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Macroeconomic and financial forecasts - July 2017

MACROECONOMIC OUTLOOK

  • United States: expansion continues despite a slightly disappointing H1. Donald Trump’s political difficulties do not jeopardise the continuation of the cycle. Tax cuts are likely before the 2018 mid-term elections, which should help growth to stabilise at around 2%.
  • Japan: fiscal policy and the positive cycle of industry and trade remain growth drivers. The BoJ’s policy is enabling accommodative monetary conditions to remain in place. However, nominal GDP growth is very low due to a decline in prices (GDP deflator) and employees’ real remuneration was lower for the 2nd consecutive quarter. 
  • Eurozone: the recovery is strengthening. Sentiment is at its strongest level since 2011, indicating an improvement in the economy with monetary conditions remaining accommodative despite the rise in interest rates. It is important to continue monitoring the political risk (in Italy especially).
  • Brazil: Q1 GDP growth came out at -0.4% year-on-year, better than the previous quarter (-2.5%). However, this improvement can be attributed mainly to the recomposition of inventories. We have upgraded our forecast for 2017 to 0% vs. -0.5% previously. We remain cautious given the weak demand and political uncertainty and with regard to the budgetary reforms. 
  • Russia: GDP rose +0.5% yoy in Q1. This figure reinforces our scenario of a Russian economic recovery. With growth carryover of 0.9% and rising economic indicators in the second quarter, we are revising our 2017 growth forecast up to 1.5% vs. 1% previously.

 

 

KEY INTEREST RATE OUTLOOK

  • FED: the Fed raised the fed funds target to 1.00-1.25% in June. The Fed will announce soon that it starts the non-reinvestment of the maturing assets it holds. The market underestimates the ability to hike its rates thereafter. ECB: the QE will continue at a €60bn/ month pace until December 2017. The ECB should announce later this year that the QE’s pace will be reduced in 2018. The communication will be gradually less dovish.
    BoJ: she will stick to its Yield Curve Control (YCC) policy and should not change its rate targets.
    BoE: the BoE will not hike its rate if the economic situation worsens but MPC members will continue to send mixed signals while inflation remains elevated.

 

2017.07-macroeco-forecast

LONG RATE OUTLOOK

  • United States: markets are too pessimistic with regards to the inflation outlook and the ability of the Fed to hike the fed funds in 2018. As a consequence, long-term rates should rise slightly in the coming months. 
  • Eurozone: long-term rates should rise in the coming quarters with the gradual exit of the ECB from its ultra-loose policies. Inflation break-even rates remain (too) depressed.
  • United Kingdom: the worsening of activity indicators should exert some downward pressure on UK yields.
  • Japan: the BoJ controls the long-end of the curve and is probably in favour of a decline of short-term bond yields.

 

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CURRENCY OUTLOOK

  • EUR: with the gradual exit of the ECB from its ultra-loose policies, the euro should be higher at the end of the year.
  • USD: the USD is back to its September levels and is far less overvalued than in January. Further disappointment about future stimulus measures would weigh further on the USD. 
  • JPY: the yen is undervalued and will lose further ground if long-term rates rise in other zones. This being said, against a backdrop of very low volatility, the JPY may be interesting for risk hedging purposes.
  • GBP: we keep a negative view on the pound, which should continue to suffer from the gradual worsening of the economy.
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ITHURBIDE Philippe , Global Head of Research
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Macroeconomic and financial forecasts - July 2017
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