Global economy report : February 2014

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Global Economy Report

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Global Economy Report

The Global Economy Report is prepared in cooperation by the Macroeconomic Research Division of Banca Aletti and the Global Governance Programme of the Robert Schuman Centre for Advanced Studies of the European University Institute.

The objective of the Report is to provide an analysis of the current and expected macroeconomic and financial conditions at the global level, with also a focus on key economic areas such as Europe, the USA and ASIA.

This report has been prepared by:

- Daniele Limonta (daniele.limonta@alettibank.it) - Massimiliano Marcellino (massimiliano.marcellino@eui.eu) - Francesca Panelli (francesca.panelli@alettibank.it) - Alessandro Stanzini (alessandro.stanzini@alettibank.it) - Maria Eleonora Traverso (mariaeleonora.traverso@alettibank.it) with the collaboration of:

- Alberta Martino (alberta.martino@eui.eu)

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EXECUTIVE SUMMARY



January IMF forecasts depict favourable conditions for major economies in

2014, with upward revisions for several previous forecasts, in particular for

advanced economies.



Among BRIC countries, forecasts for China (7.5%) and India (5.4%) have been

raised, although fractionally. Russia (2%), Brazil (2.3%) and South Africa

(2.8%) see lower growth forecasts for this year due to endogenous conditions

of disequilibrium and exogenous reasons connected to uncertainty on the Fed’s

exit strategy.



After the 3% growth estimate for 2013, the global economy this year will grow

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

US growth in Q4 was in line with our forecasts, but the composition was

mixed at the end of 2013. We continue to foresee a good growth both in the

housing and the manufacturing sectors. Growth forecasts are at 2.7% for 2014

and at 2.9% for 2015. Unemployment rate is expected to decrease below the

6.5% threshold around mid year and continue under 6% at the end of 2015.



We expect inflation below 2% for most of the forecasting period, thanks to the

output gap accumulated during the Great Recession and these years of weak

recovery. After the October cyclical low at 0.9% yoy, Headline CPI trend

growth has gradually accelerated to 1.5% yoy in December. Our Forecasts are

for average headline CPI at 1.5% in 2014 and at 2.0% in 2015, while average

core CPI is seen at 1.8% in 2014 and at 2.1% in 2015.

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

The Fed has decided to continue Tapering (its purchases reduction) in

January, cutting monthly purchases by a further 10 bln to 65 bln USD per

month. As long as data will support the Fed’s outlook, we expect a

continued gradual reduction during this year, to completely halt the

program in Q4 2014 (October or December). The first increase in Fed

Funds should be around mid 2015.



Congress approved the Omnibus Spending Bill for Fiscal Year 2014, thus

approving all spending for the current fiscal year and avoiding the risk of

further shutdowns and incorporating the 10 December Budget agreement

that reduces Sequester’s cuts for 2014-2015. Earlier this month, Congress

also passed a bill to raise the Debt Ceiling.

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

The modest inversion in global economic expectations, due to turbulence in

emerging markets, has not seriously impacted the qualitative indicators that

lead the Eurozone’s economic cycle. Most of them reached new highs in the first

survey for 2014, confirming our forecast for above consensus growth in

Eurozone for the current year.



Aggregate income should therefore increase by 1.4% in 2014, accelerating to

1.8% in 2015, led by Germany, with above 2% growth both this year and next

year. There are signals that Italy, after exiting the recessive phase, will gradually

consolidate its growth in the course of the year, while also France is overcoming

its unexpected negative growth of the second half of 2013. The key point comes

from improvement in the periphery of the area.



Inflation was at +0.7% in January. We expect it may reach even further lows in

February (+0.6%), stabilising on modest levels (below 1%) for most of the year.

The average inflation rate is seen at 1%, but is expected to increase in 2015 to

1.5%.



In this report we present a special focus on the euro area.

