Investment Research General Market Conditions 5 June 13 Economic Fact Book: In 11, the European debt crisis spread to, which caused the interest rate on 1-year government bonds to rise to a record high around 7. Former Prime Minister Silvio Berlusconi was forced to resign after losing his majority in Parliament. Prior to this, Berlusconi had a standoff with the ECB over reforms and bond purchases and Angela Merkel and Nicholas Sarkozy gave Berlusconi a non-verbal no-confidence vote. Berlusconi resigned in November 11. A technocrat unity government led by Mario Monti was then formed with the purpose of implementing reforms and austerity measures until general elections were held on 4-5 February 13. Following two months of political deadlock, the Democratic Party (PD), the People of Freedom (PDL) and Civic Choice (CC) finally reached an agreement on a new large coalition government with Enrico Letta (PD) as the new Prime Minister on 7 April. One of Letta s first acts was to call for more focus on growth and job creation and less rigid focus on austerity. Mario Monti pushed through a substantial number of reforms in his first 13 months in office (after which he resigned) and it is our assessment that it will not be a disaster if the new government does not undertake new reforms for a while. What is important is that it does not roll back reforms and that it behaves in such a way that investors can remain confident that the ECB OMT programme remains available to. Letta has suspended the property tax payment, which should otherwise have been paid in this month and he also aims to abolish a 1 increase in the highest VAT rate. Nevertheless, Letta sticks to a budget target for this year at.9 of GDP, i.e. below the Maastricht criteria. As a result, the European Commission recommended removing from the excessive deficit procedure on 9 May. has a long history of government budget deficits and high government debt. Under Mario Monti, the Italian government improved public finances substantially. The European Commission estimates that ran a primary budget surplus of.5 of GDP in 1, up from 1. of GDP in 11, and that it will increase further to 3.1 in 14. The yields on s government bonds have fallen markedly since July 1, when the ECB s Mario Draghi signalled that the ECB would introduce the OMT programme. Three days before the Italian elections, the ECB announced that it had bought EUR99bn of Italian government bonds under the Securities Market Programme, in what could be seen as a reminder to the Italian people that they need friends with big pockets. After a decade of almost no growth, is currently trapped in a severe recession, with negative growth since Q3 11. The housing market looks fragile and housing starts have fallen dramatically. The unemployment rate has risen sharply and is now 11.9. has implemented several labour market reforms but is still struggling with very low productivity growth. The business climate is hampered by significant bureaucracy. The World Bank s Doing Business report ranks as number 73, just after Romania. Corruption is deep rooted, which distorts incentives and hampers productivity growth. On Transparency International s Corruption Perception Index figures as number 7 (Romania is 66). has partly specialised in labour-intensive production of luxury goods, which also limits the scope for productivity gains. Key facts Population:.8m (1) GDP per capita: EUR6,7, ninth highest in the euro area (11) Government type: Republic with an upper house (Senato della Repubblica) and a lower house (Camera dei Deputati) Government coalition: PD, PDL, SC Prime Minister: Enrico Letta (PD) President: Giorgio Napolitano Central Bank governor: Ignazio Visco Economic characteristics Large public debt Low productivity growth Struggles with corruption Wealthy private sector Produces many luxury goods Declining population Senior Economist Frank Øland Hansen +45 451 856 franh@danskebank.dk Analyst Pernille Bomholdt Nielsen +45 451 8498 perni@danskebank.dk Assistant Analyst Mikael Olai Milhøj milh@danskebank.dk
Economic Fact Book: Outlook for the Italian economy Outlook for key economic variables - Outlook for key economic variables Danske Bank GDP (1) CPI (1) Unemployment () Govt. Budget (3) Govt. Debt (3) 13 14 13 14 13 14 13 14 13 14-1,6 1,1 1.6 1.3 1. 1.3-3, -,6 13,9 13, IMF -1,5,5, 1,4 1, 1,4 -,6 -,3 13,6 13,8 OECD -1,8,4 1,6 1, 11,9 1,5-3, -,3 13,4 13, EU (Commission) -1,3,7 1,6 1,5 11,8 1, -,9 -,5 131,4 13, 1) y/y. ) of labour force. 3) of GDP. Source: OECD (autumn), IMF (spring), EU (spring), Danske Bank Key macroeconomic indicators Structural indicators versus the euro area (EMU) When EMU When EMU Sovereign ratings GDP(1) Q1-13 -.5 -. GDP per capita (5) 1 5,7 8,5 S&P Public sector () 1 5.6 49.9 Economic size in EMU (4) 16.5 - Moody's Private cons () Q4-1 61. 57.5 Inflation - HICP (7) Apr-13 1.3 1. Fitch BBB+ / neg Baa / neg BBB+ / neg Investments () Q4-1 16.9 17.9 Public budget () EC fcst 13 -.9 -.9 Exports () Q4-1 3.8 17.9 Public debt () EC fcst 13 131.4 95.5 Sovereign bond spreads Current account (),(8) Q4-1 -.7 1.3 Long-term interest rates Apr-13 4.8.87 Y spread (6) 17 Unemployment (3) Apr-13 1. 1. 1Y spread (6) 95 Household loans () 11 46 65 1: q/q, : Pct of GDP, 3: of labour force, 4: based on nominal GDP, 5: EUR per capita, 6: sov spread vs.germany, bp, 3M average, 7: y/y, 8: 1M average Source: Reuters EcoWin, Danske Bank Leading indicators PMI manufacturing PMI services 65 55 5 45 4 35 Diffusion index Diffusion index PMI manufacturing 3 65 55 5 45 4 35 3 67.5 Diffusion index Diffusion index 6.5 57.5 5.5 47.5 4.5 PMI services 37.5 67.5 6.5 57.5 5.5 47.5 4.5 37.5 5 June 13
