EU 2018 From Risks to Opportunity? - Fujitsu · 2018-02-08 · EU 2018 – From Risks to Opportunity? Fujitsu Research Institute Dr. Martin Schulz 2018.02.07

EU 2018 – From Risks to Opportunity?

Fujitsu Research Institute

Dr. Martin Schulz 2018.02.07

1


Copyright 2018 FUJITSU RESEARCH INSTITUTE

End of easy money – Europe at risk again?

EU market recovery – opportunities or more shocks?

Japan and Europe – trade and investment

Copyright 2010 FUJITSU RESEARCH INSTITUTE 2 Copyright 2018 FUJITSU RESEARCH INSTITUTE

Domestic Credit to the Private Sector (% GDP)

Financial Bubbles: Back to Normal?

50

70

90

110

130

150

170

190

210

19

80

19

81

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

World 1980-1993 China 1980-2003

World 1960-2015

World 1960-2015 China 1980-2015

Source: Data from World Bank 2017.

Japan

Thailand

USA

China

Spain

Financial Deepening World Credit Trend

UK

World Trend

1980-2000

150

200

250

300

350

400

450

500

5

10

15

20

25

30

2002 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2017

Central Bank Assets Drove Asset Bubbles

Source: Bloomberg 2017.

G4 (US, ECB, JP, CH) Central Bank Balance Sheets (% World GDP)

& MSCI ACWI Stock Index

Copyright 2018 FUJITSU RESEARCH INSTITUTE 3

%GDP

Central Bank Assets (left scale)

MSCI Stocks

MSCI

Index

-3

-2

-1

0

1

2

3

4

5

6

FED Rate Taylor Rule Estimate

All Rights Reserved, Copyright Fujitsu Research Institute 2010 4

Monetary Tightening: Europe Behind the US

Source: Data from Bloomberg. Copyright 2018 FUJITSU RESEARCH INSTITUTE 4

Taylor Rule Estimate EU: Policy Rate = Neutral Rate 1.5% + Inflation + α (Inflation – Target 2%) + β (Nairu 8.5% – Unemp)

ECB Policy Rate vs Taylor Rules for US & EMU

US

3 Years

Taylor Rule: Policy Rate = Interest Ratelong-term + 0.5 (Inflation Gap) + 0.5 (Employment Gap)

-3

-2

-1

0

1

2

3

4

5

6

ECB Rate Taylor Rule Estimate

EMU

3 Years?

ECB follows FED with a 2-year time lag

-12

-7

-2

3

8

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

ECB Rate Taylor Rule Estimate Taylor Rule Estimate Taylor Rule Estimate Taylor Rule Estimate

All Rights Reserved, Copyright Fujitsu Research Institute 2010 5

Restructuring: EU Recovering, Germany Booming

Source: Data from Bloomberg. Copyright 2018 FUJITSU RESEARCH INSTITUTE 5

Taylor Rule Estimate: Policy Rate = Neutral Rate 1.5% + Inflation + α (Inflation – Target 2%) + β (Nairu 8.5% – Unemp)

Spain=15%

ECB Policy Rate vs Taylor Rules for EMU, Italy, Spain

Spain

Germany

Italy

EMU

6

EU Outlook


EU market recovery – opportunities or more shocks?

7

EU Outlook


US EU EMU East

Europe DE UK SP JP

2017 2.3 2.4 2.4 3.8 2.2 1.8 3.1 1.7

2018 2.5 (2.6)

2.7 (2.2)

2.9 (2.2)

3.1 (3.0)

3.0 (2.3)

2.0 (1.4)

3.0 (2.6)

1.6 (1.3)

2019 1.8 (2.2)

2.2 (1.9)

2.3 (1.8)

2.9 (2.9)

2.3 (1.9)

1.9 (1.5)

2.3 (2.2)

1.2 (1.0)

1

1.5

2

2.5

3

3.5

2018 Growth Forecasts

Recovery in the EU pushes growth beyond the US

Note: Growth Forecasts by JP Morgan on Feb 2, 2018; (Bloomberg consensus forecasts in brackets )

Source: Data from Bloomberg.

German Economy Gains from EU Restructuring

Source: Data from IMD (2017, …).

IMD Competitiveness: Macro Economy


0

5

10

15

20

25

30

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

-40

-30

-20

-10

0Economy

Governm.

Business

Infrastr.

2017 US

Germany

Japan

-50

-30

-10

10Economy

Governm.

Business

Infrastr.

2005

-60

-50

-40

-30

-20

-10

0Economy

Trade

InvestmentEmployment

Prices

-60

-50

-40

-30

-20

-10

0Economy

Trade


Prices

Market Reforms had a Significant Impact

Source: Data from IMD (2017, …).

