Overseas Headlines – January 08, 2018


Euro-Area Economic Confidence Soars to Nearly Two-Decade High

Confidence in the euro area continued its advance at the end of 2017, capping what was probably the strongest year for the economy in a decade. The European Commission’s measure of sentiment touched its highest since late 2000 in December. The reading of 116 was above the median forecast of 114.8 in a Bloomberg survey and was based on an improvement in the outlook for industry and services. After slowly emerging from the bank failures, record joblessness and sovereign debt crisis that marred its last decade, the 19-nation economy has found its feet. Growth in 2017 was probably the fastest since before the financial crisis and momentum this year is forecast to be almost as impressive. Reports last week showed the region’s economic activity at the end of the year was the strongest in almost seven years, and unemployment continuing to decline. In Spain, the jobless rate is at a nine-year low, while Germany’s is the lowest on record.

Missing Inflation

Still, despite the European Central Bank’s negative interest rates and asset purchases worth 2.3 trillion euros ($2.8 trillion) so far, inflation has been slow to stage a convincing return, remaining below the bank’s goal. One reason is that, despite the better employment picture, wages have been slow to rise. In Germany, the euro area’s biggest economy, pay talks for metalworkers and engineers this week could be key for determining whether inflation is finally on track for a pickup.




U.S. bank gains from tax law start with red ink

U.S. bank executives and investors expect a long-term boost from the new federal tax code, but the biggest lenders will first need to book multi-billion-dollar charges that will muddle fourth-quarter results. Banks will adjust deferred tax assets and liabilities to account for a lower corporate rate, and also take charges related to other tax changes. But analysts said the overall benefit from lower taxes will make up for any short-term hit. Citigroup Inc could report a quarterly loss of more than $15 billion and Goldman Sachs Group Inc will likely have lost about $3 billion, based on analyst estimates and recent profit warnings. JPMorgan Chase & Co, which reports first on Friday morning, could show a 35 percent plunge in net income from a year earlier. Bank of America Corp, which reports the following Wednesday, could show a 50 percent drop. “It is no doubt going to be a messy quarter,” said Jason Goldberg, bank stock analyst at Barclays. Citigroup is expected to take a $20 billion charge, largely because its losses during the 2007-2009 financial crisis will offset future taxes less now that the corporate tax rate has been cut to 21 percent from 35 percent. Goldman is expected to take a $5 billion charge, mostly due to a new repatriation tax on income kept outside of the United States. Meanwhile, banks with deferred tax liabilities will be able to write those down thanks to the lower tax rates.




India Has Highest Medium-Term Growth Potential among Largest Emerging Markets

Investment and Demographics Key to EM GDP Growth Potential here LONDON, January 04 (Fitch) New estimates of supply-side potential GDP growth over the next five years highlight the importance of demographic factors and investment rates and place India at the top of the list among the ten largest emerging markets (EMs) covered in Fitch Ratings’ Global Economic Outlook (GEO) forecasts. India’s projected potential growth is 6.7% per annum (p.a.). China and Indonesia jointly rank second-highest, both with projected potential growth of 5.5% p.a. The estimate for China represents a significant slowdown from recent historical average growth and reflects both a deteriorating demographic outlook and a slowdown in the rate of capital accumulation as the investment rate has declined. Broader measures of productivity growth in China have also slowed since the late 2000’s. Turkey’s potential growth rate is also projected to be rapid at 4.8% p.a. but this hinges crucially on continued high investment rates, which could be vulnerable to a sustained slowdown in capital inflows.