EXECUTIVE SUMMARY

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

After over a year of stagnation, the UK recovery accelerated in 2013 and since Q2

we registered an above potential growth. Growth comes mainly from Private

Consumption, supported by an improved job market, by increased housing prices

and by low interest rates, causing thus a further accumulation of private debt. Our

forecasts for real growth are at 2.7% in 2014 and at 2.1% in 2015.



Inflation in the past year has been supported by a series of one-off shocks

(increased taxes, university fees and utility tariffs) and by particularly low labour

productivity that pushes up ULC, while more recently the pound appreciation is

limiting the impact of raw materials’ price increases. In January Headline CPI fell

to 1.9% yoy, below the BOE’s target for the first time since November 2009. After

this number, we forecast a mild acceleration and CPI to get back above target for

most of the forecasting period. Our forecasts for average headline CPI are at

2.1% in 2014 and at 2.3% in 2015.



Monetary Policy: the February MPC meeting didn’t change neither rates (at 0.5%)

nor the asset Purchases programme (stuck at 375 bln pounds). The Inflation

Report introduced a new Forward Guidance phase, that refers to spare capacity

and different job market indicators.

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

China: the system is finding an equilibrium on more modest growth

trajectories compared to the recent past. 2013 ended with an income increase

limited to 7.7%, value that could decrease to 7.3% in the current year. There

are no data for January on industrial production and sales, but December

values indicate an increase in production of 9.7% and in sales of 13.6%,

overall in line with the average values for the previous two years.



Japan: persistence of an expansive impulse with uniform intensity in the

2014-2015 period, with average income increases between 1.5%-2%. The

unemployment rate decreased to 3.7% in December, while the inflation value

confirms the end of the deflation, with an yoy rate of 1.6% and a positive

value also for the core inflation (0.7%). CPI inflation could reach 2.9% by the

end of 2014, partly due to the increase in the consumption tax.

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

Weakness in Australian economy is evident from GDP’s fluctuation in the third

quarter, at 0.6% qoq, in line with Q1 results. Also signals from labour market are

not encouraging, with rising unemployment rate and declining participation rate.

Growth forecasts incorporate a partial recovery in 2014 and 2015 (Oxford

Economics forecasts are at 2.74% for 2014 and 2.9% in 2015), supported by

RBA’s accommodative monetary policy stance.



Korea: National accounts highlight a slowdown in the second semester, with Q4

2013 growth at 0.9% qoq, down from 1.0% in Q3. The trend remains positive,

benefitting from a consumption recovery sustained by government policies and

low interest rates. Growth forecasts for this year are modest, around 3.02%,

mainly led by consumption and supported by the Central Bank’s and

Government’s policies. For 2015 we foresee an impulse in growth that should

bring it back to 2011 levels.

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EXECUTIVE SUMMARY

GENERAL MACRO SUMMARY

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Distance from peak (Q1 2008, bln euros) RHS

GDP dynamics (fig.1)

In Q4 we still had positive dynamics. The income level is still significantly below

pre-crisis levels, but is highest since mid 2012.

EUROZONE - Growth

DISTANCE FROM PEAK (fig.2)

PIL QoQ

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Fonte: Thomson Reuters Datastream 2011 2012 2013 -4 -2 0 2 4 6 1Y % change of GDP : Germany 1,4% 1Y % change of GDP : France 0,8% 1Y % change of GDP : Italy -0,8% 1Y % change of GDP : Spain -0,1%

Fonte: Thomson Reuters Datastream

2008 2009 2010 2011 2012 2013 90 92 94 96 98 100 102 104

For the first time since the beginning of 2011, the four major Eurozone economies have registered positive variations of output simultaneously. Germany is still the strongest economy, with a 0.4% qoq increase and 1.4% on a yearly basis. France recovered from its summer drop and is growing at +0.3% qoq, +0.8% yearly. Italy and Spain registered +0.1% and +0.3% GDP growth respectively, with a still negative trend.

