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European economy
Economic outlook: Dawn in
Europe
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Table of Contents
This report has been prepared by UBS AG and UBS Bank, S.A.. Please see important disclaimers and disclosures at
the end of the document.
European economy
58
56
10%
54
8%
52
50
6%
48
4%
46
44
2%
42
40
2001
0%
2003
2005
2007
Manufacturing PMI
2009
2011
2013
2015
European economy
10
10
Forecast
EURUSD (lhs)
4Q15
3Q15
2Q15
1Q15
4Q14
-60
3Q14
-50
-60
2Q14
-40
-50
1Q14
-30
-40
4Q13
-20
-30
3Q13
-10
-20
2Q13
-10
Percentage (y/y)
1Q13
Percentage( y/y)
more by imports. Indeed, stronger economic growth and job creation will
likely lead to more demand for imports, even if imported goods and
services have become more expensive following the decay of the euro.
The sharp fall in oil prices in turn has already led to a windfall in the
Eurozone trade balance in the second half of 2014 as energy constitutes
a quarter of goods imports in the Eurozone. In the meantime, Brent oil is
trading approximately at the same level as at the end of 2014, so that we
see little further support from that side for the trade balance in 2015.
What's more, the increase in oil prices that the futures market is
reflecting for 2016 means a modest headwind for the trade balance next
year.
Further out, it will take 12 months for the oil price shock to filter out of
year-over-year comparisons. This means that the inflation rate is set to
move up very quickly once the negative base effects filter out. Therefore,
we believe that inflation should move above zero during the summer, to
around 1% by end of 2015 and to 1.7% by end of 2016.
ECB: To stay easy, for now
With large scale asset purchases, the ECB has embarked on the only key
alternative to interest rate reductions. However, this does not mean that
the ECB has no ammunition left. Indeed, the asset purchase programs
can be redesigned at any time in terms of size, composition and pace for
instance. Nevertheless, it is imperative that the courts rule favorably this
year regarding asset purchases. With a low trend growth rate of around
1%, the ECB will have to rely on this tool probably again and again over
the long term.
In the short term, the ECB will be faced with an increasingly stronger
economy and be challenged by the hawks in the governing council to
prematurely scale down the QE program. By early 2016 inflation should
have moved beyond 1% and the unemployment rate should be relatively
close to the structural unemployment rate of about 10%. However,
Mario Draghi recently pointed out that the new ECB economic staff
projections assume a full implementation of the asset purchases at least
until September 2016. It will therefore probably require growth even
stronger than 2% to scale down QE, which is not likely but not
impossible.
Conclusion: Eurozone economy to re-accelerate
Given the very favorable fundamental backdrop over the forecast horizon,
we expect the Eurozone to grow well above trend growth (estimated at
approximately 1%). The growth enhancing effect from the monetary side
should intensify sharply in the second half of 2015, given the lead of the
monetary impulse. This should propel the year-over-year GDP growth rate
from 0.9% currently to 1.9% by the fourth quarter of 2015.
European economy
This outlook assumes that key risks do not materialize. Greece and a
potential exit from the Eurozone is certainly a key risk. As the President of
the European Commission put it, an exit would be an "irreparable loss of
reputation". What's more, as we laid out in our note "Greece:
negotiations formally launched" on 15 February 2015, an exit could
shave off 5 points from the manufacturing PMI within 3-6 months despite
the strong fundamental backdrop. Given that 70-80% of Greeks want to
remain in the euro and given that 70% of Greeks want their government
to reach an "honorable compromise" with its partners, we continue to
believe that a deal for a new "program/contract" will be made by June
2015 even if negotiations should remain difficult and bumpy. That said,
we continue to see the exit risk at a low 10-20%.
Other than that, a sharp escalation of the Ukraine crisis and in particular a
break in Chinese growth would also act as a serious headwind.
Furthermore, the final ruling on the OMT case has not been issued yet,
while a too restrictive ruling could seriously hamper the effectiveness of
ECB asset purchases. We expect the European Court of Justice's
preliminary ruling during the next 1-2 quarters, with the final ruling by
the German constitutional by the second half of 2015. We continue to
assume a "yes, but" ruling.
