On the day, benchmark Treasury yields rose 4-7bp, with the 5-year the worst performer and the long end holding in best after a reversal of a good part of the post-claims plunge. The 2-year yield rose 6bp to 1.14%, 3-year 6bp to 1.68%, 5-year 7bp to 2.68%, new 7-year 6bp to 3.38%, 10-year 6bp to 3.84% and 30-year 4bp to 4.64%. This wrapped up a terrible year for the Treasury market, at least the nominal part of it, with the total return from buying the then on-the-run 10-year note at the end of last year and holding it through 2009 near -8.5%. TIPS, on the other hand, outperformed to finish up an excellent year, reflecting both how distorted the market was in the depths of the market turmoil late in 2008 and also rising inflation expectations since mid-year. On the day, the 5-year TIPS yield rose 6bp to 0.43%, 10-year 4bp to 1.43% - leaving the benchmark 10-year inflation breakeven, which ended 2008 barely above zero, at a new high since mid-2008 of 2.41% - and 20-year 1bp to 2.01%. TIPS outperformance versus nominals in 2009 was immense - holding the on-the-run 10-year TIPS as of the end of 2008 through 2009 returned about +10% versus the -8.5% loss on the nominal 10-year. Bill yields eased a bit as settlement moved past New Year's, with the 4-week yield up 4bp to 0.04%, but the crunch in financing markets reached extraordinary levels. In mid-afternoon trading just ahead of the 2:00 closes, the overnight general collateral Treasury repo rate was trading at -1.40% (and sinking by the minute), which actually made bills at near zero yields look quite cheap. Mortgages resumed sinking Thursday after a couple of days of upside to finish a terrible month, but at least lower coupons managed to outperform the Treasury losses. Fannie 4.5%s rallied back to par Wednesday, but current coupon yields were up near 4.55% after Thursday's sell-off, a 65bp loss on the month and also on the year. Freddie Mac's national survey showed average conventional 30-year mortgage rates at an 18-week high of 5.14% in the latest week after having reached a record low of 4.71% at the start of the month. Current MBS yields would be consistent with 30-year rates staying near 5.125%, still a very low rate from an historical perspective. The better relative performance by mortgages helped swap spreads narrow to finish up a year in which overwhelming Treasury supply helped them hit record lows, with the benchmark 5-year spread at 29.5bp, just above the all-time low of 28.25bp hit in mid-November.
Risk markets were trading very slightly in the red as the interest rate market investors were heading home early, but the S&P 500 was still on pace to end just marginally below its best level of the year for a 2009 gain of 24%. The best sectors of the year were tech and basic materials with gains of nearly 50% and consumer discretionary with about a 40% rally. Financials recovered powerfully off the March lows, but the prior losses were so big that the sector was a laggard for the full year with about a 15% rally. In what little trading was actually going on, credit was also ending the year on a marginally softer note, but with the investment grade index looking to close near 85bp, the upside in 2009 relative to the 197bp close to 2008 was even more impressive than stocks. The high yield CDX and leveraged loan LCDX indices also had huge years, the former tightening over 600bp to just above 500bp and the latter tightening about 875bp to near 425bp. On the other hand, despite big recoveries off the lows, it was a rough year for the subprime ABX and commercial mortgage CMBX markets.
The weekly jobless claims report was surprisingly strong, but seasonal adjustment is difficult for weekly data under normal circumstances and nearly impossible during major holidays, so we'll probably need to wait until we get into January to get a clearer picture. Still, our read of the seasonals suggested significant upside bias to initial claims this week, so the 22,000 drop to 432,000 in the week of December 26 seemed quite strong. This drop kept the very impressive run of declines in the four-week average alive, with a 17th straight drop, by 5,500 to 460,250, another low since mid-2008. Continuing claims in the prior week (pre-holiday, so a cleaner number) were also improved again, with a 57,000 decline to 4.981 million, a low since February. Note that continuing claims are improving even including all the emergency and extended programs. Adding these programs (which aren't seasonally adjusted) to non-seasonally adjusted regular continuing claims and seasonally adjusting the combined figure shows a decline to 9.65 million in the week of December 12 from the peak of 10.94 million the week of October 3. At this point we're still forecasting a 25,000 decline in December non-farm payrolls and a further 0.1pp dip in the unemployment rate to 9.9%. There appear to be upside risks to those forecasts, but we'll wait until the ADP report next week to finalize our estimate.