YOY CHANGES LEVELS

GERMANY

FRANCE

ITALY

SPAIN

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Fonte: Thomson Reuters Datastream 2008 2009 2010 2011 2012 2013 90 92 94 96 98 100 102

2011 2012 2013 -4 -3 -2 -1 0 1 2 3 4 1Y % change of GDP : Netherlands 0,8% 1Y % change of GDP : Portugal 1,6% 1Y % change of GDP : Belgium 0,9% 1Y % change of GDP : Austria 0,1% Forecast 1

2011 2012 2013 -2,0 -1,5 -1,0 -0,5 0,0 0,5 1,0 1,5 1Q % change of GDP : Netherlands 0,7% 1Q % change of GDP : Portugal 0,5% 1Q % change of GDP : Belgium 0,4% 1Q % change of GDP : Austria 0,1% Forecast 1 QOQ CHANGES

Also the minor economies of the area register improving levels and dynamic output trends. The Highest growth was in the Netherlands (+0.7%), while Portugal marked the strongest trend

change (+1.6%). YOY CHANGES

LEVELS _AUSTRIA

BELGIUM

NETHERLANDS

PORTUGAL

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Fonte: Thomson Reuters Datastream -6 -4 -2 0 2 4 LATVIA 3,6 PORTUGAL 1,6 GERMANY 1,4 SLOVAKIA 1,3 BELGIUM 0,9 NETHERLANDS 0,8 FRANCE 0,8 AUSTRIA 0,5 EUROZONE 0,5 SPAIN -0,1 ESTONIA -0,5 ITALY -0,8 FINLANDIA -1,4 CYPRUS -5,3

-1,0 -0,5 0,0 0,5 1,0 NETHERLANDS 0,7 LATVIA 0,7 PORTUGAL 0,5 SLOVAKIA 0,4 BELGIUM 0,4 GERMANY 0,4 SPAIN 0,3 FRANCE 0,3 AUSTRIA 0,3 EUROZONE 0,3 ITALY 0,1 ESTONIA -0,1 FINLAND -0,8 CYPRUS -1 GDP DYNAMICS QoQ changes

EUROZONE - Growth

GDP DYNAMICS Yoy changes

Only Estonia, Finland and Cyprus registered negative variations. Latvia is number one in trend terms, while among major economies Portugal beat Germany.

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The modest decline in global confidence due to the current crisis in emerging markets has smouldered but not stopped the expansive trait of the global economic cycle. Economic activity, although with stronger downward risks, keeps improving, especially in developed economies. The expectations of progressive strengthening of growth trajectories for Eurozone’s main macroeconomic variables is thus confirmed, in line with aggregate industrial production

dynamics already seen in the Union.

EUROZONE –

GENERAL ECONOMIC ACTIVITY

GRECIA

Eurozone Income and International variables e Variabili internazionali EUROPE AND INTERNATIONAL CYCLE

Eurozone Production and International variables EUROPEAND INTERNATIONAL CYCLE

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With the January 2014 survey, Eurozone Manufacturing PMI index was higher figure than the global PMI index for the first time in past three years, as the Chinese index touched its six-month low and the US index its eight-month low, though we believe the deterioration is only temporary. The European gap compared to world levels has been closed and the difference has inverted into positive territory.

EUROZONE –

GENERAL ECONOMIC ACTIVITY

GRECIA

PMI Manufacturing index comparison

EUROPE AND WORLD CYCLE

PMI Manufacturing index comparison

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Eurozone recovery pace grew in January, bringing confidence to its two and a half year high. In the first survey for 2014, the Composite PMI index (that measures the general economic climate), accelerated from 52.9 to 52.1 in December, remaining above the 50 threshold for the seventh month in a row. The Manufacturing index accelerated to 54.0, its highest since May 2011, triggered by recovery of new orders (55.7, highest since April 2011). The Services index is at a four-month high at 51.6, confirming itself in expansion area..