120
115
110
105
100
95
97
99
01
03
05
07
09
11
13
15
0.9%
1.6%
2.0%
2014
0.9%
Consensus
2015E 2016E
1.2%
1.6%
2014
Inflation
2015E
2016E
2014
0.4%
0.1%
1.5%
0.4%
Consensus
2015E
2016E
-0.1%
1.2%
European economy
1.6%
2.1%
2.4%
2014
1.6%
Consensus
2015E 2016E
1.5%
1.7%
2014
Inflation
2015E
2016E
2014
0.8%
0.1%
1.4%
0.8%
Consensus
2015E
2016E
0.3%
1.6%
European economy
France
Ongoing fiscal tightening and a lack of competitiveness will likely keep
French growth rates below the Eurozone average in 2015. Contrary to
Spain, Portugal, Ireland and Greece, France has not been able to
materially reduce its labor costs relative to Germany since the Global
Financial Crisis (see Fig. 11). However, a weaker euro, lower oil prices,
and a bottoming in the construction sector in 2015 should lead to a
significant acceleration of economic growth to 1.0%, compared to just
0.4% in 2014.
The downturn in the construction sector exacerbated the weakness in
investments last year. This should change in 2015 in response to various
changes in housing legislation (Loi Pinel, prt taux zero), the sharp fall in
mortgage rates and the already depressed level of activity. House prices
are already in a bottoming process after an almost three year long
downturn, while construction orders have yet to pick up. Low interest
rates should lend further support, so that private investments should
grow this year. Private consumption was the main driver of growth in
2014. For 2015, we expect private consumption to continue to grow
positively, supported by low oil prices and positive wealth effects from the
ECB's quantitative easing program. Meanwhile, net trade should benefit
from the weaker euro and solid demand from key trading partners.
Spending cuts by the French government should act as a slight brake on
economic growth, though. We expect the debt-to-GDP ratio to start
coming down from 2016, but the 3% deficit target is still out of reach for
France, despite the government planning spending cuts. The European
Commission estimates the French deficit at 4.3% for 2014 (see Fig. 12)
and is giving France two additional years (until 2017) to leave the
Excessive Deficit Procedure. In exchange, the French government has to
deliver additional fiscal tightening and to strengthen its reform efforts,
otherwise it could face sanctions. The new fiscal guidelines by the
European Commission are allowing for more flexibility, taking into
account economic circumstances, which should partly placate French
demands for a more balanced mix of fiscal, monetary, and structural
policies.
President Francois Hollande and Prime Minister Manuel Valls have
strengthened efforts to reform the French economy to make it more
competitive. The "Macron" law was pushed through in conjunction with
a vote of confidence according to Article 49.3. The law is aimed at
reducing overregulation in order to stir growth and activity. Important
points include extending shop trading hours, facilitating the creation of
new businesses, easier layoffs, and the deregulation of some professions.
Although by far not revolutionary, this is causing internal conflict in the
ruling Socialist Party. There is potential risk of the government facing a
loss of majority as a result. Upcoming departmental and regional elections
this year are contributing to this risk. Nevertheless, we believe that the
government will follow up with a reform of labor laws to reduce
bureaucratic hurdles. The key risk for the outlook on France is thus a
failure to push through necessary reforms.
With contributions from Thomas Veraguth
0.4%
1.0%
1.5%
2014
0.4%
Consensus
2015E 2016E
0.9%
1.4%
2014
Inflation
2015E
2016E
2014
0.6%
0.3%
1.6%
0.6%
Consensus
2015E
2016E
0.1%
1.1%
European economy
4
3
-1
-1
-2
-3
-1
-4
-2
-5
-2
-6
-3
-7
07
08
09
10
11
12
13
14
15
16
-1
-2
-3
-4
-5
-6
-7
04
05
06
07
08
Trade balance
09
10
Income balance
11
12
13
14
In our view, the risks around the UK outlook are primarily centered on the
7th May general election. Current polling points to neither of the major
UK parties gaining a majority, which suggests that another coalition
government or perhaps a less stable arrangement is the most likely
outcome. For markets, the key areas of focus will be the fiscal policy, EU
membership, and the potential for further devolution. These matters have
the potential to weigh on consumer, and crucially, business confidence as
the election approaches and after. Especially if there is a lack of certainty
about the direction and pace of travel on these major issues.
