First obstacle to overcome: keep the alliance together in passing the 2016 budget…..
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Intesa Sanpaolo – Research Department For professional investors and advisers only
The oil market will continue to be characterised by excess supply for many months to come. The impact of the Paris attacks on tourism should not derail the moderate French recovery.
In Portugal, the President of the Republic finally asked the socialist leader António Costa to form the new government, with the external support of the Green Party and of two far-left formations, the Communist Party and the Bloco de Esquerda. Not without asking of Costa clarifications on how the alliance will move on six key fronts: respect of European fiscal rules, the approval of the budget, the stability of the financial system, respect of the international defence agreements (NATO), the role of trade unions and enterprises, and the management of confidence votes. It is not hard to predict that the life of the new cabinet will be a difficult one: the government is not supported by a true coalition, and a majority will have to be secured bill by bill, through negotiations between forces which remain ideologically very distant. The first test will come very soon, and will be very important, as the government must immediately start working on the 2016 budget, which all the other European countries have already presented in October.
The markets have reacted positively to the formation of the new government. In the week, the Portuguese Treasury placed a tranche of 10Y bonds at rates only slightly higher than at the previous auction. The socialists confirmed they intend to respect European fiscal rules, while aiming to obtain a more gradual future consolidation path. Obviously, there are doubts on the solidity of the external support provided by the far left; however, the far left formations are handed a historical and possibly unrepeatable opportunity to realise a part of their manifestos, and therefore have all the interest of seeking a compromise with the government on the budget, in exchange for other measures that are compatible with their electoral promises. On the other hand, a failure of the Socialist government would inevitably lead to new elections being held in the spring of 2016, at which the far left would probably lose all its power of influence, with the centre-right winning back leadership of the government.
The trend of the oil market seems to be further postponing achievement of the inflation targets pursued by the central banks. The consensus scenario, which assumed a rebound in prices between 2015 and 2016, is still being disrupted by the policy pursued by OPEC to protect its markets shares. The trend of demand is too weak to rapidly reabsorb excess supply, and the time horizon on which the decline in non-OPEC supply and the increase in demand will restore an equilibrium, is uncertain. For the time being, there is only evidence of a slower accumulation of inventories, which should drop further in 2016. Therefore, the average forecast for the price of Brent Crude oil in 2016 is currently 57.5 dollars, and some analysts even estimate an average price still lower than the 50 dollar mark next year as well. Abundant output and inventories also have the effect of making the oil market less sensitive to the conflicts under way in the extraction areas.
Based on past experiences, the impact of the terrorist attacks on the French economy will probably be very modest. The most vulnerable sector is tourism, as one-fourth of total business volumes are generated in the Paris region: arrivals in the past few days have plunged, as was also the case in January. However, even assuming a 50% decline throughout the winter season, the impact on French GDP in 4Q would be smaller than 0.1%. After the January attacks, the recovery was swift, therefore only an intense campaign of further attacks would justify pessimistic views on the economic effects of recent events.
Appendix
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