EUROZONE -

QUALITATIVE INDEXES HIGH

PMI COMPOSITE

PMI COMPOSITE OUTPUT

PMI MANUFACTURING

PMI MANUFACTURING NEW ORDERS

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Fonte: Thomson Reuters Datastream 2012 2013 2014 2015 -1,5 -1,0 -0,5 0,0 0,5 1,0 GERMANY FRANCE ITALY

MAJOR ECONOMIES- Quarterly rates

GDP

Previsioni

During our forecasting horizon, Eurozone’s economy will see a) Germany’s constantly above average performance, with quarterly increases in GDP around 0.4%/0.5% in 2014-2015; b) France’s near-recessive evolution that will persist till the middle of this year (risk decreasing); c) gradual consolidation in Italy.

EUROZONE - GROWTH FORECASTS

France’s near-recessive evolution

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-4 -3 -2 -1 0 1 2 3 2010 2011 2012 2013 2014 2015 1.7 0.6 -2.6 -1.9 0.6 1.3 0.0 0.4 0.8 1.2 1.6 2.0 2.4 2010 2011 2012 2013 2014 2015 1.60 2.00 0.30 0.70 1.50 0 1 2 3 4 5 2010 2011 2012 2013 2014 2015 3.9 3.4 0.9 0.5 2.1 2.1 GERMANY – Average Annual Rates

GDP

FRANCE – Average Annual Rates

GDP

ITALY – Average Annual Rates

GDP

We expect Germany to grow by 2.2% in 2014 and 2.1% in 2015, while growth for 2014 will be at 0.6% in Italy and 0.7% in France. In 2015 the gap between Eurozone’s major economies is expected to reduce (France +1.5% and Italy +1.3%).

EUROZONE - GROWTH FORECASTS

1.7 1.6 1.4 2.0 1.5 1.0 1.6 0.7 1.1 0.6 1.4 OECD FMI Growth below expectations in France in 2014 Growth above expectations in Germany in 2014 1.1 IT GOV 0.9 Growth in line with expectations in Italy in 2014

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-1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 2010 2011 2012 2013 2014 2015 1.90 1.60 -0.60 -0.40 1.40 1.80

EUROZONE – Quarterly rates GDP EUROZONE – Average Yearly Rates

GDP

2011 2012 2013 2014 2015 -0,6 -0,4 -0,2 0,0 0,2 0,4 0,6 0,8 Previsioni Previsioni Feb-14 Forecast

2013 ended with a 0.4% reduction of aggregate income. We confirm our 2014 growth forecast for Eurozone at 1.4%, sensibly above consensus or major international organisations forecasts. For 2015 we foresee a further acceleration in income up to 1.8%, still above consensus, strongest growth since 2010.

EUROZONE - GROWTH FORECASTS

+1.0% IMF forecast (Jan 2014) Consensus Forecast (Jan 2014) OECD (Nov 2013) 2014 Eurozone growth above consensus +1.6% OECD (Nov’ 2013) +1.4% IMF (Jan 2014) Consensus Forecast (Jan 2014)

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The latest available data on exports (November 2013, 0.2% mom), confirm Eurozone exports stagnation, with an average increase for 2013 at 0.6%, compared to an average 10% growth in 2011-2012 and 20% in 2010. The trend of the leading indicator is compatible with an acceleration of exports in the current year.

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Accelerating exports in 2014 is a common feature for the main Eurozone economies, particularly Germany and the Netherlands. Greatest difficulties in France, that is recovering anyway.

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Despite export stagnation, in the past year the trade balance registered a surplus, thanks to the simultaneous decline in import volumes (-3.9% yoy November 2013). Balance is currently at 17.1 bln euro, close to its March 2013 peak data (21.1 bln).

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US and UK, both enjoying brilliant growth perspectives for 2014, represent the principal markets for Eurozone exports, counting together for slightly less than 24% of exports. Trade toward emerging Asian economies excluding China, centre of the current turbulence, represent a little over 7% of total. The persistence of critical conditions in these areas is in any case insufficient to deteriorate the EMU’s competitive position in the current year.