Dean Turner
35
30
25
20
15
10
5
0
Apr 12
Okt 12
CON (%)
Apr 13
LAB (%)
Okt 13
LD (%)
Apr 14
UKIP (%)
Okt 14
Grn (%)
2.4%
2.9%
2014
2.6%
Consensus
2015E 2016E
2.6%
2.4%
2014
Inflation
2015E
2016E
2014
1.5%
0.1%
1.7%
1.5%
Consensus
2015E
2016E
0.5%
1.7%
European economy
Italy
Italian GDP fell once again in 2014, contracting 0.4%. After more than
three years, we expect Italy to leave recession behind, posting positive
growth rates from the first quarter 2015 onwards. Nevertheless,
compared to the Eurozone average, Italian growth is going to remain
subdued, as we expect the economy to grow only by 0.7% this year. A
lack of competitiveness is still keeping potential growth rates low. The
government of Matteo Renzi finally addressed this in part with labor
market reform, but more needs to be done. To that effect, the rise of the
Lega Nord in polls as well as the termination of the collaboration
(Nazareno pact) between Renzi's PD party and Forza Italia serve as a
reminder for the challenges ahead. The Italian government plans only a
marginal fiscal tightening this year. Nevertheless, the debt-to-GDP ratio
should start to come down by 2016.
Private consumption is set to grow marginally in 2015 on the back of a
moderately falling unemployment rate and positive wealth effects from
the ECB's quantitative easing program. Investments continue to be the
weak point, but we expect a gradual stabilization in 2015 on the back of
the government repaying arrears and easier financial conditions. As
inflation has fallen into negative territory, relatively high real interest rates
are a drag on investments. The longer term outlook is better, though, as
the labor market reform should somewhat increase flexibility for
companies and raise long-term economic growth potential. Additionally,
we expect Italy to be one of the main beneficiaries from the "Juncker
fund" for investments, especially in 2016, as the fund is only fully
operational from summer 2015 onwards. House prices show tentative
signs of a bottoming and falling mortgage rates and better loan demand
should lead to a bottoming in construction activity, with a rebound
conceivable in 2016. Finally, we expect net trade to contribute
moderately to economic growth in 2015, as a weaker euro and lower oil
prices should keep Italian imports in check and support competitiveness
of exports.
The main risks for our Italian outlook are fewer than expected structural
reforms, further weakness in the construction sector and a stronger than
expected euro. Moreover, even more negative inflation rates than
expected could push real interest rates higher, thereby making loans
effectively more expensive and acting as a drag on investments and
consumption.
-0.4%
0.7%
1.3%
2014
-0.4%
Consensus
2015E 2016E
0.4%
1.0%
2014
Inflation
2015E
2016E
2014
0.2%
0.6%
1.6%
0.2%
Consensus
2015E
2016E
-0.1%
0.9%
European economy
Spain
The recovery of the Spanish economy is gathering pace, helped by
improving external conditions. Domestic demand is growing by more
than 2% y/y already as the initial pull from export-related activities was
followed by significant job creation and a swift recovery in household
consumption. Meanwhile, fiscal restraint has been much lower than
budgeted as Spain enters in an intense election year. Furthermore, the
construction sector has been contributing positively to GDP in the last
three quarters, at an increasing rate.
Besides, three key external elements are materially improving the
economic outlook in the Eurozone, particularly in Spain. First, the
depreciation of the euro will support exports and restrain imports and,
even more important for Spain, will foster the recovery in France,
Germany and Italy, its main trade partners. Secondly, the slump in oil
prices provides a big boost to the Spanish economy, whose energy trade
deficit amounted to 4% of GDP in 2014. As oil and gas imports cheapen,
the goods trade balance will temporarily register a boost while real
disposable income jumps and consumption accelerates temporarily. The
overall positive effect could surpass 0.5% of GDP, supporting continued
strong growth in 2015.
Thirdly, the expected improvement in credit conditions is feeding through
to the real economy. The ECB's QE announcement has helped the
sovereign spread to fall and credit standards to ease. The net flow of
loans is improving and should start to trend in positive territory during
2015, providing a very favorable credit impulse that will contribute to the
cyclical bounce. What's more, we expect Spain to be one of the main
beneficiaries of the forthcoming European Fund for Strategic Investments
(EFSI).
As a result, we now expect quarter-on-quarter growth to remain at
around 0.6% in 2015, with a significant probability of even stronger
readings in the next 1-2 quarters as the positive effect of a more
competitive euro and low oil prices provide an additional boost to net
exports and to consumption. This could translate into 2.4% GDP growth
in 2015 (1.4% last year) and 2.3% in 2016. Given this hefty economic
recovery, despite a clear relaxation in the fiscal tightening efforts, the
budget deficit should only miss its target of 4.2% in 2015 and 2.8% in
2016 by a few tenths of a percentage point. Nevertheless, Spain won't
register a primary fiscal surplus until 2016/2017. Therefore, debt-to-GDP
will only stabilize in 2016 at close to 100% of GDP, meaning that longterm fiscal sustainability has not yet been achieved.