Economic Fact Book: Public finances Budget balance 1. 7.5 5. of GDP of GDP Primary budget balance.5. -.5-5. Budget balance -7.5 1. 7.5 5..5. -.5-5. -7.5 Public expenditure and revenue 53 of GDP Government budget of GDP 53 51 51 Expenditure 49 49 47 47 45 45 Revenue 43 43 1 3 4 5 6 7 8 9 1 11 1 Sovereign spreads Government debt 7 6 5 4 3 1-1 Government bonds spread to Germany, 1-days MA 1 year year 1 3 4 5 6 7 8 9 1 11 1 7 6 5 4 3 1-1 13 of GDP General Govt debt, of GDP EC forecast 7 14 13 7 National account Real GDP Output gap. Index = Index = 117.5 115. GDP 11.5 constant prices... 117.5 115. 11.5.. Output gap -points 4 - -4-6 -8 Jan 7 Jan 8 Jan 9 Jan 1 Jan 11 Jan 1 Jan 13 Jan 14 OECD USA Sources: OECD Private consumption 115. 11.5.. Index = Private consumption constant prices Index = 115. 11.5.. Investments 15 Index = Index = Gross capital formation 115 constant prices 15 95 85 15 115 15 95 85 3 5 June 13
Economic Fact Book: Export and trade Current account 3 1-1 - -3-4 -5 of GDP, Ecofin forecast Current account, SA, Ecofin forecast of GDP 14 3 1-1 - -3-4 -5 Exports by commodity 4.5 EUR bn Exports by commodity, 4. SA, 6-months MA 3.5 Textile and clothes 3..5. Metal products Transport EUR bn 1.5 Chemical products 1. 4.5 4. 3.5 3..5. 1.5 1. Distribution of exports by region Distribution of exports Date EU China USA Other Quarterly Exp., EUR bn Oct-1 51.6.5 6.5 37.5 Pct of total exp. Oct-1 5.6.5 6.6 38. Pct of GDP Oct-1 13..6 1.7 9.6 Key export countries Germany France Spain Pct of total exp. Oct-1 11.8 1.9 4.7 Pct of GDP Oct-1 3..7 1. Exports 47.5 of GDP Exports of GDP 4.5 37.5 3.5 7.5.5 47.5 4.5 37.5 3.5 7.5.5 Industrial activity indicators Manufacturing Industrial turnover 15 14 13 7 Index = Manufacturing Production New Orders Index = 15 14 13 7 17 Index 1= Index 1= 1 Industrial total 15 turnover, 3m MA 14 13 Foreign Domestic 1 3 4 5 6 7 8 9 1 11 1 17 1 15 14 13 Capacity utilisation Business climate 9.5 Capacity utilisation, manufacturing sector, s.a. 87.5 8.5 9.5 87.5 8.5 Balance Balance 4 Service Sectors assessment of business climate 4 77.5 77.5 7.5 67.5 7.5 67.5 - - 6.5 6.5-4 -4 4 5 June 13
Economic Fact Book: Consumption components Retail sales Car sales Confidence indicators Consumer confidence Business confidence Labour market and demographics Unemployment 1 Unemployment rate, SA 11 1 9 8 7 6 1 3 4 5 6 7 8 9 1 11 1 1 11 1 9 8 7 6 Employment. 117.5 115. 11.5.. Index = Employment, SA Index =. 117.5 115. 11.5.. Unit labour costs Declining population is a challenge 59. Millions 58. 57. 56. 55. 54. Growth in population >> << Total population, forecast.3..1. -.1 -. -.3 -.4 53. -.5 95 5 1 15 5 3 35 4 5 5 June 13
Economic Fact Book: Competitiveness indicators Real effective exchange rate Labour productivity 15 Index = Index = 115 15 95 Real effective exchange rate 85 15 115 15 95 85 Index =. 95. Labour productivity per hours worked Index = 9.5. 95. 9.5 Manufacturing sector Manufacturing sector Industrial activity by type 1 of GDP Manufacturing sector of GDP as share of GDP, SA 19 18 17 16 15 14 1 3 4 5 6 7 8 9 1 11 1 1 19 18 17 16 15 14 Index = Consumer goods, non-durable Capital goods Consumer goods, durable Industrial activity 7 by type, SA Intermediate goods 7 Housing market House prices Housing starts 6 5 June 13
Economic Fact Book: Disclosures This research report has been prepared by Danske Bank Markets, a division of Danske Bank A/S ( Danske Bank ). The authors of this research report are Frank Øland Hansen (Senior Economist), Pernille Bomholdt Nielsen (Analyst) and Mikael Olai Milhøj (Assistant Analyst). Analyst certification Each research analyst responsible for the content of this research report certifies that the views expressed in the research report accurately reflect the research analyst s personal view about the financial instruments and issuers covered by the research report. Each responsible research analyst further certifies that no part of the compensation of the research analyst was, is or will be, directly or indirectly, related to the specific recommendations expressed in the research report. Regulation Danske Bank is authorised and subject to regulation by the Danish Financial Supervisory Authority and is subject to the rules and regulation of the relevant regulators in all other jurisdictions where it conducts business. Danske Bank is subject to limited regulation by the Financial Services Authority (UK). Details on the