The year 2017 was marked by the strengthening of the global recovery and international trade. The growth process is increasingly continuous and inclusive, affecting both the advanced and emerging economies, fostered by cyclical and structural factors. Global demand has increased, driven by Chinese and US growth. The liquidity in the economic system remains exceptional, a consequence of the accommodative monetary policies of the major central banks, leading players in the world economic scene.
The banking system is more solid, confidence is gradually increasing and market volatility is subsiding. Although the global macroeconomic picture has improved, political risks persist, linked to separatist sentiments and international crises, as do economic risks, associated with the unresolved fragilities of the system.
The former include the tensions in Spain, the talks for the renegotiation of NAFTA and those related to Brexit and the deterioration in relations between the United States and North Korea. Conversely, the results of elections in various European countries have reduced political instability in Europe. Structural factors include the risk linked to the sustainability of the public finances in the face of the investments necessary to increase the productivity of economies. In this context, the economies of the countries in which the Group is present grew, displaying resilience to the adverse shocks that occurred during the year. These included natural disaster such as the flood that hit Peru, the hurricane season and the earthquake in Mexico.
The United States, now in the advanced phase of its economic cycle, continued to grow at the pace registered in recent years. A tax reform was approved in December, which will lend new impetus to the economy, but uncertainty remains concerning the protectionist orientation of the new administration and, more generally, frictions in international relations. In the United States the 4th Quarter saw an improvement in economic indicators, with GDP growing by 2.5% compared with 2.3% in the 3rd Quarter. The trend was mainly driven by consumption of goods and services, as well as by a good performance of investment and an increase in the trade balance. Despite a decline in the central months of 2017, prices rose by 2.1% on an annual basis, in line with the central bank’s target. Inflation was sustained by extremely positive labor market conditions. As a result, the Federal Reserve (Fed) further reduced the supply of liquidity to the financial system with three increases in its policy rate, bringing it to 1.25%.
The euro area has grown faster than market expectations. Pending structural reforms that would help raise productivity, making growth sustainable, the expansion in 2017 was supported by the accommodative monetary policy of the European Central Bank (ECB) and the dissipation of anti-European tensions and sentiment (e.g. the Dutch, French and German elections), which had eroded the level of confidence in the economic system. Inflationary pressure still differs among euro-area countries and remains distant from the optimal level of 2%. However, upward pressures during 2017 prompted the ECB to announce the possible end of quantitative easing.
Among European countries, the Italian economy – if expectations are confirmed – is projected to have grown by 1.5%, close to the fastest pace since 2010. The expansion was fueled by the recovery in consumption, partially financed by a reduction in the precautionary saving of households.
The labor market has shown signs of improvement: the unemployment rate, although very high, is decreasing and reached 10.8% in December, the lowest level since the end of 2012. Prices on an annual basis rose at a faster pace than in 2016, with inflation reaching a peak in April (1.9%), before gradually slowing to an annual low in December (0.9%).
Spain continues to expand at a rate of more than 3%, buoyed by favorable developments in consumption, which, as in Italy, has been sustained by reducing the savings rate.
Inflationary pressure was strong in the 1st Half, at an average of 2.4% on an annual basis, before declining in the 2nd Half of the year, which brought the annual average to 2%.
The peak of the crisis in Catalonia appears to have passed and the risks associated with the possible independence of the region now seem smaller than a few months ago. On the political level, the elections in the Netherlands and especially in France had a positive influence on stability, which could have been further undermined by a strong rise in nationalist movements. In Great Britain the outcome of the elections heightened uncertainty. On March 29, 2017, British Prime Minister Theresa May officially invoked Article 50 of the Treaty on European Union, which establishes the procedure for Member States to withdraw from the European Union. However, the general election showed a Conservative party losing votes and strength, increasing the uncertainty about the EU exit process, which will not be defined before the last quarter of 2018.