EUROZONE - INTERNATIONAL TRADE

0 5 10 15 20 25 EUROPE DEV/RUSSIA/C.I.S. 20,6 WESTERN EUROPE EX E.ZONE 16,4 DEV. ASIA/KOREA 15,3 NORTH AMERICA 14,2 C/SOUTH AMERICA 5,7 AFRICA 5,6 M.EAST 5,2 NORTHERN EUROPE 4 JAPAN 2,7 OCEANIA 1,6 EXPORT/TOTAL EXPORT 10 year average 5 year average 0 2 4 6 8 10 12 14 US 12,4 UK 11,4 CINA 7,9 AFRICA 5,6 M.EAST 5,2 SWITZERLAND 5 RUSSIA 4,8 POLAND 4,5 SWEDEN 2,9 JAPAN 2,7 BRASIL 1,9 KOREA 1,9 CANADA 1,7 INDIA 1,5 AUSTRALIA 1,4 HONG KONG 1,2 NORWAY 1,1 ARGENTINA 0,5 NEW ZEALAND 0,2 EXPORT/TOTAL EXPORT 10 year average 5 year average

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China is instead Eurozone main import market (over 11% of total). US and UK combined share is about 18%, while Russia is gaining importance, over 7%. Around one fifth of imported goods come from emerging Asian economies.

EUROZONE - INTERNATIONAL TRADE

0 5 10 15 20 25 EUROPE DEV/RUSSIA/C.I.S. 22,7 DEV. ASIA/KOREA 20,2

WESTERN EUROPE EX E.ZONE 13,6 NORTH AMERICA 9,9 NORTHERN EUROPE 5,8 AFRICA 5,7 C/SOUTH AMERICA 5 M.EAST 5 JAPAN 2,5 OCEANIA 0,4 IMPORT/TOTAL IMPORT 10 year average 5 year average

0 2 4 6 8 10 12 CHINA 11,3 US 9,2 UK 8,9 RUSSIA 7,3 AFRICA 5,7 M.EAST 5 SWITZERLAND 4,7 POLAND 4,6 NORWAY 2,9 SWEDEN 2,9 JAPAN 2,5 BRASIL 2 INDIA 1,8 KOREA 1,5 HONG KONG 1,5 CANADA 0,7 ARGENTINA 0,4 AUSTRALIA 0,3 NEW ZEALAND 0,1 IMPORT/TOTAL IMPORT 10 year average 5 year average

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At the beginning of 2014, the manufacturing leading indicator recorded its highest level in the last three years at 52.2, supporting the recent acceleration of industrial production. The

manufacturing cycle in Spain finally signals an expansive phase..

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The first survey for 2014 also records expansive data for Greece. It’s the first time since the great recession of 2008-2009. The Manufacturing PMI index in January was at 51.2, its highest since July 2008, with dynamics that anticipate a strengthening of industrial activity, currently still markedly recessive.

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Irish business confidence, although decreasing in the past three surveys, remains on levels close to the past three years’ highs, in expansive territory (52.8). The figure is consistent with the great acceleration of industrial activity generated in the final months of 2013. The December 2013 fluctuation seems temporary and reversible, due to extreme volatility.

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In Portugal the industrial cycle is in a phase of rapid acceleration. At 99.6, business confidence for the manufacturing sector is at its five-year high, while production registered an exceptional trend increase in December 2013 at 9.1%, marking its record since 2006.

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The consolidation of macroeconomic conditions in the Union’s periphery is a central element in Eurozone’s growth acceleration in 2014.

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Fonte: Thomson Reuters Datastream 2011 2012 2013 -10 -5 0 5 10 15 2,7 0,7 -0,3

lug 13 ago 13 set 13 ott 13 nov 13 dic 13 -2

-1 0123

1M % change of IND. PRODUCTION INCLUDING CONSTRUCTION (CAL ADJ) : Germany -0,6% 1M % change of IND. PRODUCTION : France -0,3%

1M % change of IND. PRODUCTION : Italy -0,9% 1M % change of IND. PRODUCTION (WDA) : Spain -0,3%

In December industrial activity registered declines in all major economies of the area, that we assume temporary and not problematic for the strengthening production trend.