extent of the regulation by the Financial Services Authority are available from Danske Bank upon request. The research reports of Danske Bank are prepared in accordance with the Danish Society of Financial Analysts rules of ethics and the recommendations of the Danish Securities Dealers Association. Conflicts of interest Danske Bank has established procedures to prevent conflicts of interest and to ensure the provision of highquality research based on research objectivity and independence. These procedures are documented in Danske Bank s research policies. Employees within Danske Bank s Research Departments have been instructed that any request that might impair the objectivity and independence of research shall be referred to Research Management and the Compliance Department. Danske Bank s Research Departments are organised independently from and do not report to other business areas within Danske Bank. Research analysts are remunerated in part based on the overall profitability of Danske Bank, which includes investment banking revenues, but do not receive bonuses or other remuneration linked to specific corporate finance or debt capital transactions. Financial models and/or methodology used in this research report Calculations and presentations in this research report are based on standard econometric tools and methodology as well as publicly available statistics for each individual security, issuer and/or country. Documentation can be obtained from the authors upon request. Risk warning Major risks connected with recommendations or opinions in this research report, including as sensitivity analysis of relevant assumptions, are stated throughout the text. Date of first publication See the front page of this research report for the date of first publication. General disclaimer This research has been prepared by Danske Bank Markets (a division of Danske Bank A/S). It is provided for informational purposes only. It does not constitute or form part of, and shall under no circumstances be considered as, an offer to sell or a solicitation of an offer to purchase or sell any relevant financial instruments (i.e. financial instruments mentioned herein or other financial instruments of any issuer mentioned herein and/or options, warrants, rights or other interests with respect to any such financial instruments) ( Relevant Financial Instruments ). The research report has been prepared independently and solely on the basis of publicly available information that Danske Bank considers to be reliable. While reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and Danske Bank, its affiliates and subsidiaries accept no liability whatsoever for any direct or consequential loss, including without limitation any loss of profits, arising from reliance on this research report. The opinions expressed herein are the opinions of the research analysts responsible for the research report and reflect their judgement as of the date hereof. These opinions are subject to change, and Danske Bank does not undertake to notify any recipient of this research report of any such change nor of any other changes related to the information provided in this research report. This research report is not intended for retail customers in the United Kingdom or the United States. 7 5 June 13
Economic Fact Book: This research report is protected by copyright and is intended solely for the designated addressee. It may not be reproduced or distributed, in whole or in part, by any recipient for any purpose without Danske Bank s prior written consent. Disclaimer related to distribution in the United States This research report is distributed in the United States by Danske Markets Inc., a U.S. registered broker-dealer and subsidiary of Danske Bank, pursuant to SEC Rule 15a-6 and related interpretations issued by the U.S. Securities and Exchange Commission. The research report is intended for distribution in the United States solely to U.S. institutional investors as defined in SEC Rule 15a-6. Danske Markets Inc. accepts responsibility for this research report in connection with distribution in the United States solely to U.S. institutional investors. Danske Bank is not subject to U.S. rules with regard to the preparation of research reports and the independence of research analysts. In addition, the research analysts of Danske Bank who have prepared this research report are not registered or qualified as research analysts with the NYSE or FINRA but satisfy the applicable requirements of a non-u.s. jurisdiction. Any U.S. investor recipient of this research report who wishes to purchase or sell any Relevant Financial Instrument may do so only by contacting Danske Markets Inc. directly and should be aware that investing in non- U.S. financial instruments may entail certain risks. Financial instruments of non-u.s. issuers may not be registered with the U.S. Securities and Exchange Commission and may not be subject to the reporting and auditing standards of the U.S. Securities and Exchange Commission. 8 5 June 13