Positive economic developments also prevailed in Russia, confirming the signs of improvement seen at the end of 2016 and in the first two quarters of 2017, with growth in the 3rd Quarter at 2.5% year-on-year. Consumption and investment also made positive contributions, growing by 2.8% and 4.8% respectively compared with the same period in 2016. Annual inflation was 2.5%, well below the target of the Russian central bank (4%), inducing the latter to implement a further cut in its policy rate, bringing it to 7.8%.
In South America the macroeconomic context was mixed, but characterized by a general improvement compared with the previous year. After the three quarters of recession in 2016, Argentina returned to growth, recording an expansion of 3.1% in the 2nd Quarter and 3.9% in the 3rd Quarter. The Argentine national elections saw the strengthening of the coalition led by President Macri, fostering political continuity and allowing the current coalition to pursue more forcefully the program of fiscal reforms needed to increase economic potential and reduce the strong inflationary pressures. After 12 quarters of recession, even Brazil began a gradual recovery, expanding by 2.2% in the 4th Quarter. The decline in inflationary pressures allowed the central bank to increase liquidity, thereby supporting the recovery, but political instability could weigh on the country’s potential growth and delay the necessary reform process. The Chilean economy in 2017 grew more slowly than in recent years, penalized by major strikes in the mining sector. However, the growth rate in the 3rd Quarter, equal to 2.2% on an annual basis, represents an improvement compared with the previous quarters, as do the monthly data at the end of the year. Here too, as in Brazil, inflation continued to subside, enabling the central bank to stimulate the economic system by increasing liquidity. For Colombia, 2017 was a transition year. Growth, which was slower than in previous years, averaged 1.5% in the first three quarters. Diversification remains one of the major issues facing the Colombian economy, which is still highly dependent on the mining sector and therefore exposed to developments in cyclical rather than structural factors. In Peru, 2017 was marked by the flooding caused by El Niño, which penalized growth in the early quarters of the year. However, despite this adverse shock, the more recent quarters were characterized by a recovery in the rate of expansion (2.2% in the 4th Quarter) driven by household consumption, exports and public investment. Mexico continued to grow at a pace in line with previous years in the first two quarters, thanks to the good performance of consumption despite rising inflationary pressure (6.8% on an annual basis). However, the figures for the 3rd Quarter and 4th Quarter show GDP growth of 1.7% and 1.5% respectively, below 2% for the first time since the 1st Quarter of 2014. The deceleration reflected the slowdown in consumption and exports. The renegotiation of trade agreements with the United States and Canada (NAFTA), which began in 2017 and will continue in 2018, has been one of the greatest sources of currency volatility and potential risk to the Mexican economy.
The following table shows the growth rates of GDP in the main countries in which Enel operates.
Annual real GDP growth
Source: National statistical institutes and Enel based on data from ISTAT, INE, EUROSTAT, IMF, OECD and Global Insight.
International commodity prices
Oil prices were characterized by two distinct phases in 2017: the first part of the year was marked by substantial price stability, culminating in lows of around $45 a barrel at the end of June, while the second phase began at the end of August and saw steady growth. From the point of view of the fundamentals, the oil market in 2017 experienced a reduction in the large supply surpluses recorded in 2014- 2016 thanks to a reduction in the level of inventories, strong world demand and a general agreement among the OPEC and non-OPEC producer countries to comply with previously agreed production cuts. All this generated growing pressure on the price level, with oil prices rising well above $65 a barrel at the end of the year.
Despite the growing global attention paid to environmental issues, the price of coal rose sharply above the levels registered in 2016, due mainly to three factors: the strong growth in demand in China, excessive temperatures during the summer and numerous structural problems in Indonesia and Australia that limited their exports, reducing availability.
On the other hand, the gas market was characterized by the expanding role of liquefied natural gas (LNG) and strong European demand driven by both seasonal factors and the decline in the supply of French nuclear power in the first part of the year. All of this applied upwards pressure on prices compared with the previous year.