Principal countries; QoQ changes

Germany

Spain

Italy

France

Principal countries; YoY changes

France

Italy

Spain

Germany

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Eurozone’s industrial production closed 2013 with a -0.7% change, corresponding to a +0.5% trend change. The leading indicator is consistent with the foreseen improvement of aggregate industrial activity.

Eurozone; Monthly changes

PMI MANUFACTURING Lag 3m Industrial Production Yearly change month/month YoY, dx

EUROZONE - PRODUCTION

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December marked a surprising weakness in private consumption in the Monetary Union. The major surprise came from the strong drop in retail sales in Germany (-2.5% mom), but decreases have been observed in Austria (-1.8%), Spain (-3.6%) and Portugal (-5.8%) as well. France is the only exception.

EUROZONE - CONSUMPTION

-6 -4 -2 0 2 4 CYPRUS 2,1 IRELAND 1,4 LUX 0,1 ITALY 0,1 FINLAND 0 NETHERLANDS -0,1 BELGIUM -0,3 ESTONIA -0,4 LATVIA -0,5 SLOVAKIA -0,5 SLOVENIA -0,6 EU -0,8 FRANCE -1 GREECE -1,2 EUROZONE -1,6 AUSTRIA -1,8 GERMANY -2,5 SPAIN -3,6 PORTUGAL -5,8

-6 -4 -2 0 2 4 6 8 10 LUX 8,5 LATVIA 3,8 IRELAND 3,4 ESTONIA 2,3 SLOVAKIA 1,5 FRANCE 1,2 EU 0,7 AUSTRIA -0,3 EUROZONE -0,7 PORTUGAL -0,8 SPAIN -1 ITALY -1,3 SLOVENIA -1,3 GERMANY -1,4 FINLAND -1,7 BELGIUM -1,8 NETHERLANDS -2 CYPRUS -2,6 GREECE -5,5 RETAIL SALES Eurozone RETAIL SALES

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set 2012 ott 2012 nov 2012 dic 2012 gen 2013 feb 2013 mar 2013 apr 2013 mag 2013 giu 2013 lug 2013 ago 2013 set 2013 ott 2013 nov 2013 dic 2013 gen 2014 -2,0 -1,5 -1,0 -0,5 0,0 0,5 1,0 1,5 -6 -4 -2 024 RETAIL SALES

Retail sales in Eurozone, on average, recorded a -1.5% decrease in December 2013. The Q4 average was negative by seven tenths of a point compared to the previous quarter.

REAL, ex Auto

month/month 3m/3m ann. _{Right Scale}

YoY, right

Eurozone; changes RETAIL SALES Quarterly Averages

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Weakness in private consumption at the end of 2013 is in contrast with the evident improvement in consumer confidence, which grew even further at the beginning of the year. For households, the economic outlook for the coming months is at a three-year high. We expect a significant recovery in retail sales already in January.

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In December 2013, the job market recorded a 129K unemployment decline. In the past three months the number of unemployed decreased by 244K units overall. Such an evident improvement in occupation was not seen since 2010.

EMPLOYMENT variazione 1Y PMI COMPOSITE EMPLOYMENT UNEMPLYMENT RATE Right scale UNEMPLOYMENT 1M change Unemployment JOB MARKET

Employment and Expectations

JOB MARKET

EUROZONE - LABOUR MARKET

PMI Employment:

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January 2014 preliminary figure for Eurozone Headline CPI was +0.7% yoy, fourth consecutive data below 1%, twelfth under ECB’s target 2%. It represents a 47-month low, previously recorded last October and it implies a -1.1% mom change. The average inflation rate for 2014 was +1.4%, down from +2.5% in 2012 and +2.7% in 2011. This is the lowest yearly rate since 2009 (+0.3%). In December (latest available Eurostat official surveys for all countries), harmonised inflation was below its long-term averages in almost all countries (except Austria and Finland), was negative in Greece and Cyprus and just positive in Portugal, Spain and Slovakia.

