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Outlook 2014: accelerating recovery ahead

In the eurozone GDP is expected to grow by 1.5% with Germany being the engine benefiting both periphery and CEE   

Italy back to growth (+0.7%)

Enduring normalization will favor further risk appetite



UniCredit's Research Department, led by Global Chief Economist Erik F. Nielsen, presented today its 2014 Outlook report.


UniCredit reaffirms its fundamental outlook: markets' normalization process is enduring and the growth recovery across the OECD area is gaining good momentum, while global trade is picking up nicely.


"We think this improvement will continue in the course of 2014, when also the eurozone will finally shift gear and enter a sustainable recovery phase. With liquidity in the major advanced economies set to remain ample, this is likely to keep financial markets well supported" Marco Valli, Chief Eurozone Economist comments.


UniCredit's research team expects eurozone GDP growth to accelerate to an annual average of +1.5% in 2014 from -0.4% in 2013, as firming global growth, more favorable corporate fundamentals and pent-up demand for capital goods will lead to a recovery in capital expenditures and intra-area trade. This will lead to a positive spillover on the labor market, but progress is likely to be slow and with meaningful differences across countries. The resulting acceleration in private consumption - also supported by a further easing of fiscal tightening and very low inflation - is likely to remain moderate. Risk of deflation is assessed to be low.


At country level, Germany (GDP: +2.5%) will be the engine of growth; the tight intra-European trade links will secure that the positive effect will be felt in the periphery as well as CEE.


In Italy, the recovery is underway, although the pace of GDP growth is likely to remain subdued at 0.7%. UniCredit forecasts a steady recovery in exports, a moderate pick-up in capital expenditures, amid still tight credit conditions, and a continuation of the easing in the fiscal drag. While the free fall in private spending is probably over, household consumption is likely to remain weak, as the saving ratio is on an upward trend and the labor market is unlikely to recover soon, with the unemployment rate set to rise (at least) until mid-year. In this context, UniCredit sees the fiscal deficit falling below 3% this year, but the debt-to-GDP ratio is expected to enter a downward trend only in 2015, after having peaked at 133.9% this year.


UniCredit's research team thinks the U.S. will continue to deliver sufficiently good growth and labor market indicators for the Fed to complete the tapering by the end of 3Q14. The policy focus will shift away from asset purchases to the forward guidance, through which the Fed tries to convince investors that short-term rates will remain low for an extended period. However, in UniCredit's view, this will not keep long-term rates from rising significantly, and we forecast the 10Y UST yield at 3.80% by the end of 2014. Bund yields are likely to move higher in sympathy, and we expect the Bund yield to reach 2.50% by year-end, with the UST-Bund spread set to widen to around 130bp.


The ECB will fight hard - and mostly successfully - to limit the import of tighter monetary conditions from the US and restore the transmission mechanism of monetary policy. The next ECB move will probably be on the liquidity front, via a new dose of cheap funding for banks conditional to lending activity. ECB interest rates are likely to remain unchanged well into 2015.


Amid normalization in economic growth, fading rating risk and exceptionally low policy rates, intra-eurozone sovereign spreads are likely to continue to tighten during most of 2014, but at a slower pace than in 2013. The expected target for the BTP-Bund spread is 180bp at year-end.


In FX, UniCredit's research team expects the normalization process to include further weakening of the yen and, to a lesser extent, the Swiss franc. EUR-USD is seen reaching 1.40 at year-end, partly as the world's central banks start restoring their historical weight of euros in reserves.




Milan, 27 January 2014