IMD Competitiveness: Economic Performance

Germany 1999


2009

2017

1999

2009

2017

Spain

-50

-40

-30

-20

-10

0Economy

Trade


Prices

Poland

2009

2017

Competitiveness has recovered in most regions


Big Restructuring Impact on Real Incomes

Restructuring resulted in growth and imbalances

-4

-2

0

2

4

6

8

10

Switzerland

Germany

UK

Japan

Note: Based on purchasing power parities (PPP) calculated as IMF “international” dollars.

Real GDP per Capita Difference Relative to the EU (EU Level = 0 from 1991) 1000

Int.$

Source: Data from IMF-WEO; UK Government

0

200

400

600

800

1000

1200

0

100

200

300

400

500

600

EU Mid-Size Companies Gained from EU Integration

Source: Data from Bloomberg (2018.02.06).

Major Stock Indices (JPY Base) Mid-Caps (JPY Base)

Germany

US

Japan

US

Japan

Germany

UK

EU

Italy


Hong Kong

EU

Note: SP500, Dax, Hang Seng, Stoxx, Nikkei country indices.

60

70

80

90

100

110

120

130

140

150

160

20

17

20

15

20

13

20

11

20

09

20

07

20

05

20

03

70

80

90

100

110

120

130

140

150

20

17

20

15

20

13

20

11

20

09

20

07

20

05

20

03

90

95

100

105

110

115

20

17

20

15

20

13

20

11

20

09

20

07

20

05

20

03

EU Regional Potentials

Real Disposable Income Net Operating Surplus Labor Productivity

Swiss

US

US

US

EU

UK

Spain

Spain

Germany

Source: Data from AMECO Database (2017).

UK

Japan EU

Spain

Germany

Japan

EU

Germany

UK Japan

Note: 2008=100. 2010 prices. Based on local currencies.

Swiss

Swiss


EU of “many speeds” emerging

EU Council has become the de-facto executive institution, enforcing national reforms from banking to security

National (reform) policies lead to different national levels of integration with a stronger focus on trade, industrial policy, competition

EU integration policies are challenged by national agendas

Macron plan

EU Finance Minister & Budget for integration policies

EU Investment Initiatives (Fonds) for regional growth

Protecting the “core” EU with stronger institutions & representation

Macron/Merkel/Schulz (France-Germany) negotiations

European Monetary Fund (EMF) with EU finance minister

Finalizing banking union, stabilizing fiscal policies

Support investment at the national level, financing EU investment funds


EU Reform Plans

14

EU Outlook


Japan and Europe – trade and investment

0

200

400

600

800

1,000

1,200

1,400

1,600


US

Europe

Asia

Source: Data from CEIC (2017).

Japan’s Regional Income Balance (Billion Yen)

Note: Current Account, Primary Income, Net Balance.

Japan’s Foreign Income: Europe remains Attractive

-100

0

100

200

300

400

500

600

700

70

90

110

130

150

170

190

1999 2001 2003 2005 2007 2009 2011 2013 2015

EU Trade – Japan Remains Below Potential


US (248 Bn)

Japan (60 Bn)

China (350 Bn) (right scale)

Source: Data from CEIC (2017).

EU Import (1999=100; (Euro Bn))

Thai (20 Bn)

Note: Korea, Thai imports as 6-month averages

17

JEFTA/JEEPA: The ‘Cars for Cheese’ Trade Agreement

Top 5 Bilateral Export Gains by Industry (% share of total increase)


Source: EU Commission (2016) - Trade Sustainability Impact Assessment of the Free Trade Agreement between the European Union and Japan.

GDP impact +0.2% for Japan and +0.1% for EU

Only +5% EU and +1% Japan service export gains!

EU 28 Winning Sectors Japan Winning Sectors

Food, feed, processed foods (55%) Motor vehicles (47%)

Other manufacturing (14%) Other machineries (21%)

Chemicals (incl. pharmaceuticals) (12%) Electrical machinery (10%)

Business services (4%) Chemicals (incl. pharmaceuticals) (8%)

Motor vehicles (3%) Other transport equipment (7%)

0

10

20

30

40

50

60

0

10

20

30

40

50

60

70

80

90

100

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

十億

Investment has become the Most Important Driver


US

Cases

EMEA

Cases

Source: Data from from Bloomberg (2017).

Japan’s M&A

(Cases; Bn USD)

Note: All initiated crossborder cases, including canceled deals. Amounts as 5-quarter averages

0

10

20

30

40

50

60

0

10

20

30

40

50

60

70

80

90

100

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

十億

China’s M&A

(Cases; Bn USD)

US

Cases

EMEA

Cases

Amount

Amount

Japan & Germany have Similar Investment Preferences

Japanese & German M&A Cases in EMEA (2013-2018)

Top Sectors Japan

%

Germany

% Communications (Media, Advertisement, Internet)

11 10

Consumer, Cyclical (Auto Parts, Retail)

11 11

Consumer, Non-cyclical (Biotechnology, Commercial Services,

Pharmaceuticals)

19 17

Energy (Alternative Sources)

6 5

Industrial (Electrical Comp., Electronics,

Transportation)

20 17

Technology (Software)

15 12

Source: Data from Bloomberg (2018.02.06) Copyright 2018 FUJITSU RESEARCH INSTITUTE 19

Almost identical investment preferences in JP & DE

Chinese M&A: Investing in Technology & Trade Barriers

Copyright 2010 FUJITSU RESEARCH INSTITUTE 20 Copyright 2018 FUJITSU RESEARCH INSTITUTE Source: Data from Bloomberg (2017).

