European Economies: Will Political Risk Spoil the Party in 2017?

The UK referendum in June, parliamentary elections in, Spain in December 2015 and June 2016… The past 12 months have seen a multiplication in the number of political deadlines with unexpected outcomes and uncertain consequences in Europe. However, the political tempo is set to quicken again in the coming year, with the referendum in Italy and the presidential election in Austria on 4 December, possible parliamentary elections in Spain on 25 December (the third in just over a year!), elections in the Netherlands on 15 March, presidential and parliamentary elections in France in April, May and June, without forgetting the vote in Germany in autumn 2017.

The question induced by this faster political tempo is simple: will economic growth withstand the pace? Indeed, growth could be affected in various ways by increased political uncertainty: delayed investment and corporate spending decisions, a drop in household confidence, a downturn on equities markets and the increase in bond rates taking a toll on financing terms for economic agents, as well as a lack of reforms and a freeze on public spending in the event of a government vacuum. While it is easy to enumerate these transmission channels, it is far more difficult to quantify the impact of this political uncertainty on growth. This is what we attempt to do here.

After measuring political risk in 14 countries in western Europe by taking into account risk indicators specific to the region (rising euroscepticism, anti-immigration sentiment and a fragmentation of political scenes), we have built an econometric model aimed at measuring the impact of an increase in political uncertainty on GDP growth in five countries: Germany, the UK, France, Italy and Spain. This indicates that the increase in political risk noted since the crisis has dented growth by 0.2 points on average, the impact on investment (0.5 points) being higher than that on household consumption (0.1 points). Nevertheless, this average masks clear differences, growth in the UK (0.3 points), France (0.4) and Spain (0.3) being more affected by political risk than in Italy and Germany. In the event that these last four countries suffer a rise in political uncertainty like that seen in the UK at the time of the referendum in June, their growth would be dented by around 0.5 points on average.

Eventually, it is difficult to speak of political uncertainty without mentioning the US in these last months of 2016. Our model shows a significant impact on the US economy by a shock in political uncertainty to a similar extent of that seen with the UK referendum (1.5 points). The impact on European economies would be even worse, thereby confirming the systemic role of the US economy.

Download this publication:

Mexico’s Economy: More Difficult Times Ahead

Mexico’s economy has been increasing above the Latin American average since 2012. While the region contracted by 0.5 % in 2015, Mexico, its second largest economy, grew by 2.5 %. Looking ahead however, the outlook is less optimistic. Coface forecasts that the country’s GDP will grow by 1.6 % in 2016 and 1.5 % in 2017.

A less supportive global environment is the key rationale behind this expected slowdown. The US presidential elections have created volatility in the Mexican market, due to its strong economic dependence on its northern neighbour. The less open approach to trade shown by the presidential candidates is also threatening the future of of trade relations. Beyond this political issue, Coface expects that the US economy will continue to slow in 2017 (to record +1.5%, following +1.6% in 2016). Against this backdrop, along with lackluster industrial activity in the US, the Mexican manufacturing sector is likely to disappoint again. Moreover, the slump in oil production, with low international prices, continues to represent a major concern on the fiscal front. Public debt rose to 42.3 % in 2015, up from 38.3 % in 2013, and is expected to reach 45 % by the end of this year.

This deteriorating macroeconomic outlook is clearly having repercussions at micro level. Momentum is therefore slowing in private consumption-related sectors. Coface is downgrading its risk assessment for the country’s retail and automotive sectors, while commodity dependent sectors remain at risk.

Download this publication:

Barometer of Sector Risks in the World – 4th Quarter 2016

For this quarter, the result is clearly negative once again, as eight sectors have been downgraded and only one upgraded.

Each quarter, Coface conducts a risk analysis on 12 sectors throughout 17 countries in six regions.

The changes concern North America (increased risks in the retail, textile-clothing, paper-wood and transport sectors), Western Europe (downgrade of the agrofood sector) and Central Europe (downgrades for construction and IT & communications, but an upgrade for the transport sector) and Middle East (downgrade for IT & communications).

This contrasting sector momentum confirms that the balance is still precarious, even in regions that have so far been relatively spared from the rise in risks noted on a global scale (23 sector assessment downgrades, compared to just 10 upgrades for 2016 as a whole).

This trend is set to continue in 2017, with global growth likely to remain weak. The continuation of low prices for commodities means that there is no respite for the large number of emerging economies that depend on them. In terms of developed economies, as for the Donald Trump election in the US which beat the odds and is building uncertainties for a few months, the number of risky elections scheduled over the next 12 months in Europe could cause companies to delay their investment decisions. This would undermine the timid recovery noted since 2014. In terms of positive news, for the first time since November 2014, there have been no downgrades noted in Latin America or even in Asia – all regions that have particularly suffered from the emerging markets shock of the past two years.

Download Infographic: Sector Risk Assessment – 4th Quarter 2016








Download this publication:

The German Economy in 2017: Stable But Not Staid

The signs for Germany’s further economic development are promising, with a high level of stability.

