Looking at Luxembourg, industrial production is up 6% year-on-year in the first two months of the year, which explains manufacturers’ optimism. Consumption is also up: car registrations have increased by 7% year-on-year, and household consumption expenditure increased by 2.6% in 2017. With unemployment consistently falling, and reaching 5.6% in April, it’s likely that these trends should continue in 2018. Regarding the unemployment rate, some industries have actually begun to face recruitment difficulties, especially in skilled labour. With this high demand, we anticipate that a rise in real wages would likely strengthen the rise in consumption. So, with all this in mind, Statec confirmed its Luxembourg growth forecasts at 3.9% for 2018 and 4% for 2019.
In Europe, the ZEW index has stopped its fall and reached +2.2, up from last months +1.9. The worry born of the last Italian election continued to climb, even though a government was formed. The threat of a sharp increase in Italian public spending is raising fears of an increase in debt, which already accounts for 132% of GDP. Keeping in mind that the ECB already holds 22 to 25% of Italian debt, an additional flattening of the Italian debt yield curve is unlikely, given that the ECB can't hold more than 33% of member states’ debt under normal circumstances. Right after Italian elections, we have observed an increase in the spread with German 10-year bonds reaching 320 basis points. Should Italian sovereign debt rating be downgraded, Italian financial institutions may go through a rocky path, as future interest rate hikes will bring down the value of existing bonds. Finally, Italian Central Bank registered a strong increase in intra-eurosystem claims, signalling that Italian banks (and bank customers) have moved assets in other Eurosystem's banks.