Note: All initiated crossborder cases, including canceled deals.

China’s EMEA and US M&A by Sector (Cases; EMEA %)

US EMEA UK Germany Holland

Total Cases 1000 905 16.13% 17.20% 7.18%

Industrial 10.60% 21.44% 8.25% 27.84% 6.19%

Consumer, Cyclical 11.40% 17.35% 19.11% 21.66% 7.64%

Consumer, Non-cyclical 23.50% 15.14% 16.79% 10.95% 10.22%

Financial 7.80% 10.39% 28.72% 11.70% 7.45%

Energy 4.30% 9.17% 15.66% 12.05% 6.02%

Technology 20.40% 8.29% 14.67% 6.67% 12.00%

Basic Materials 2.30% 7.18% 12.31% 12.31% 4.62%

Communications 14.30% 5.08% 30.43% 15.22% 2.17%

Utilities 0.60% 1.99% 16.67% 5.56% 0.00%

Diversified 0.70% 1.66% 6.67% 53.33% 13.33%

Trade Barriers?

Technology

Technology

21

JEFTA/JEEPA: 21st Century Issues

Strong potential for EU Standards and regulations - if aligned with Japan’s Asian investment

Investor State Dispute Settlement (ISDS) Agreements - could not be advanced in Asia - new mechanisms necessary, EU Multilateral Court unlikely

E-Commerce has become the most important economic issue - more than standards, governance will be key



Brexit Challenges: UK Innovation Center at Risk?

Note: EU indices exclude UK stocks.

MSCI Stock Market Indices for the UK and EU (ex UK) (2003=100)

Source: Data from Bloomberg.

UK Stocks

EU Stocks

EU IT Stocks

UK IT Stocks

0

50

100

150

200

250

300

350

400

2003 2005 2007 2009 2011 2013 2015 2017

UK government estimates of Brexit costs:

“Hard Brexit”: -8% lower GDP in 2030 (WTO Tariffs)

“EU FTA”: -5% lower GDP

“Soft Brexit”: -2% when joining the general European Economic Area (EEA)

UK’s dynamic service, R&D and universities profited from EU

Finance, mobility and machinery technology might be at risk

Brexit Challenges: Japan’s “Smart” Services in the UK

Japanese M&A Cases in the UK and Germany (2011-2016)

U.K. No. Germany No.

Commercial Services 13 Chemicals 11

Internet 10 Electronics 11

Food 9 Computers 9

Holding Companies 9 Machinery-Diversified 9

Computers 7 Auto Parts & Equip. 8

Alt. Energy 7 Commercial Services 5

Advertising 6 Misc. Mfg 4

Software 6 Pharmaceuticals 4

Entertainment 4 Biotechnology 3

Misc. Mfg 4 Hand/Machine Tools 3

Total 139 Total 109

Source: Data from Bloomberg (2017)

UK Investment

Services

HQs, R&D

German Investment

Mfg, Sales

R&D


0

100

200

300

400

500

600

700

0

50

100

150

200

250

300

350

400

2000 2001 2002 2004 2005 2007 2008 2009 2011 2012 2014 2015 2017

-100

100

300

500

700

900

1,100

1,300

1,500

1,700

50

100

150

200

250

300

350

400

1998 1999 2001 2002 2004 2005 2007 2009 2010 2012 2013 2015 2017

Brexit Challenges: China’s Supply Chain Focus on UK

Copyright 2010 FUJITSU RESEARCH INSTITUTE 24 Copyright 2018 FUJITSU RESEARCH INSTITUTE Source: Data from CEIC (2018).

EU Import (1999=100; (Euro Bn))

UK Import (1998=100) GER Import (2000=100)

US (3.5 Bn)

Japan (0.9)

China (4.0 Bn) (right scale)

US (5.4 Bn)

Japan (1.9 Bn)

China (9.5 Bn)

(right scale)

“Real” growth remains strong well into 2019

Reform plans are “uninspiring” but “doable,” Brexit impact is limited, policy challenges remain at the regional level

EU competitiveness has improved, investment opportunities seem stronger than trade opportunities




Documents

EU 2018 From Risks to Opportunity? - Fujitsu · 2018-02-08 · EU 2018 – From Risks to Opportunity? Fujitsu Research Institute Dr. Martin Schulz 2018.02.07