An Economy in Transition
In 2010, the European economy should transition towards a more sustainable, albeit still sub-par, recovery. This economic transition will be reflected by a shift in the engines of growth from a swing in the inventory cycle towards an ongoing recovery in domestic demand and net exports. This transition is unlikely to be smooth, though. Hence, investors should brace themselves for potential setbacks in the course of the next few quarters. Our own quarterly forecast profile suggests a gradual slowdown in growth momentum over the course of the year. Until some domestic demand dynamics start to materialise, the European economy remains in what could be called the no man's land of the business cycle.
Monetary and fiscal policy decisions to move from triage treatment towards long-term rehabilitation, we think. Thus, exit strategies will likely be a focus for financial markets. With a few exceptions (the UK, Spain, Ireland and Greece), we don't expect any meaningful fiscal policy tightening in 2010. Hence, the fiscal policy issue is mainly about preparing the budgets for 2011 and beyond. These are likely to bring more meaningful tightening in order to ensure a return to fiscal sustainability over the medium term. As such, they will be key in shaping medium-term growth expectations too. Monetary policy, by contrast, will likely start exiting its current ultra-expansionary stance in late 2010. The anticipation of the new tightening cycle should cause higher bond yields and wider country spreads.
From an inventory-led bounce in industrial activity to a broader demand-based recovery. As expected, the European economy emerged from recession in mid-2009. The trigger was a turnaround in the inventory cycle, a normalisation in global trade flows and a policy-induced stabilisation of the financial system. With the global economy clearly having turned the corner courtesy of buoyant growth in emerging markets, and with the euro's unrelenting ascent having been stopped for now, a revival in external demand is already coming through in the quarterly GDP reports. The key question for 2010, however, is whether the initial spark that ignited the engine will translate into a broader domestic demand recovery. Until these domestic demand dynamics materialise, the European recovery remains vulnerable. There is no mistaking the considerable headwinds still faced by both consumers and corporates. After a steep decline in 2009, we therefore look for what is probably best described as a stabilisation in domestic demand.
Investment spending still struggles with subdued capacity utilisation and what companies argue are tight financing conditions. Yet, rising business confidence and rebounding corporate profits should suffice to create a small rise in machinery and equipment investment - consistent with repair and replacement and possibly some rationalisation projects - in the course of the year. Construction investment is a much more diverse story, driven by local property prices, public infrastructure projects and excess capacity issues. Public construction investment aside, we expect construction investment to lag behind capital goods investment in 2010. For the year as a whole, investment spending will likely stagnate due to a negative statistical overhang from 2009.
Consumer spending is to be dampened by a rise in unemployment, modest gains in wages and an increase in inflation. True, in terms of their debt load, balance sheets and savings rate, European consumers are in better shape than their US and UK counterparts. But the lower number of layoffs recorded in Europe since the start of the recession suggests that part of the labour market adjustment is still to come - after all, activity shrank more sharply on this side of the Atlantic. Thus far, tighter employment legislation, voluntary labour hoarding and government-sponsored short-shift programmes have prevented an adjustment in labour costs. We see payrolls being trimmed further and expect the EMU unemployment rate to rise well into 2H10. Against this backdrop, and factoring in the expansionary fiscal policy measures taken by several governments, we forecast broadly stable consumer spending for 2010. After what likely will be a marked contraction in 2009, a stabilisation can already be regarded as an achievement in itself.
After a marked divergence in growth between countries in 2009, we expect to see some renewed convergence in 2010. We expect export-oriented countries with sizeable industrial sectors, such as Germany and Sweden, to outperform in terms of headline GDP growth. However, the bigger bounce-back partially reflects that they were hit harder by the global trade slump than many of their counterparts. We expect other countries, such as Spain and Ireland, which were hit hard by the financial turmoil, to continue to underperform as they work their way through the aftermath of a property price bubble, a construction boom and a savings-investment imbalance. Both are making good progress though in rebalancing their economies and should be able to return to positive GDP growth in 2011.
