloudy and EMU woes have not disappeared. Hence, while EUR-USD may still hold the line during the rest of the summer, its medium-term prospects are still skewed to the downside, although room for a large drop has declined significantly.

CEE Quarterly – CEE Economics & Fixed Income/FX quarterly

This publication, on a quarterly basis, provides a broad overview of the key regional macro drivers, detailed country reports on 17 emerging European economies and full macroeconomic forecasts.

Complementary to the CEE Quarterly, the semi-annual CEE Economic data provides an overview of key cyclical and structural economic indicators for 21 countries in Emerging and Western Europe (Austria, Germany and Italy)

3Q 2009 - Better than a year ago, worse than 2 months ago

-- The main risks to growth and financial stability to the EEMEA region seem to emanate from the global picture, and in particular from the developments in Europe and the rest of the advanced economies. Europe is still in the throes of a debt crisis, where concerns about the sustainability of public finances and about the health of the banking sector risk feeding on each other. We believe concerns that European fiscal consolidation might trigger a double-dip recession in Europe and undermine the global recovery are exaggerated. The Eurozone is benefiting from the marked depreciation of the EUR to date, which we estimate will add about 0.8 percentage points to growth over the second half of this year and the first half of 2011.

-- The EEMEA region has weathered the European sovereign debt crisis relatively well to date, as growth indicators continued to improve during 2Q. We believe till the growth divergence of core and periphery Eurozone economies holds, the EEMEA region will continue to perform relatively well. Firstly, the weaker EUR is making German exports even more competitive. A broad divergence between core Eurozone and periphery is obviously not a new phenomenon but on balance it is still supportive for the CEE region. In addition, the EUR referenced EEMEA currencies (HUF, PLN, CZK and RON) are the only ones in the world that are weaker against the EUR YTD, which is making them more competitive towards other trade zones (Asia, LatAm). In this vein, the USD or basket referenced EEMEA currencies (TRY, RUB and ZAR) are somewhat less competitive (but they have more trade relationship vs. Asia). These considerations and somewhat better than expected Q1 GDP numbers have prompted us to slightly increase our regional GDP forecast for 2010 to 3.1% from 2.8%.

-- On the other hand given the above outlined uncertainties we did not reflect these changes in the 2011 forecast fully (4.3% from 4.1%). With these forecasts we are above consensus in Turkey and Russia for 2011 and somewhat below consensus in Hungary, Czech Republic, Romania and Poland for 2011.

-- Inflation has remained off the agenda for a good number of months, apart from that we see increasing upside risks in the next few months driven by #1 weaker currencies and #2 the fact that spring floods that have been much heavier in some countries than usual. Turkey remains the inflation outlier in the EEMEA region because of the very strong growth momentum and rising inflation expectations, although we note that the short term dynamics are encouraging. The near term implication for monetary policy is less clear cut but on balance we maintain our view that Turkey will be the only country in the EEMEA region that will enter into more meaningful monetary tightening during the year (we continue to expect 125bp in 4Q) whilst we do not see other countries hiking rates during 2010.

-- FX market outlook: Relative growth ranking and monetary policy direction matter: Given our relative growth ranking and expected monetary policy divergence we see no reason to change our overweight TRY vs. the rest of the region call in the coming quarter. In individual cases we believe that central banks still do not favor too strong currencies and this was evidenced in the actions of the Polish and Czech central banks but also by the ongoing presence of the Russian and Ukrainian central banks (this remains a tricky job given significantly improved current account balances in many countries).

-- FI Outlook: As we do not believe that any of the countries (apart from Turkey) will enter into a more meaningful tightening strategy, and if anything, lower G3 rates and too strong currency appreciation might even prompt further rate cuts. Resultantly we would remain wary of outright bearish rate positions (payers). On the other hand, we do not believe that all countries will be able to follow G3 rates lower in a global deflationary environment and hence we would add/keep bearish rate positions on countries with higher financial and fiscal stability risks (Hungary and Romania) as general hedging strategies. We hence would reduce Hungarian debt duration further. We also believe that positioning is a risk in Poland and accordingly would not add fresh positions at current levels.

Market Sense – by UniCredit's Chief Economist Marco Annunziata

It's an in-depth assessment & evaluation of major economic, financial, policy events and and their market impact.