65
60
55
50
-2
45
-4
40
-6
35
30
-8
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
140
140
130
130
120
120
110
110
100
100
90
90
80
80
70
70
60
60
Goods imports
50
50
Goods exports
40
40
30
30
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
Despite this very positive cyclical backdrop, Spain's healing remains fragile
and highly dependent on external economic and financial conditions,
especially as consumption growth is outpacing income growth by a wide
margin, which is not sustainable. Besides, the recovery could be
threatened by rising political instability as local and regional (May) and
national (November) elections in 2015 will likely result in weaker
governments, while Podemos is unlikely to win a majority.
Roberto Ruiz-Scholtes, Ricardo Garcia-Schildknecht
Table 6: Spanish growth and inflation forecasts
Past reforms should continue helping to outperform the Eurozone
Annual real GDP growth
2014
2015E 2016E
Year over year
1.4%
Source: UBS estimates, Bloomberg.
2.4%
2.3%
2014
1.4%
Consensus
2015E 2016E
2.1%
2.2%
2014
Inflation
2015E
2016E
2014
-0.2%
-0.3%
1.4%
-0.2%
Consensus
2015E
2016E
-0.4%
1.1%
European economy
Switzerland
At 0.6%, quarterly growth in Switzerland in 4Q surprised to the upside
(consensus estimate 0.3%). However, after the Swiss National Bank (SNB)
withdrew the exchange rate floor of EURCHF 1.20 on 15 January, this all
seems like water under the bridge. Leading economic indicators from 1Q
2015 point to an economic slowdown after the Swiss franc's jump of
12% against the euro since mid-January. The strengthening of the Swiss
franc represents a serious hit to the Swiss economy. Switzerland's exports
value 50% of its GDP; 60% of these exports go to the Eurozone.
We expect the government not to initiate any fiscal stimulus to support
the economy. Slower tax revenues will be offset by lower government
expenditure that should keep the budget well-funded and the debt-toGDP ratio constant at 36%. Negative interest rates have become the
SNB's instrument of choice to weaken the Swiss franc, a measure that
seems to have worked well in the relative calm of the recent market
environment. We assume no further tightening of the negative interest
rates in 2015. However, we expect further bumpy discussions between
the Eurozone and Greece regarding the debt program that could again
trigger safe haven flows strengthening the Swiss franc. The SNB will keep
a close eye on the EURCHF exchange rate and we expect further
interventions from the SNB trying to weaken the Swiss franc if the pair
trades substantially lower, especially if EURCHF moves well below parity.
Accelerating growth in the Eurozone and the US should attenuate the
negative effects of the strong Swiss franc and give some support to Swiss
exports. All in all, we expect negative export growth of -1.0% for 2015
and a negative growth impact of -0.5 percentage points from net
exports. The uncertainty surrounding the introduction of immigration
quotas and the strength of the Swiss franc create an unfavorable
environment for business investment. We expect equipment investments
to be down by -0.3% in 2015. A higher expected unemployment rate of
3.6% on average in 2015 up from 3.2% in 2014 and slightly slower
expected population growth of 0.9% in 2015 down from 1.2% in 2014
will weigh on private consumption. Nevertheless, we expect private
consumption and construction investment to increase by 1.4% and
1.6%, respectively and, therefore, to support growth in 2015. Overall, we
forecast 0.5% GDP growth in 2015 and 1.1% in 2016.
Political risk stems from the uncertainty about how the mass immigration
initiative will be implemented and whether a solution will trigger a
cancelation of the bilateral treaties with the EU. We expect difficult
negotiations with the EU and no breakthrough in 2015. A further
referendum on the issue is likely to take place in 2016/2017. General
elections will be held in October 2015, which is expected to have no
considerable market impact. A strong appreciation of the Swiss franc in
the case of more Eurozone troubles and the EURCHF hovering around
0.95 for a sustained period of time represents a risk to our GDP forecast.
This might lead to a deep recession, much lower immigration and a
decline in real estate prices of up to 20%.
