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Belgium's Trading Ties With Germany Help Keep Growth Grounded

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Includes: BUD, BUDFF, DLAKY, EWG, EWK, KBCSF, KBCSY, SOLVY, SVYSF, SVYZY
by: Interactive Brokers
Summary

Market participants in the week ahead will receive updated figures on Belgium’s rates of inflation and economic growth, amid an increasingly gloomy landscape across the European continent.

Certain of Belgium’s corporate ownerships, as well as its export ties to Germany, for example, appear to pose increased downside risks to the country’s broader economic health.

Higher airline travel costs and a slowing pace of gross domestic product (GDP) growth may be indications of German influence.

Europe: The Week Ahead (May 27-31)

Market participants in the week ahead will receive updated figures on Belgium’s rates of inflation and economic growth, amid an increasingly gloomy landscape across the European continent.

Certain of Belgium’s corporate ownerships, as well as its export ties to Germany, for example, appear to pose increased downside risks to the country’s broader economic health, with higher airline travel costs and slowing gross domestic product (GDP) pace indications of the German influence.

Overall, Belgian inflation has been relatively subdued in recent months, having dropped to 2.08% in April from 2.33% in the prior month, with the country’s consumer price index (CPI) at 108.91 in April, up from 108.85 in the previous month.

Tuesday, May 28

  • Consumer Price Index (CPI) – May

According to Statbel, the Belgian statistical office, the “most significant” month-over-month price declines were highlighted by lower costs of electricity (-3.7%), natural gas (-5.7%), travels abroad (-2.9%) and fruit (-3.1%), while increases were mainly attributed to higher prices of airplane tickets (+12.7%) and hotel rooms (+9.6).

Grounded by its parent

One reason for the higher costs of plane travel may be assigned to Brussels Airline’s exposure to Germany’s Deutsche Lufthansa (OTCQX:DLAKY), which suffered a €336m earnings plunge in the first quarter of 2019.

Lufthansa fully-owns Belgian airline SN Airholding, which is Brussels Airlines’ direct parent company.

Moody’s Investors Service recently noted that while Brussels Airlines’s financial profile “has somewhat improved in recent years and benefits from its integration” into Deutsche Lufthansa, its business model “faces uncertainties as a result of this process.”

Indeed, Lufthansa said that on a preliminary basis, its adjusted EBIT Q1’19 amounted to a loss of €336m compared with its prior year’s gain of €52m.

The German airline giant noted that, among other factors, the loss was largely due to higher fuel costs, as well as market-wide overcapacities in Europe, which placed downward pressure on fares.

Ulrik Svensson, Deutsche Lufthansa’s CFO, said that the company is “seeing good booking levels for the quarter ahead,” however, at the same time, it has “substantially reduced” its own capacity growth.

Gears grind as trade war intensifies

Elsewhere, Belgium’s close trading ties with Germany may also pose slower growth prospects for the nations’ broader economy – especially following Thursday’s dismal manufacturing report.

Wednesday, May 29

  • Gross Domestic Product (GDP) Growth Rate – May

Belgium’s rate of GDP growth has been decelerating on a year-over-year basis since September 2018, when it was running at 1.5%. For the three-months ending March 2019, the country’s GDP registered 1.1%.

The National Bank of Belgium sees continued slowing of the GDP pace in the years ahead, with an expected annual average drop of 0.1% from 2018 through 2021, when it may grow by only 1.2%.

Belgium’s reliance on Germany for exports could further drag-down the country’s economy, amid global uncertainties over recent trade tension escalations.

IHS Markit economists noted that, despite goods production in Germany falling at a slower rate, May saw the headline IHS Markit Flash Germany Manufacturing Purchasing Managers Index (PMI) tick down slightly from 44.4 in April to 44.3, owing in part to negative influences from the employment and stocks of purchases components.

The latest PMI reading was the second weakest in nearly seven years, next to March’s low of 44.1.

IHS Markit economist Phil Smith said that it is manufacturers who “remain the most downbeat about the outlook amid lingering global trade tensions, though the survey highlights that fears of a slowdown may have started to spread to services, where confidence is now at its joint-lowest since 2014.”

Against this backdrop, the value of iShares Inc iShares MSCI Belgium ETF (NYSEARCA:EWK), which has among its top holdings Anheuser-Busch Inbev (NYSE:BUD), insurance company KBC Group (OTCPK:KBCSY) and chemicals company Solvay (OTCQX:SOLVY) has come down close to 8.0% since mid-April.

The ETF had last shed more than 1.3% intraday Thursday to around US$17.90, according to the IBKR Trader Workstation. This is in-line with the same intraday fall in the iShares MSCI Germany Index Fund (NYSEARCA:EWG) of about 1.40% to US$27.47.

Investors will likely be paying close attention to Belgium’s rates of inflation and GDP in the week ahead, as well as its exposure to slower growth across Europe – notably among its top trading partners, including Germany, as trade-related effects continue to pose downside global risks.

Note: This material was originally published on IBKR Traders' Insight on May 23, 2019.

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