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Macroeconomic context: Our convictions and our scenarios

Central scenario (70% probability): reflation continues and the Eurozone is gaining ground


  • World GDP growth will be above 3% per year in 2017 - 2018. The Eurozone is progressing, the United States and China are stabilizing, the UK is weakening, Brazil and Russia are emerging from recession, Asia remains the strongest zone among so-called “emerging” areas.
  • Growth in advanced economies - and to a lesser degree in emerging economies - is largely driven by domestic demand(as in the case of Europe, the United States and Japan in particular).
  • World trade:after a dramatic decline since the financial crisis, world trade is recovering, particularly in Asia. But this recent acceleration is probably temporary at the global level. We anticipate a stabilization of the world-trade to world-GDP ratio (i.e. the main engine of growth will remain domestic).
  • The Brexit negotiations will slow UK growth:the impact is underestimated by the consensus and by the British government. We do not expect a significant impact on growth in the Eurozone. We expect tough negotiations, especially as cohesion between EU countries is strong. We also expect a further weakening of UK long-term growth and a depreciation of the sterling.
  • China:growth is excessively fuelled by credit. Debt remains essentially domestic and manageable, but the risk remains. We expect a gradual deceleration of growth and a rebalancing (less growth, less debt).
  • Core inflation will remain moderate(by historical standards) in most advanced economies. We expect a moderate acceleration in the coming years in line with the improvement of the labour market. The acceleration of core inflation is more likely to materialise in the United States (full employment, rising unit-labour costs). It’s worth following the debates on inequalities and the sharing of added value.
  • Oil prices: we expect oil prices to evolve in the $45 to $55 rangewith potential peaks outside this range ($40- $60), but we would expect these peaks to be short-lived.
  • Fiscal and tax policies are likely to become more expansionary(in the US and Germany in particular). In the US, we anticipate a modest fiscal stimulus that should be voted in the first quarter of 2018 at the latest. In Germany, we would expect some infrastructure spending, after the elections (24 September 2017). The impact on growth will not materialise before 2018 or even 2019.
  • Monetary policies will remain broadly accommodative (fiscal dominance, financial repression and low inflation by historical standards). Central banks will, however, want to remove “excessive accommodation”: reduction of the Fed’s balance sheet (less and less reinvesting maturing papers), reduction of the ECB’s asset purchasing programme (consistent with the return of growth and with the improvement of budget balances).

Pessimistic risk scenario (15% probability): global growth at about 2% or even lower

Four distinct events would be likely to drive the global economy in this scenario.

  • China:banking crisis / hard landing of the economy
    • Stabilization of growth is at the expense of a sharp rise in debt, especially of non-financial corporates. This is not sustainable in the long term (significant increase in non-performing loans in banks’ balance sheets.
    • Bank runs, massive capital outflows, strong depreciation of the RMB ...
    • A hard landing in China would have massive spillovers on the rest of the world (emerging economies in particular).
  • A recession in the United States
    • Potential growth is much weaker than in the past: the ability to absorb shocks has been weakened and the room for manoeuvre in terms of economic policy (fiscal and monetary policies) has diminished. In other words, it is easier to fall into recession in the wake of an exogenous shock. It is all the more true that the economy is mainly driven by consumption.
    • Donald Trump may surprise with protectionist measures adopted at midterm of his presidential mandate. Such a move would increase inflation expectations, forcing the Fed to accelerate the pace of normalization.
  • A bond-market crash would trigger a fall in equity markets, which are notoriously overvalued, and this could generate expectations of recession or even a recession.
  • A disorderly deleveraging(general, excessive and rapid) would generate new deflationary fears and the return of the spectre of “debt deflation”.
    • Public and private debt continued to rise, reaching a new peak in 2016, to about 250% of GDP (US, EZ, UK, China). Should asset prices fall, deflationary pressure would rapidly resurface forcing central banks to continue or restart their QEs.

Optimistic risk scenario (15% probability): strong acceleration of global growth in H2 2017-2018

Several factors, which are likely to generate higher growth, should be closely monitored.

  • World tradehas seen a dramatic decline, a decade of disruption in the 40 years that preceded it. If the current improvement (especially in Asia) becomes global, then global growth will accelerate.
  • Investment, which has been sluggish since the beginning of the post-financial crisis recovery, is moderately recovering. It is an essential engine for global trade and thus for global GDP growth.
  • The resynchronization of the global cycleis likely to accelerate global growth.
  • A large-scale tax stimulus in the USwould remove doubts about the continuation of the US cycle.
  • Continued cyclical acceleration in the Eurozone (supported by low inflation which would allow for an accommodative monetary policy for a few more years), the use of budgetary and fiscal room for manoeuvre provided by lower interest rates, and the fading political risks in the Eurozone would enable the European monetary union to emerge as a stronger and more stable growth area.

July/August 2017



Juillet/Août 2017

The Article



> Risk Factors

> Context & macroeconomic picture and financial forecasts


> Facteurs de risque

> Contexte & prévisions macroéconomiques et financières

2017.07-macroeco context - 1
2017.07-macroeco contexte-2

Risk Scenarios: downside and upward risks appear balanced

2017.07- macroeco context-3
2017.07-macroeco context-4



ITHURBIDE Philippe , Global Head of Research
BOROWSKI Didier , Head of Macroeconomic Research
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Macroeconomic context: Our convictions and our scenarios
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