Bernd Aumann
Table 7: Swiss growth and inflation forecasts
Solid growth, inflation sharply down
Annual real GDP growth
2014
2015E 2016E
Year over year
1.9%
0.5%
1.1%
2014
2.0%
Consensus
2015E 2016E
0.8%
1.2%
2014
Inflation
2015E
2016E
2014
0.0%
-1.0%
0.2%
0.0%
Consensus
2015E
2016E
-0.9%
0.2%
10
European economy
Sweden
We expect the Swedish economy to grow above its long-term trend in
2015 on the back of broad-based improvement in consumption,
investments, and net trade. Although some normalization of the
extraordinary 4Q2014 growth rate of 1.1% q/q is likely in the first half of
2015, we believe that the average q/q growth rate of the Swedish
economy in 2015 will be able to stay close to the second half of 2014.
Supportive factors are high business confidence indicated by the
purchasing managers' indices, low oil prices, an improving Eurozone
economy, and further monetary easing by the Swedish Riksbank.
However, with a size of only SEK 10bn and a duration of one month, the
recently launched sovereign bond purchase program (QE) is too small and
too short to be able to turn around the downward trend in inflation
expectations (see Fig. 22) and the low inflation. Negative rates should be
an effective tool to depreciate the Swedish krona (SEK). However, the
currency is already weak and the 1Q2015 Riksbank business survey has
shown that Swedish companies are hesitant to pass on higher import
prices due to strong competition. As such, we expect the Riksbank to
ease further by cutting the repo rate further into negative territory and by
extending the QE program at least until the end of 2015. This should
keep the SEK weakening against major currencies, including the euro.
Unemployment is still relatively high at almost 8%, since growth in
2013/14 has not been strong enough to compensate strong immigration
(see Fig. 23). We expect unemployment to fall more rapidly in 2015 given
strong growth rates. This should lend further support to consumer
confidence, along with lower oil prices and higher household wealth after
recent strong house price increases. Therefore, consumption should
remain the main growth driver in 2015, although high household debt
levels will likely prevent even stronger growth. The Swedish government's
fiscal policy is likely to be a slight drag, however. It ran a sizeable budget
deficit of 2.1% in 2014. Initial plans to reduce the deficit to 1.1% in
2015 could be loosened, as the government intends to drop the 1%
budget surplus target. However, the proximity to the 3% limit set by the
European Union does not give much room on the easing side.
Despite immigration-led strong demand pushing house prices higher by
over 8% y/y recently, construction investment remains rather sluggish,
partly due to extensive rent control. Swedish total investments, however,
have improved sharply in 2014 and we expect this to continue in 2015.
Drivers will be persistent high business confidence and the general
rebound in its biggest trading partner, the Eurozone, which is already
feeding through to the export-heavy Swedish industry (see Fig. 24).
Exports will also benefit from the Eurozone acceleration and are
additionally supported by the weak SEK. As such, the net trade drag on
growth that was observed in 2014 will likely be much lower in 2015.
Key risks to our outlook for Sweden are a serious escalation of the RussiaUkraine crisis hurting Swedish exports and investments in Russia and a
resurgence of political and economic uncertainty in the Eurozone.
Daniel Trum
Table 8: Swedish growth and inflation forecasts
Ultra-strong growth, but inflation too low
Annual real GDP growth
2014
2015E 2016E
Year over year
2.3%
Source: UBS estimates, Bloomberg.
3.0%
3.7%
2014
2.3%
Consensus
2015E 2016E
2.3%
2.7%
2014
Inflation
2015E
2016E
2014
-0.2%
0.2%
1.5%
-0.2%
Consensus
2015E
2016E
0.3%
1.5%
11
European economy
Norway
After three years of strong GDP growth above 2%, the Norwegian
Mainland economy is coming under pressure from low oil prices. We
expect Brent crude oil prices to fall again over the next three months and
to rebound only to around 70 USD by the end of 2015. Against this
background, we believe that the Norges Bank will lower its key policy rate
further from 1.25% to 0.75%, most likely at its 19 March meeting. The
inflation rate has remained close to target throughout 2014, but the
weak oil price is also putting this stability into doubt (see Fig. 25).
Contrary to other European countries, Norwegian consumers are set to
suffer from the low oil prices, as employment prospects in the oil and gas
sector are already deteriorating sharply (see Fig. 26). Given that this sector
makes up more than 20% of the total economy, employment in the
Mainland economy is likely to be dragged down, too. Consumer
confidence has already weakened to the lowest level since the Global
Financial Crisis in 2009 (see Fig. 27). At that time, the Norwegian
government supported the economy with higher spending. This is likely
to happen again in 2015, but to a much smaller extent. The center-right
government has its focus on long-term initiatives to make Norway less
dependent on oil. Furthermore, they declared that it is the central bank's
job to react to short-term fluctuations such as the current drop in oil
prices. If the economic downturn should last into 2016, though, more
fiscal stimulus is likely. They certainly have enough firepower with a
government debt-to-GDP ratio around 30% and some leeway left in
using returns from the over 800bn USD large government pension fund.