QoQ change; harmonised on European base

INFLATION BY COUNTRY

YoY change; harmonised on European base

INFLATION BY COUNTRY

-1,5 -1,0 -0,5 0,0 0,5 1,0 AUSTRIA 0,8 GREECE 0,8 GERMANY 0,5 BELGIUM 0,4 FINLAND 0,4 FRANCE 0,4 ITALY 0,3 PORTUGAL 0,3 EU 0,3 MALTA 0,2 LUX 0,1 NETHERLANDS 0,1 ESTONIA 0 SPAIN 0 IRELAND -0,1 SLOVAKIA -0,2 SLOVENIA -0,5 CYPRUS -0,6 EUROZONE -1,1

-2 -1 0 1 2 3 4 5 AUSTRIA 2 ESTONIA 2 FINLAND 1,9 LUX 1,5 NETHERLANDS 1,4 BELGIUM 1,2 GERMANY 1,2 MALTA 1 EU 1 SLOVENIA 0,9 FRANCE 0,8 EUROZONE 0,7 ITALY 0,7 SLOVAKIA 0,4 SPAIN 0,3 PORTUGAL 0,2 CYPRUS -1,3 GREECE -1,8 HICP YoY % 10 year average 5 year average

EUROZONE - INFLATION

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With preliminary January reading, Eurozone inflation rate, net of its volatile components (ex Energy, Food, Alcohol, Tobacco), is at +0.8% yoy, up by one tenth compared to its all-time low recorded in December (+0.7%). Core inflation is thus higher than headline inflation, with a one pp difference. On average in 2013 core inflation was at 1.1% (lowest since 2010), down from +1.5% in 2012 and +1.4% in 2011.

EUROZONE - INFLATION

CORE INFLATION BY COUNTRY CORE INFLATION BY COUNTRY

CPI Headline

CPI Core

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EUROZONE - INFLATION

Trend variation

INFLATION BY MACROSECTORS

Variazioni tendenziali FOOD (incl. Alcohol tobacco)

SERVICES ENERGY

INDUSTRIAL GOODS (non energy)

The decline in inflation in January is mainly due to energy prices (Energy CPI at -1.2% from 0% in December), but was also supported by a modest slowdown in food prices (+1.7% from +1.8) and industrial goods (+0.2% from +0.3%). Instead services inflation (over 42% of the basket) increased by one tenth, at +1.1%.

Weight 19.3%

Weight 10.9%

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EUROZONE - INFLATION

YoY changes

INFLATION BY MICROSECTOR

Excluding the energy component, that is now in deflation, the January inflation rate would be three tenths higher at 1.0%.

-4 -2 0 2 4 6 ALCOHOL TOB 3,5 FOOD 1,5 HOUSING 1,5 REST & HOTELS 1,4 INSURANCE 1,1 CORE 0,8 ALL ITEMS 0,7 EDUCATION 0,7 FLASH ESTIMATE 0,7 FURNISHING & HH EQ. 0,5 RECREATION & CULT. 0,5 TRANSPORT 0,4

CLOTHING & FOOT. 0,2 HEALTH -0,6 ENERGY -1,2 COMMUNICATIONS -3,4 HICP YoY % 10 year average 5 year average

0,0 0,5 1,0 1,5 2,0 2,5 EX ENERGY 1

EX EN & SEAS FOOD 0,9 EX EN. & UNPROC. FOOD 0,9 CORE 0,8 EX SEAS FOOD 0,8 EX TOBACCO 0,8 EX ADM. PRICES 0,8 ALL ITEMS 0,7 FLASH ESTIMATE 0,7 EX FREQUENT PURCH 0,5 HICP YoY % 10 year average 5 year average YoY changes CORE INFLATION

December 2013 data. Ex-Energy, Flash, Core, All Items: January 2014 December 2013 data. Energy, Flash, Core, All Items: January 2014

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Inflation tends to follow the economic cycle with a two-quarters lag. The sudden slowdown of consumer prices in the fall months is largely due to the delayed effects of recession. Industrial activity’s and private consumption’s modest recovery perspectives and the improving confidence will have a positive effect on price dynamics only in a couple of months.