We expect the ECB, the BoE and the Riksbank to start raising rates gradually in 2H. In total, we expect the ECB and the Riksbank to hike by 50bp and the BoE by 75bp by the end of 2010 (see UK Economics: Later Rate Rises, December 2, 2009). In conjunction with raising rates, central banks will also begin to unwind their quantitative easing (QE) measures. This unwinding might at least partially precede the first interest rate hikes, but will unlikely be completed before the start of the new interest rate tightening cycle (see EuroTower Insights: Executing the Exit, November 11, 2009). The details of the unwinding of QE are largely determined by the QE strategy pursued during the market turmoil. The ECB and the Riksbank have resorted to passive QE via their various refi/repo operations. Hence, unwinding QE will affect the banking system directly and asset markets indirectly. Meanwhile, the BoE pursued a strategy of active QE, where it purchased assets directly in the open market. Unwinding these measures will thus likely affect markets more directly and banks more indirectly.
At this stage, there has been little indication that unwinding of QE or rate hikes are imminent. The ECB signalled that it is no longer willing to offer one-year funding at a fixed rate of 1% - instead opting for a tracker rate reflecting the average refi rate in 2010 - and that it will phase out its one-year and its six-month LTROs during the year. The cornerstone of the ECB's QE, the fixed-rate tenders with full allotment (which allow the banking system to draw down unlimited funds from the ECB), will remain in place for as long as it takes though - at least until spring 2010. Under this operational set-up, the overall liquidity entirely depends on the bids submitted by banks - unless, of course, the ECB takes additional action (e.g., reverse tenders). Where the EONIA overnight rate and the EURIBOR money market rates trade relative to the ECB refi rate therefore depends on these bids too. Hence, in addition to the two factors that would normally drive EONIA - the ECB's decision on the refi rate and/or the deposit rate and the ECB's liquidity provision (notably the decision to drain liquidity from the system via conducting reverse tenders or by issuing debt certificates) - we have a third risk factor: the banks' bidding behaviour. Thus far, overbidding by banks has caused excess reserves to swell and pushed market rates well below the policy rate. But this bidding behaviour could change going forward, potentially causing the market rate to jump higher.
The unwinding of QE will likely have marked effects on money markets, bond markets and country spreads. The heavy use of the ECB's refi facilities allowed banks to become big buyers of bonds. Since the start of the turmoil, euro area banks have added about €330 billion to their holdings - effectively indirect QE via the banks. These purchases have likely helped to lower benchmark bond yields. But the main beneficiary probably was the EMU periphery. Less generous liquidity provision this year is likely to have repercussions on the euro area government bond markets. During the credit crunch, intra-EMU spreads were characterised by a high degree of co-movement, reflecting systemic concerns; we think that country-specific factors are likely to play a bigger role again in 2010. The start of another ECB tightening cycle should also contribute to wider spreads across the board, as it has done historically. Eligibility for the ECB's collateral pool, which is scheduled to revert back to A- at the end of 2010, could become another country-specific concern for investors in 2010.
Key Surprises for the European Economy
Our base case for the euro area economy in 2010 is that of a lacklustre, sub-par cyclical recovery, subdued consumer price inflation and a hesitant removal of policy stimulus in 2H10. We and the consensus expect the European economy to expand by around 1% this year, thus recovering only some of the ground lost when the currency union plunged into the deepest recession in post-war history. With capacity utilisation still extremely low and unemployment set to rise until 2H10, domestic demand dynamics will likely remain rather muted. Overall, we believe that the risks to our baseline forecasts are broadly balanced.
We consider four potential macro surprises that could challenge our outlook and the market consensus. The main surprise element is the qualitative direction in which they would affect the macro outlook, not necessarily the quantitative measure in which they occur. As such, they are not part of our base case and only some are among the factors underlying our bull and bear scenarios. However, none of these surprises seems to be priced into financial markets or much talked about by macro thinkers at this stage. The potential surprises include:
1. A late-cycle credit crunch seriously curtails access to bank lending in the non-financial sector.
2. Brisk growth in emerging economies and/or renewed supply setbacks cause another surge in commodity prices.
3. Ample liquidity helps to keep government bond yields subdued, notwithstanding massive debt issuance.
4. Country-specific political risks replace systemic risk concerns in driving intra-EMU spreads, but matter less than expected in the UK.
Surprise #1
A late-cycle credit crunch seriously curtails access to bank lending, causing the recovery in investment spending to falter.