The downturn will be felt even more sharply in investments. A 2012
Norges Bank survey among Norwegian companies indicates that oil prices
below 70 USD are likely to have severe negative effects on economic
growth. The construction sector already weakened in 2014 despite
further strong increases in house prices of over 8% y/y recently. With
lower growth in Mainland economic activity, we also expect house prices
to trend sideways and the construction sector to be a drag on growth.
We expect the huge net trade surplus (oil and gas make up around 50%
of exports) to deteriorate in 2015. However, the anticipated improvement
in Eurozone economic momentum should help Norway Mainland's
exports, leading to a positive contribution to its GDP in 2015. We expect
the Norwegian krone (NOK) to stay weak against the euro, as the ECB's
QE policy is matched by Norges Bank rate cuts, thereby more than
offsetting the effects on the currency pair . Moreover, an oil price below
70 USD increases the need for a weaker NOK to offset falling oil revenues
from abroad. Beginning in the second half of 2015 we expect the Brent
oil price to rebound to around 70 USD in 12 months. This should reaccelerate Norway Mainland growth again from 1.1% in 2015 to 2.2% in
2016.
Key risks to our outlook on the Norwegian economy pertain to a longer
than expected period of oil price weakness, a stronger housing market
downturn as a result of the general economic weakness, and a weaker
than expected Eurozone economy.
Daniel Trum
2014
Consensus
2015E 2016E
2014
Inflation
2015E
2016E
2014
2.0%
Consensus
2015E
2016E
2.2%
2.2%
12
European economy
13
European economy
14
European economy
Six-pack
A set of six legal acts adopted in 2011, strengthening procedures for the surveillance of the member states' fiscal policies (the
"Stability and Growth Pact") and introducing new ones for their macroeconomic policies. The aim is to better control public
deficits and national debt and to better address macroeconomic imbalances.
Stability and Growth Pact
The Stability and Growth Pact (SGP) is a rule-based framework for the coordination of national fiscal policies in the European
Union. It was established to safeguard sound public finances, based on the principle that economic policies are a matter of
shared concern for all Member States.
TARGET2
The second-generation TARGET system. It settles payments in euro in central bank money and functions on the basis of a single
IT platform, to which all payment orders are submitted for processing. This means that all payments are received in the same
technical form.
Targeted Long-Term Refinancing Operations (TLTRO)
A new LTRO (see above) announced on June 2014 targeted at business loans, consisting of eight LTROs. The aim of this
refinancing operations is to improve bank lending to the Eurozone non-financial private sector in order to ensure that the supply
of credit will not endanger the recovery of the real economy. TLTROs should also improve the distortions in the monetary
transmission channel. TLTROs will be accessible on a quarterly basis from September 2014.
Treaty on stability, coordination and governance (fiscal compact)
The fiscal compact is an intergovernmental treaty signed by euro area members and other EU member states at the European
Council meeting on 2 March 2012. The treaty requires structural government deficits not to exceed 0.5% of GDP and the
budget to be in balance or surplus. In addition, debt to GDP ratios above 60% of GDP must be reduced over a 20- year period
(subject to a three-year grace period following compliance with the deficit objective).
Two-pack
The second package of proposals on economic governance was presented by the Commission in November 2011 and builds on
the so-called "six-pack" of economic governance proposals. Once adopted, the two draft regulations will introduce provisions
for enhanced monitoring of eurozone countries' budgetary policies.
Unit labor costs
Unit labor costs (ULC) measure the average cost of labor per unit of output and are calculated as the ratio of total labor costs to
real output. A rise in an economys unit labor costs represents an increased reward for labors contribution to output.
Source: BaFin, Bundesbank, ECB, European Union, Markit, OECD.
15
European economy
Appendix
Chief Investment Office (CIO) Wealth Management (WM) Research is published by UBS Wealth Management and UBS Wealth Management
Americas, Business Divisions of UBS AG (UBS) or an affiliate thereof. CIO WM Research reports published outside the US are branded
as Chief Investment Office WM. In certain countries UBS AG is referred to as UBS SA. This publication is for your information only and
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