5 August 2010 - Prudence and fingers crossed

With fingers crossed and a prudent attitude, Trichet welcomed the positive surprises on eurozone growth and the improvement in money markets and sovereign bond markets, but warned against premature optimism. The ECB remains cautious, gives no hints yet on its exit strategy, and keeps the sovereign bonds purchase program gently simmering on the backburner, just in case. Trichet was most positive on the stress tests, which he said confirmed the resilience of the eurozone banking system to economic and financial shocks; while repeating that banks should make sure they have enough capital to meet a future rise in credit demand, he also indicated that recapitalization needs are limited as a lot of new capital has already been raised before the tests. Trichet was least convincing in addressing the problem of a multi-speed recovery in the eurozone; he said the ECB would always focus on price stability for the area as a whole, and it was up to national governments to do the rest. He noted that while ten years ago Germany was struggling and Ireland and others were booming, now the tables are turned, and it is the turn of peripheral countries to work hard to regain competitiveness. Yet many would argue that monetary conditions during 2000-06 were too loose for countries like Ireland, Portugal and Spain, contributing to the imbalances which eventually brought us to the most recent financial turmoil. “Real divergence” might not be the ECB’s problem, but it remains a serious problem nonetheless. Overall, the ECB does not seem to have an itchy trigger finger and this should help cap exuberance on the EUR, while normalization in money market rates should proceed at a slower pace.

Italy Monitor

Monthly in-depth assessment and evaluation of major economic, financial, and policy issues in Italy.

July 2010  - Jobs: More work needs to be done

- While industrial production increased at a strong pace in 2Q, the end of the car-scrapping scheme is likely to have weighed on overall GDP. In 2Q, we expect economic growth to have slowed to 0.2% qoq, which should be followed by still modest growth in the following quarters.
- While the pace of increase in the number of inactive people keeps moderating and the growth rate of the labor force steadily increased, monthly employment figures and signals from business surveys show that a real turning point in the labor market has not yet occurred.
- In May, bank lending continued to gain a stronger foothold, although the rate of growth remains modest. Still, it is encouraging that the increase in household lending was accompanied by a return on an upward trend of corporate lending, although the latter is still in negative territory.
- Inflation kept easing in June, following the drop in gasoline prices. In July, we expect inflation to resume its upward trend. The Italy-EMU inflation gap has closed, mainly on the back of non-core components, while the differential on core prices remained relatively stable.
- In the Focus section we analyze the impact of the recession on the labor market. While the unemployment rate has increased less than in the eurozone, reforms are needed to foster new hiring, and prevent that a dual labor market leads to a jobless recovery.

Economics Special

10 June 2010  - Why Italy is different

-- Italy is probably the “swing factor” in the current European crisis: as the largest of the vulnerable countries, and the most vulnerable of the large, its ability to withstand current market tensions will likely determine whether and how the eurozone can weather the storm. Italy accounts for nearly one fifth of the eurozone’s economy, and over one quarter of its marketable sovereign debt: its stability is therefore essential to the eurozone’s ability to navigate the current crisis. So far, Italy has been a paradoxical success: the country had long been regarded as the weak link, with some investors periodically wondering whether it might eventually leave the eurozone; yet when it came to the crunch, Italy proved extremely resilient compared to its “periphery” peers, namely Greece, Ireland, Portugal and even Spain. Contagion-driven tremors have been felt in Italian fixed income markets too, however, and more recently spreads on Italian government bonds have suffered the opaque ECB’s interventions in the sovereign debt market.

-- It therefore seems to be an appropriate time to take stock of Italy’s strengths and vulnerabilities, to assess whether and to what extent Italy really is different from its periphery peers. In this paper we provide a detailed analysis of the key aspects of Italy’s macro outlook, from its growth performance to its external balance, from the state of public finances to the health of its private sector.

-- The main conclusion is that the tensions which have recently affected Italian bond markets are probably a blessing in disguise: Italy is genuinely stronger than its periphery peers, but its resilience is eroding and fragile; a decisive acceleration in structural and fiscal reforms is needed to put the country on a stronger sustainable footing.

-- But above all, Italy should now accelerate efforts to improve flexibility, productivity, competitiveness and growth. This is needed also to help ensure fiscal sustainability, but first and most importantly to guarantee a sustainable improvement in living standards and incomes. This in turn would help reverse the ongoing deterioration in Italy’s main strengths: its strong private savings and robust external position. The European crisis provides a call to action, and the timing is fortunate: Italy’s relative strengths are still clear, Italy still is different than the rest of the periphery in some important ways; but the difference is eroding, and the trend must be reversed now.