A year ago, everyone (ourselves included) talked about the credit crunch as a serious risk to the economic outlook. But, what we were debating at the time should probably have been more accurately labelled a liquidity crunch for banks and corporates in funding markets. Since then, credit spreads have contracted sharply, corporate debt and more recently equity issuance have surged, and financial institutions have been propped up by a variety of government measures. Lately, euro area and UK banks have projected looser credit standards. Effective interest rates on loans have been falling for a while. Our banks team believes that the provisioning cycle has likely peaked. We ourselves have played down the fact that bank lending is falling on a year-on-year basis, arguing that much of the drop is due to a fall in demand. At this stage, this is probably largely true. But, it could change when the recovery in corporate spending gets underway. While companies will initially be able to draw on internal cash flows, eventually they will likely need external funds to bump up investment spending - even if it is largely to repair and replace - and possibly also for re-stocking. If they cannot obtain these funds, the rebound in activity following a turnaround in the inventory cycle could quickly reverse.
At this (vulnerable) stage of the recovery in euro area domestic demand, the yet-to-be crystallised write-downs, timid recapitalisation and excessive reliance on ECB funding might backfire in a financial system that is still largely bank-based. Such a credit crunch could potentially be a particular problem in Germany, which ironically is the only large euro area country that deleveraged in recent years and which - as its current account surplus shows - enjoys a funding overhang from domestic savings. A credit crunch would spell bad news for growth in the near and medium term and would likely hit investment spending hard. More prolonged feedback effects between bank profitability and economic growth in bank-based financial systems could make the credit crunch a constant feature weighing on euro area growth in the coming years. In contrast to the earlier liquidity crunch, there would be little that the ECB could do, for it cannot boost banks' equity capital buffers. This would need to come from either governments or private investors. Without decisive government action, we would not be able to rule out that euro area banks just shrink their loan books.
Surprise #2
Emerging economies expanding at a brisk pace and/or renewed supply setbacks fuel another surge in commodity prices.
In this scenario, a surge in commodity prices would put additional pressure on companies' profit margins, eat into consumers' purchasing power and potentially force central banks to hike interest rates earlier than expected if higher commodity price inflation spills over into higher inflation expectations. As a result, the composition of nominal growth would likely become more much stagflationary again, at least initially. The commodity price surge could be triggered by further upside surprises on growth, especially in EM, on the back of the unprecedented monetary and fiscal stimulus that has been put into place globally, or by a disruption in the supply chain, say, due to geopolitical events. For example, the price of oil might rise noticeably through the US$100/bbl mark, in line with our commodity strategists' bull case and above the US$81/bbl implied by the forward curve. Such an overshoot would hit commodity importers particularly hard, such as virtually all the European countries with the exception of Norway and (to a much lesser degree) the UK.
Although this implies stronger European exports to commodity producers, the overall effect on economic activity would be detrimental, for three reasons. First, European companies would face significant pressure on profit margins, which are already under stress, as employment and hence labour costs have not fallen a great deal. Second, European consumers would need to tighten their belts even further, as was the case during the 2008 commodity-driven inflation shock. Third, the feed-through of higher commodity prices into inflation might push inflation expectations - which have remained relatively well-behaved for now - higher. As a result, central bankers could be forced to move earlier and more boldly than our base case forecasts show.
If central bankers didn't act to anchor inflation expectations, a sharp rise in bond yields could equally derail the recovery. In this scenario, money markets would probably start to price in earlier and more aggressive tightening, and risky asset markets would probably be affected too. A sharper tightening of monetary policy - especially if coupled with faster fiscal consolidation in the face of rising interest payments - might well push the European economy into another (this time policy-induced) recession. Eventually, the commodity price shock would likely add to renewed deflationary pressures.
Surprise #3
Ample liquidity keeps government bond yields subdued, notwithstanding massive debt issuance.
Consensus is forecasting benchmark ten-year Bund yields to reach 3.8% in late 2010, some 60bp above the current level of 3.16%. We are even more bearish on bonds and forecast ten-year Bunds to break above 4% in 2H10. Our interest rate strategy team would be short the long end and long forward-curve steepeners (see 2010 Global Interest Rate Outlook, November 30, 2009). The reasons for rising bond yields are not difficult to find: ongoing economic recovery, abating deflation risks and tightening monetary policy (through traditional interest rate hikes and unwinding unconventional quantitative easing).
