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Risk factors, Macroeconomic context and forecasts - September 2017


Risk factors

The table below presents risk factors with probabilities assigned. It also develops the most credible market impacts.

MACROECONOMIC CONTEXT - Our convictions and our scenarios

This section provides a reminder of our central scenario and alternative scenarios.

Macroeconomic picture by area

An overview of the macroeconomic outlook for world’s major economic regions

Macro and Market forecasts

September 2017

Septembre 2017



The table below presents risk factors with probabilities assigned. It also develops the most credible market impacts.

2017.09-risk factors-1



This section provides a reminder of our central scenario and alternative scenarios.

Central scenario (70% probability): reflation continues. The resynchronization of the cycle in all the major areas carries the global economy

  • Global resynchronization: global growth accelerated in 2017 and will remain dynamic next year. The advanced economies (with the notable exception of the United Kingdom) will continue to experience above potential growth (notably the eurozone and Japan). And the major emerging economies that were in the red (Brazil and Russia in particular) confirm their exit from recession. Finally, growth remains strong in China. The recovery is mainly driven by domestic demand. The resynchronization of the global cycle generates “multiplier effects” - via trade - that sustain the recovery on a global scale.
  • World trade: After a marked decline since the financial crisis, world trade has recovered markedly. It is now stimulated by the resynchronization of the global cycle which it feeds in return. This effect is however expected to wane: we anticipate a stabilization of the world-trade to world-GDP ratio in the future (this means that, in the medium run growth will remain primarily driven by domestic demand).
  • United States: the two topics that are currently attracting media and investors’ attention (the impact of Hurricane Harvey and the risks of a “government shutdown”) should have little impact on growth. The impact of the hurricane in Texas is expected to be temporary, as it was the case for the Sandy hurricane, for example. In addition, keep in mind that reconstruction spending will benefit to growth. As regard a potential government shutdown, we tend to consider that such a scenario - which means that the government runs out of money because of the Congress’s refusal to vote on the budget - is unlikely to happen, one year before the mid-term’s elections.
  • Eurozone: the euro appreciation goes in tandem with the recovery more than it threatens it. It is through this channel that monetary conditions will start to tighten in the Eurozone. Hence the slight decline in GDP growth expected in 2018 (from 2% to 1.7%).
  • UK: the economy will slow. The negotiations of the Brexit stumble upon the very elements which are to be negotiated and the order in which they are to be negotiated. The negotiations will be difficult as the cohesion between the EU countries is strong. Against this backdrop, the Sterling remains at risk. The slowdown in the UK is underestimated. Nevertheless, we do not expect a significant impact on Eurozone growth, supported above all by domestic demand.
  • China: growth is excessively fueled 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. There is a structural slowdown in inflation due to supply factors which partly temporary. The cyclical component of inflation is still struggling to materialize (flattening of the Phillips curve). Ultimately, 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 US (full employment, rising unit-labour costs).
  • Oil prices: we expect oil prices to evolve in the $45 to $55 range with 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). 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 the gradual rise in core inflation).

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 still surprise with protectionist measures. Such a move would increase inflation Donald Trump may still surprise with protectionist measures. Such a move would increase inflation.

  • 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 (generalized, 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 trade has 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 cycle is likely to accelerate global growth.
  • A large-scale tax stimulus in the US would 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.









Growth remains above potential

  • Surveys remain strong, particularly in the manufacturing sector. Growth is expected to be between 2% and 3% in Q3 2017. Nonfarm payrolls are decelerating, which is not abnormal at this stage of the cycle. However, core inflation has unexpectedly fallen. We believe that it is due to temporary shocks on specific products and that core inflation will ultimately recover in the coming months (cyclical inflation expected to materialize).
  • Two events may muddy the waters in the coming months (Hurricane Harvey and debt ceiling). With regard to the hurricane, we estimate that the reconstruction spending will support growth in Texas. With regard to the debt ceiling, we expect a further increase due to the proximity of the mid-term elections. For the same reason, we believe that some tax cuts will be voted in Q1 2018 at the latest, despite the political difficulties faced by Donald Trump with his own camp.
  •  A messy debt ceiling debate
  • Protectionist risk still present
  • Lower potential growth
  • Erosion of corporate margin