EUROZONE - INFLATION

EUROCOIN index INDUSTRIAL PRODUCTION

EUROZONE RETAIL SALES CPI

CPI CPI

CONSUMER SENTIMENT

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Looking at the charts, we notice overshooting of retail prices vs production prices, considering the existing correlation. The qualitative indexes, which remain close to their past year highs, signal that downward pressures in wholesale prices should be gradually fading.

EUROZONE

-

INFLATION

YoY changes PRODUCTION PRICES CPI PPI PPI - YoY PMI COMPOSITE INPUT PRICE +3 months

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Fonte: Thomson Reuters Datastream -3,0 -2,5 -2,0 -1,5 -1,0 -0,5 0,0 0,5 FRANCE -0,6 SPAIN -0,6 GREECE -0,7 GERMANY -0,8 PORTUGAL -0,9 AUSTRIA -1,2 EUROZONE -1,2 ITALY -1,8 BELGIUM -2,5 NETHERLANDS -2,7

December data signalled smaller disinflationary pressures on inputs of the production chain.

EUROZONE - INPUT PRICES

YoY Change

PRODUCTION PRICES

-2,5 -2,0 -1,5 -1,0 -0,5 0,0 0,5 1,0 SPAIN 0,6 FRANCE -0,1 PORTUGAL -0,1 GREECE -0,2 GERMANY -0,5 EUROZONE -0,8 AUSTRIA -1 NETHERLANDS -1,7 ITALY -1,8 BELGIUM -2,5 November ‘13 December ‘13

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Deflation risks are negligible in the Eurozone as an aggregate. Risks may be higher in the periphery. For February, we forecast a new low at 0.6% for the headline inflationrate. Up to September 2014 general inflation will remain around 1%, compressed by high spare capacity in goods and labour markets, with a modest economic recovery. Only in October it will return around 1.5%, thanks to stabilising input and energy prices. Inflation will accelerate in 2015, but the persistent negative output gap will still bind price dynamics, keeping it far from 2%. Average rate will be at +1.0% in 2014 and at +1.5% in 2015. For core inflation we foresee a declining profile for the first three quarters of the year, with a minimum at +0.3% in September 2014 and then a gradual increase to 1% in 2015. Average rate at +0.5% in 2014, +1.0% in 2015.

EUROZONE - INFLATION

CPI

HEADLINE

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DISCLAIMER

The content of the preceding pages has been prepared by Banca Aletti&C. S.p.A. (“Banca Aletti”) together with the European University Institute. Banca Aletti – belonging to the Gruppo Banco Popolare – is a broker authorized by law, listed in the Register of Banks, number 5383.

With this document Banca Aletti proposes to its customers’ evaluation information retrieved from reliable sources in the system of financial markets and – where deemed necessary – its own opinion on the matter with possible commentary (notes, observations, evaluations).

We point out that the information provided, communicated in good faith and on the basis of data available at the moment, could be inexact, incomplete or not up to date and is apt to variation, even without notice, at any given moment.

This document cannot be in any way considered to be a sales or subscription or exchange offer, nor any form of soliciting sales, subscriptions or exchange of financial instruments or of investment in general and is neither a consulting in financial investment matters.

Banca Aletti is not responsible for the effects deriving from the use of this document. The information made available through the present document must not be considered as a recommendation or invitation on Banca Aletti’s side to accomplish a particular transaction or to perform a specific operation.

Each investor should form his own independent persuasion, based exclusively on his own evaluations on the opportunity to invest. The decision to undertake any form of financial operation is at the exclusive risk of the addressees of the present disclaimer.

The source of all data and graphs is provided by Thomson Reuters where not otherwise specified.