The wildcard in all of this is to what extent the unprecedented excess liquidity created by central banks globally in the past year and still sloshing around the global financial system could find its way into the government bond market. In the euro area, additional demand has come largely from banks, which have added €330 billion to their government bond holdings since October 2008. With monetary policy still expansionary and policy rates potentially staying low for longer than our base case forecasts show, government bonds might actually be better bid. Additional demand for bonds could come from asset reallocation away from risky assets and from looming bank regulation on liquidity buffers (the latter particularly likely to provide a natural buyer of bonds in the UK). Finally, if a credit crunch causes deflationary concerns to resurface, bond yields could potentially fall further from current levels - as they did in Japan in the 1990s.
Surprise #4
Country-specific political risks replace systemic risk concerns as a driver of spreads in the euro area.
In 2009, spreads in the euro area periphery were characterised by a very high degree of co-movement, suggesting that systemic concerns were the main driver. In 2010, the focus could swing towards country-specific issues. None of the euro area countries has the option of inflating their way out, something that is still possible for EMU ‘outs'. We would argue that the ability of countries to address the fiscal policy challenges ahead crucially depends on the institutions. Of course, these challenges also differ between countries, depending on their fiscal position before the crisis, how hard they were hit by the crisis, and the size of subsequent stimulus packages. But to what extent they can be tackled successfully will very much depend on the institutional set-up. For starters, the extent to which the electoral system generates clear political mandates to rein in budget deficits is important. Where the system generates fragmented coalitions or hung parliaments, matters become more complicated. Whether a clear mandate can be executed also depends on the degree of administrative centralisation. Countries with a federalist structure - one that grants financial independence to lower levels of the administration - might find it harder to successfully implement their budget plans (Germany, for example).
In our view, rich developed countries would only experience a sovereign debt crisis if they became unable to act because of a political stalemate or unwilling to act because the costs of doing so were deemed higher than the benefits. The latter is especially relevant within the euro area, where the disciplining effect of a potential currency crisis is absent. In this case, often a sizeable share of securities held in other euro area countries and substantial spill-over effects onto the borrowing costs of other countries create incentives for looser policy. Outside the euro area, a sovereign debt crisis could call the independence of the local central bank into question. Within the euro area, the ECB's independence might be put to the test if the government debt of one country were to become in danger of not making the A- cut-off for eligible collateral when it reverted back to the pre-crisis pool at the end of 2010. In this case, the ECB would face a very difficult decision indeed.
Germany - Taking a Breather Before the Budget Savings Start
In 2010, Germany is likely to outperform most other European countries. We expect Europe's largest economy to expand by an above-trend 1.9%, compared to only 1.2% for the euro area. Our forecasts are a tad above the current market consensus (1.7%). But contrary to many other forecasters, we expect the recovery to lose momentum into 2011, when we project growth to ease to the trend rate of 1.2%. The absence of further gains in business expectations and a marked correction in orders and production in October suggest that 3Q09 might already have been the strongest quarter in terms of growth. Germany's outperformance is partially a mirror image of it being hit much harder by the global recession due to its greater export-orientation and its bigger industrial sector. Having contracted a total 6.7% from its 1Q08 peak, German GDP will likely recover a cumulated 3.1% by 4Q10. This would leave activity still 3.6% below the peak and would close most of the gap to the euro area, where GDP should stand 3.2% below the peak, despite a more muted recovery outside Germany.
The outperformance also reflects a larger fiscal support package, which was upped again by another €8.5 billion just before Christmas and now totals 2.3% of GDP - an increase of 0.8pp over the stimulus already implemented in 2009. In addition to cutting income taxes and social security contributions, raising child and healthcare tax credits and investing more in public infrastructure, the new centre-right government decided to lower corporate taxes, raise child benefits further and extend short-shift subsidies. As a result, the budget deficit will likely increase from around 3% in 2009, to more than 5% in 2010 - which would still make Germany's budget deficit one of the lowest in the euro area! While the stimulus will help to support domestic demand, brisk headwinds still lie ahead. These stem most notably from the labour market. Thus far, the labour market has held up surprisingly well, thanks to a massive extension in short-shift subsidies and, also, some voluntary labour-hoarding by companies that are concerned about a shortage of skilled workers. The main adjustment came via a marked reduction in the hours worked per employee. As these reductions weren't matched by wage cuts, unit labour costs surged. Looking ahead, we expect a marked reduction in payrolls by a total of 1.4% and a perceptible moderation in wage increases.
