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F cus UniCredit occupies a strategic position in Italy, Germany and Austria. With about 4,171 branches in Italy, 851 in Germany and 290 in Austria, UniCredit comprises one of the largest banking networks in the heart of Europe. Accounting for more than one-third of the GDP of the European Union, these three countries benefit from their close ties to the growing economies of Central and Eastern Europe. Following the introduction of the ECB’s Outright Monetary Transactions (OMT) program in the summer of 2012, markets’ normalization process is enduring, with a gradual restoration of investors’ risk appetite. At the beginning of 2014, the growth recovery across the OECD area is gaining good momentum, while global trade is picking up quite nicely. We expect eurozone growth accelerate to an annual average of about 1.5% in 2014, from -0.4% in 2013. Germany is projected to be the engine of growth in 2014, on the wake of brighter export prospects, the unloading of pent-up demand in investment in machinery and equipment, and some strengthening of private consumption; the tight intraEuropean trade links will secure that the positive effect will be felt in the eurozone periphery as well as Central Eastern Europe. In Italy, the recovery is underway, although the pace of GDP growth is likely to remain subdued at 0.7% in 2014. The main growth drivers will AUSTRIA, ITALY AND GERMANY be a steady recovery in exports and a moderate pick-up in capital expenditures, amid still tight credit conditions, while private consumption is likely to be the weak spot. Finally, while the recovery of export markets is kickstarting the domestic economy, domestic demand, mainly investment, will ultimately constitute the main pillar of economic growth in Austria in 2014. In the medium-to-longer term, the OMT has helped to create a more favorable environment for politicians to implement structural reforms, while repairing the transmission mechanism of monetary policy remains the ECB’s most daunting challenge. Pushing ahead with the structural reforms remains essential to achieving a sufficient degree of macroeconomic and fiscal convergence across the eurozone, while efforts continue to shape a credible pan-European architecture. This process is vital to making the eurozone stronger and more competitive moving forward. In Italy, the sustainability of the recovery will largely depend on the effective implementation of reforms to restore longterm competitiveness and reduce public debt. Taking into account the reforms that have already been implemented in Italy, we expect real economic growth to continue at an average annual rate of roughly 1% in Italy and 1.8%-1.9% in Austria and Germany from 2015 to 2018. Market share1 (%) AUSTRIA GERMANY 14 2.5 ITALY 1. Market share in terms of total Customer Loans as at 31 December 2013. Source: UniCredit, National Central Banks. 12.6 CENTRAL AND EASTERN EUROPE UniCredit is a market leader in Central and Eastern Europe, it has a broad network of roughly 3,600 branches.* more supportive of domestic demand. In many of the newer EU states we expect GDP growth of above 2% this year. Its regional footprint is diverse, and include a direct presence in 14 countries. It is ranked in the top five in 10 of these counties*. In fact the CEE now accounts for 28 percent of the Group ‘s revenues.** Across the newer EU states, economic performance is expected to continue improve. A recovery was already visible over much of 2013. In part this improvement captures a stronger external environment, supporting industry and exports as EMU continues to use much of the region as a competitive production base. Over 2014 this recovery should extend more visibly into domestic demand. Following a multi year period of fiscal consolidation, the drag to growth on this front should be much more muted going forward while some countries will enjoy a positive impulse. Public debt ratios remain considerably below the average for advanced economies. In many cases labour markets have stabilized. Within Turkey and Russia the near term challenges are greater. Following a multi year period of strong growth, momentum will slow this year in Turkey. Political uncertainty plays a role. A slowdown in foreign capital inflows, prompted in part by Fed tapering, is also having an impact. In contrast, stronger industry and export performance brings benefits, as is the case in the newer EU states. Monetary policy is also exceptionally accommodative across the region while rate hikes are likely to materialize only gradually. Progress on banking union should also bring positive spillovers to the newer EU states while in many countries we see credit proving Market share2 (%) Russia Ukraine3 (UCI UA + USB) 1.5 3.4 Hungary 6.0*** Slovenia 6.1 Slovakia 6.4 Czech Republic 6.8 Romania 6.9*** Serbia 8.7 Turkey Poland Bulgaria 9.2 10.6 15.0 Bosnia and Herzegovina Croatia * as at 30 September 2013. ** as at 30 June 2013. *** as at 31 December 2012. 2. Market Share in terms of Total Assets as 30 September 2013. Market share in Azerbaijan not available. 3. Pro-forma (Ukrsotsbank + UniCredit Bank Ukraine). Source: UniCredit Research, UniCredit CEE Strategic Analysis. 21.6** 26.5 Russia continues to adjust to stable rather than consistently increasing energy prices. This adjustment is aided by increased currency flexibility, a large stock of foreign reserves and improvements in the inflationtargeting regime. Within this environment, real GDP growth over the coming 1-2 years will be more muted than in the past but remain positive. From a medium- to long - term perspective, we believe that the majority of Central and Eastern Europe economies will continue to see an increase in living standards as growth is supported by competitive labor costs, flexible labor markets and a gradual recovery in foreign direct investment.