  • Inflation continues to recede and the BCB may pursue its monetary easing cycle.
  • Economic activity indicators are slowly improving. Real GDP growth released low but positive in Q2. Baring a new shock, Brazil should exit recession.
  • The new episode in the political crisis, which, once again, involves directly the president, may delay the vote on pension reform.
  • Fiscal easing with, in particular, a very modest pension reform
  • Rise in political risks
  • Sliding into recession






A well-entrenched recovery with a lot of remaining potential

  • The series of upside surprises did not stop this summer: Good Q2 figures and business climate indicators showing a strong momentum into Q3. The recovery in investment and the rapid drop in unemployment generate a virtuous circle that will continue. Underlying inflation is slightly on the rise, but remains weak in terms of absolute level (1.2% in August).At this stage, the rise in the euro (which partly reflects the region’s economic improvement) does not put the recovery at risk: We increased our GDP growth forecast from 1.8% to 2% for 2017, from 1.6% to 1.7% for 2018. Yet a rapid additional appreciation of the euro may become problematic.
  • Political risk declined sharply after the French election. However, residual uncertainty remains in Italy (general election due no later than May 2018 against a backdrop of rising euroscepticism). The German elections (September 2018) will not cause major change (a small additional fiscal stimulus is probable).
  • Rise in the Euro
  • Political risk (rise in anti-establishment parties, notably in Italy)
  • External economic
    risk: end of the US cycle or shock originating in emerging



Slowdown amid major uncertainties around the Brexit process

  • The economy has been slowing down since the beginning of 2017 (cumulated rise in GDP of only 0.5% in H1). Rising inflation, uncertainties concerning future access to export markets, slowing investment and real estate dynamics weigh on confidence.
  • While the government has slightly eased its stance on Brexit, major disagreements do remain with Europeans, including regarding the sequence of negotiations, while the timetable looks increasingly tight (exit from the EU, in principle, in May 2019). T. May’s position has been weaker since her June election failure.
  • Shock of uncertainty related to Brexit
  • Public and foreign deficits still very high





Growth still higher than expected

  • Q2 GDP growth was higher than expected (6.9% yoy) thanks to very dynamic property and export markets. We revised up our forecasts from 6.4% to 6.7% (2017) and from 6.0% to 6.6% (2018). The construction sector and consumption have been resilient, which should limit the downturn in 2018.
  • The Government should pursue its monetary tightening and limit credit to contain financial risks. Structural reforms will be enforced.
  • The longer-than-expected stabilisation of China’s economy (2016 to 2018) is giving rise to a global upturn, clearly benefiting global cyclical sectors, commodities and the emerging markets.
  • Burst of credit or property bubbles


  • Huge appreciation of the renminbi



India: a steady growth driver for Asia in 2017 in spite of demonetisation


  • Indian growth slowed more than expected in Q2 (5.7% yoy against 6.5% expected by consensus and 6.1% in Q1) due to a sharp drop in private consumption as well as exports. Demonetization and the introduction of a new VAT explain this trend, which should only be temporary.
  • Inflation will remain moderate but a cut in the repo rate by the end of the year is unlikely.
  • Lower-than-expected
    slowdown in private
    investment that could
    weigh on productivity
  • Slippage on public


Toward the longest economic expansion since the early 1960s?

  • Growth was very strong in Q2 2017 (+4% at annual rate; +2.1% yoy), well above its potential level (0.5%). The economy benefits from the fiscal stimulus, the improvement of the industrial cycle and trade in Asia. We have raised our real GDP growth forecast from 1.1% to 1.7% in 2017. Growth is expected to decline but to stay well above potential in 2018 (1.1%). Businesses take advantage of this but wage increases are still missing, despite a very low unemployment rate.
  •  Exposure to China
  • Heightened geopolitical
    risks with renewed
    tensions with Korea




2017.09-Macro Market forecasts
ITHURBIDE Philippe , Global Head of Research
BOROWSKI Didier , Head of Macroeconomic Research
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Risk factors, Macroeconomic context and forecasts - September 2017
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