From an inventory-led bounce in industrial activity to a broader demand-based recovery. The lack of labour cost cutting, very low capacity utilization rates and a renewed moderation of export demand suggest to us that the recovery in investment spending will likely be muted. This holds in particular for investment in machinery and equipment, where only the phasing-out of the more favourable depreciation rules at end-2010 add a temporary boost to an otherwise anaemic recovery. Similarly, consumer spending will likely be held back by ongoing job losses, a renewed rise in inflation and the prospect of a multi-year fiscal consolidation starting in 2011. Even leaving the pay-back from the car scrapping scheme aside, purse strings will likely remain tight and savings elevated. Domestic demand should expand only moderately, after a sharp contraction in 2009. The main risk to the outlook is a credit crunch as discussed in the previous section.
German policymakers will have to make tough decisions. For starters, the draft budget for 2011 due in July will have to reconcile the election promise to cut income taxes noticeably with the need to rein in the budget deficit. Substantial budget savings are needed to comply with new constitutional ‘debt brake' and the European Stability and Growth Pact (SGP). In addition, policymakers will have to fend off pressure to revive the car industry, which will likely see sales falling after the end of the car scrapping scheme. Finally, the financial sector, notably the state-owned Landesbanks and savings banks, have to be put back on a healthy financial footing.
France - Saved by Consumers
The French economy held up better than the euro area as a whole during the turmoil and is likely to outperform in 2010 too, although to a smaller degree relative to the previous year. This resilience is due, at least in part, to a more rigidly regulated economy. However, this will likely hamper France's long-term growth prospects. We are more bullish than the consensus for 2010, but expect the economy to decelerate in 2011. The two main themes for this year are:
1. Domestic demand will continue to face several headwinds - but will remain more robust than in the euro area as a whole: A housing market correction is now underway. We do not anticipate prices to fall as much as in hotspots such as Spain and Ireland, but with lending conditions still tight and unemployment rising, the risks are skewed to the downside. More broadly, France is the major euro area country showing the biggest discrepancy between firms' assessment of order books and inventories. We believe that this gap will close in the coming quarters. This can happen in two ways. The first possibility is that demand starts to improve more visibly, in line with our base case. The second is that firms start seeing their stock of inventories less optimistically. Clearly, there are grounds to remain cautious. However, relative to the other major euro area members, as well as the consensus, we think that the stimulus put in place and some new fiscal measures augur for a better outlook, especially on the consumer front.
2. Fiscal policy will remain expansionary and aggravate the deficit - tightening to start in 2011: Given the size of the budget deficit, fiscal leeway will be limited in 2010. At the same time, we don't expect a tightening either, at least while the economic outlook remains uncertain.
A national loan plan called the ‘Grand Emprunt' will be put in place in early 2010. The amount is around €35 billion. Almost €13.5 billion in state aid repaid by the banks will be used to finance the loan. This means that approximately €22 billion will be raised by tapping the market. The loan aims to fund investment in sectors that could strengthen France's competitiveness and growth potential in the long term, ranging from higher education and research to renewable energies and digital technologies. France is pursuing supply-side policies that could even help reduce the deficit, thanks to the future ‘economic dividends' of a strengthened economy.
In the short term, however, the loan will weigh on France's public finances. Of course, the investments will be spread over several years, thus affecting the 2010 budget only to a limited degree. We think that the impact on government debt will amount to slightly less than 1% of GDP this year. We expect a debt-to-GDP ratio of 82.3% in 2010 and 88.5% in 2011. Although there is no indication of eventual tightening plans, we think that 2011 is likely to see the beginning of fiscal restraint.
Italy - The Aftermath of the Crisis
Like other advanced economies, Italy is now expanding again. However, the main issue for 2010 relates to how quickly and to what extent the country will recover, for three reasons:
1. Trend growth will be lower than before the crisis: We think that the economic fallout of the financial turmoil damaged both labour productivity and the labour force (see Italy Economics: Assessing the Damage, October 26, 2009). We estimate that Italy's potential growth rate will be negative this year, and average 1% between 2011 and 2014 - below our pre-crisis estimate of 1.2%. The main takeaway for investors is that extrapolating into the future the pre-crisis growth rate of potential GDP might be too optimistic. If the recession lowered the pace at which the Italian economy can sustainably expand, as we believe, the rate of growth of aggregate corporate profits, over the long term, will be lower too.
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