Coface’s expectations for solid growth therefore come as little surprise. This year’s gross domestic product is expected to grow by 1.8 % (seasonally adjusted and corrected for working days). Growth for next year, at 1.7 %, will only be marginally smaller. Since 2015, Germany’s economy has been growing faster than the potential of 1 to 1.5 % set by the German Bundesbank and several research institutions.

The primary growth driver for 2017 will once again be private consumption, mainly fuelled by the country’s record-high levels of employment. Consumers’ purchasing intentions will gain additional impetus, although less so than in 2016, due to lower increases in real wages resulting from rising inflation.

The main focus for 2017 will be on the political arena, with presidential elections in France and the Bundestag elections in autumn. The five federal state elections this year are considered important indicators for the upcoming federal elections and it can be expected that the future Federal Government – whatever its colour – will be less powerful than the current “Grand Coalition”. This will restrain reforms to a minimum level.

Risks for the German economy could also occur on the export side. Global trade is only expected to show moderate growth in 2017 and specific risks are lurking in some of the major target countries for German exports – such as the forthcoming Brexit and the cooling down of the Chinese and US economies. Insecurity could also rise in the aftermath of the US presidential elections. German exports will only grow by 2.3 % in 2016 and 3.4 % next year.

In this environment, Coface forecasts that the downward pressure on insolvencies will continue, with the fifth year in a row of record lows in 2017 (falling to a volume of around 21,000). Nevertheless, this downward trend is expected to continue at a slightly slower pace. After decreasing by 5% this year, Coface forecasts a further decline in bankruptcies by 4.2 % in 2017. Despite the positive outlook, the amount of outstanding claims in insolvency procedures could rise further, as several sectors, especially large.

Download this publication:

“Uber-ization” of the Economy in France: A New Weapon of Mass Creative Destruction?

Why is the collaborative economy so captivating in France? First of all, because it is synonymous with youth and innovation. But also because sectors that are experiencing double-digit growth nowadays are scarce. One swallow does not a summer make—France is even one of the European leaders in this market (1), notably thanks to a favourable regulatory environment (like the special self-employed status in Europe). The transactions carried out in the sector should increase twentyfold by 2025 thus continuing their recent trend: between 2012 and 2014, the number of Airbnb users hosted in Paris multiplied by 8. And 14,000 PHV (French private hire vehicle) companies have been created in France since 2010, this increase resulting from both the economic motivations of users and entrepreneurs and/or a lack of a structural supply.

Against this backdrop, the question that arises today is simple: are these business creations far superior to the business and employment failures among the traditional players in these sectors (particularly taxis and hotels)? While the private hire vehicles have contributed to generate a rise in failures of taxi companies in France (particularly in the Paris region) since 2012, it appears from this study of data concerning company failures and creations by sector and by region that the latter more than compensate for the former. And the net effect on employment is positive. An econometric model measuring the impact on the unemployment rate of a variation in the number of private hire vehicles (for example, related to a regulatory change) confirms it: a decline of 20% of the latter is associated with an increase in the unemployment rate of 0.15 point, even when taking into account the positive effects on traditional taxi companies.

Download this publication:

Turkey: End of the Tulip Period?

Turkey’s economy experienced several shocks during 2015 and 2016. Heightened political uncertainties, regional tensions, the US rate hike process, the credit rating downgrade and domestic security issues, have all resulted in lower tourism revenues, a slowdown in consumer demand, lower appetite from foreign and domestic investors and weaker local currency. These factors have contributed to a slow-down in capital inflows to Turkey – inflows on which the country is heavily reliant for its economic activity. Compounded by global risk aversion and local companies paying their debts in dollars, this environment has caused a sharp depreciation of the lira. This is threatening the payment behaviour of the corporate sector, as well as investment appetite and growth perspectives. Coface expects the Turkish economy to grow by 2.5% in 2016 and 2.7% in 2017.

It should be noted, however, that despite these domestic and external shocks over the last couple of years, the Turkish economy has remained resilient. Manufacturing production continues to edge up on an annual basis, mainly on the back of the economic recovery in Europe, Turkey’s main trading partner. The measures that have been implemented to boost domestic demand are expected to have effects on consumption in the upcoming period. Thanks to its improving relations with neighbouring countries, tourism revenues should start to increase in the second half of 2017. Exports to the EU area are continuing to rise, partially compensating for exporters’ falling profits. Higher public spending will also support economic activity, especially with 2016the recent incentives package aimed at encouraging investments.

Most importantly, the implementation of structural reforms means that a path of sustainable growth in the medium term still looks promising for economy, all the more as the country benefits from a young popu-lation and large domestic market. Although economic growth has slowed, the economy has still been in continuous progression for the last 27 quarters.

After elaborating on this challenging outlook in the first section, the panorama will focus on the retail sector, as it is a good indicator of both domestic demand and the impact of currency risks for businesses. The study will then examine the automotive sector, where domestic sales are edging down, but exports remain fairly strong, on the back of the European recovery.

Download this publication: