The latest figures from four financial surveys and reports show a positive outlook for the G7 economies and increasing confidence among CFOs in North America, more so than in Europe, while risks in the European financial system continue to create vulnerabilities – and a lack of liquidity in financial markets persists.
Accommodative monetary stance and government spending boost G7 economic growth
PwC's latest Global Economy Watch indicates a slight acceleration in G7 economic growth to 1.7 per cent year-on-year in the last quarter of 2016 (although the average growth rate post crisis is 1.8 per cent). PwC's economists picked out three reasons for the improving economic outlook:
- continued highly accommodative monetary stance across the G7 and, in particular, in the Eurozone, despite the gradual rise in US rates from historic lows recently;
- governments are starting to spend more, with some putting infrastructure plans in place; and
- increase in demand from the large (E7) emerging markets, partly driven by a fiscal stimulus in China, as well as a turnaround in economic activity in Brazil. This is corroborated by recent trade data, which shows that emerging markets’ imports continue to grow compared to a year earlier.
CFO optimism slides in Europe
Deloitte’s CFO Signals survey for Q1 2017 reflects the positive G7 economic indicators. The quarterly survey suggests that CFOs globally are increasingly optimistic about their own companies’ prospects, with optimism at a seven-year high, according to the survey. Deloitte’s chief global economist Ira Kalish said: “The rebound in confidence around the world is in line with the strengthening of economic growth that is evident in many parts of the world.”
Two-thirds of CFOs said conditions in North America are currently good, compared to only 12 per cent of CFOs who said conditions are currently good in Europe. Deloitte's managing director, Greg Dickinson, said: “Collective outlook for CFOs has improved significantly since the last survey, with CFOs voicing high hopes for lower taxes, a more business-friendly regulatory environment and better economic growth.”
Risks and vulnerabilities in Europe's banks
While the Trump-effect seems to have buoyed the business outlook in North America, uncertainty in Europe is restraining business sentiment, with three general elections due in France, the UK and Germany in the next five months. Further to general market sentiment, a report from the European Banking Authority (EBA) highlights some of the specific challenges faced by the EU's banking sector. In its spring 2017 report on risks and vulnerabilities in the European Union's financial system, the EBA underlines the following risks to financial stability:
- low profitability of financial institutions – including high levels of non-performing loans (NPLs), continuously high litigation costs, overcapacity, and lack of focus in strategies to return to sustained profitability;
- valuation risks around search for yield and repricing of risk premia – driven by increased asset price volatility coupled with lingering liquidity concerns;
- interconnectedness within the financial system – in particular via asset price contagion and direct financial exposure; and
- cyber risks and IT-related operational risks – fuelled by fast technological change.
Worsening liquidity and tightening credit terms
Further to the damp CFO sentiment for Europe and the financial sector risks highlighted by the EBA, the European Central Bank (ECB) has also released figures that show a tightening of credit terms in the securities and over-the-counter (OTC) derivatives markets. The EBA's survey suggests that the credit terms offered to counterparties, both in the provision of finance collateralised by euro-denominated securities and in OTC derivatives markets, tightened for all counterparty types when comparing the three-month reference period from December 2016 to February 2017 with the previous three months. The EBA's report stated: “By and large, the tightening of non-price terms was as important as the tightening of price terms. Worsened market liquidity and functioning, the reduced availability of balance sheet or capital and increasing internal treasury charges for funding were the most frequently cited reasons why overall credit terms had become less favourable, in addition to the tightening of non-price credit terms due to the implementation of new regulatory requirements on margins for non-cleared OTC derivatives. Credit terms are expected to tighten further for all types of counterparty over the next three-month reference period between March and May 2017.”
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