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Risk factors, Macroeconomic context and forecasts - November 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

November 2017

Novembre 2017



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

Risk factor 1



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

Central scenario (75% probability): the cyclical recovery continues. We have revised up our central scenario probability (from 70% to 75%) and reduced that of our worst-case scenario from 15% to 10%.

  • Global resynchronization: global growth has accelerated since the start of the year and will remain dynamic in 2018. The advanced economies (with the notable exception of the United Kingdom) will continue to experience above potential growth (notably the Eurozone and Japan), although probably at a slightly reduced pace. 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 and make it more robust.
  • 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).
  • United States: growth probably took a hit from the hurricanes in the third quarter of 2017, although the impact should be temporary, especially in light of the reconstruction spending announced. Most of the surveys remain at a high level. Low inflation, the ongoing accommodative monetary and financial conditions (despite the expected hike in the fed funds rate) and the forthcoming fiscal stimulus (a draft bill was adopted by a small Senate majority of 51/49) significantly reduce the risk of a recession in 2018-19.
  • Eurozone: the recovery has spread across the Eurozone, with a pick-up in investment in most countries. Growth is mainly being driven by internal demand. Political risk has faded considerably, becoming more local (status of Catalonia in Spain, Italian elections in spring 2018). The reduction in asset purchases by the ECB is likely to be accompanied by a rise in both long-term interest rates in the core countries and the euro. Hence the slight decline in GDP growth expected in 2018. Nonetheless, with credit conditions still highly accommodative, growth should be significantly above potential in 2018 and 2019.
  • UK: Brexit negotiations are making negligible progress, and will be difficult given the strong cohesion between the EU 27. The chances of a hard Brexit cannot be ruled out. In our view, the risk of a slowdown in the UK is underestimated (uncertainty shock) more robust than expected. Nevertheless, we do not expect a significant impact on Eurozone growth, which is mainly supported by domestic demand.
  • China: growth is more robust than expected. The reduction in overcapacity has reduced the downside risks. The economy’s growth drivers are now more diversified. Debt remains essentially domestic and manageable. We expect a gradual deceleration of growth and a rebalancing (less growth, less debt). The transition looks to be under control.
  • Core inflation, which is excessively low, should begin to rise very gradually. There is a structural slowdown in inflation due to supply factors. In addition, the cyclical component of inflation has weakened (flattening of the Phillips curve). Ultimately, we expect a very slight acceleration. The acceleration of core inflation is more likely to materialise in the US (full employment, rising unit-labour costs and the end of a number of temporary factors, such as the price drop on mobile phone services seen in the spring).
  • 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 expansionist (in the US in particular, and possibly in Germany). In the US, the Republicans are moving forward with the broad lines of the tax reform (income tax reform, corporate tax cuts, lower tax on repatriated profits). But this reform is still far from being adopted by Congress. In Germany, we would expect some infrastructure spending, but it will take time to form a coalition government and to reach a compromise on this controversial issue. There will probably be no visible impact on growth before end 2018 or even 2019.
  • Central banks are preparing to reduce monetary accommodation; this has been deemed excessive in view of the recovery under way. The Fed will continue to hike its interest rates and shrink its balance sheet (less and lessreinvesting maturing papers). The ECB, meanwhile, will probably announce the reduction of its asset purchases on 26 October, but is likely to extend its QE program. Having said that, monetary policies are still expected to remain broadly accommodative next year. In the US, the number of rate hikes next year will depend on the degree of stimulus introduced by the new fiscal policy, as well as on the state of the economy. In the Eurozone, we do not expect a rate hike before 2019.

Pessimistic risk scenario (10% probability): economic slowdown due to poor implementation of economic policy and/or political errors (monetary/fiscal/trade/reforms)

  • The downside risk scenario has changed: we no longer consider a recession in the US or a hard landing in China as the main risks to our forecasts. The probability of these risk factors materialising has fallen considerably over the last 6-12 months.

• Fiscal policy badly calibrated

• Errors in monetary policy (over-rapid normalisation process)

• Rise in protectionism

• Absence of reforms

  • Consequences

• Growth slows further and inflation does not stabilise (but that does not necessarily mean deflation)

• Risk of rushed deleveraging

• Central banks forced to turn to unconventional tools once again

Optimistic risk scenario (15% probability): continued acceleration of global growth in 2018


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

  • World trade after a spectacular rise in the global trade-to-GDP ratio in recent decades (globalisation phase), trade expansion should be more in line with the global GDP growth rate (i.e. a “pause in globalisation” and stabilisation of the ratio). However, if the ratio starts rising again, the current improvement should continue, with global growth accelerating again in 2018.
  • 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. In Germany, fiscal policy could become more expansionary.
  • 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. Consumer sentiment is excellent. This bodes well for  Consumption and Capex prospects in the short term. Growth is expected to decelerate moderately in Q3 2017 accounting for some disruption brought by the hurricanes. Nonfarm payrolls are decelerating, which is not abnormal at this stage of the cycle. However, core inflation is weak and also headline CPI disappointed again recently. We believe that this is due to temporary shocks that with time should fade and that core inflation will ultimately recover in the coming months (cyclical inflation expected to materialise).
  • With regard to the hurricanes, we estimate that the reconstruction spending would represent a boost for coming months, supporting growth in the affected areas. With regard to the debt ceiling, we expect a further increase due to the proximity of mid-term elections. For the same reason, we believe that some tax cuts will be voted in Q1 2018.
  • Political noise: a messy debt ceiling debate and a difficult negotiation on budget and tax reform
  • Protectionist risk still present
  • Lower potential growth
  • Erosion of corporate margins


  • 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. Barring a new shock, Brazil should exit recession  this year.
  • The political environment and the vote on pension reform are still major risks against a backdrop where the deficit and public debt continue to deteriorate.
  • Fiscal easing with, in particular, a very modest pension reform
  • Rise in political risks (approaching presidential elections)






The recovery continues with a lot of remaining potential

  • The series of upside surprises continued to pile up. The recovery in investment, solid consumption figures and the drop in unemployment are generating a virtuous circle. Core inflation remains weak (1.1% in September). At this stage, the stronger euro (which partly reflects the region’s economic improvement) does not put the recovery at risk.
  • 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 crisis in Catalonia must be contained.
  • Rise in the Euro
  • Political risk (rise in anti-establishment parties, notably in Italy and Germany)
  • 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. Uncertainties concerning future access to export markets, slowing investment and real estate dynamics are dragging down confidence. The rise in inflation due to the drop in sterling is expected to be temporary. Despite the very low unemployment rate, wages are not picking up.
  • Major disagreements remain with Europe with regards to the terms of Brexit, including over the planned sequence of negotiations. The timetable is tight (in principle, the UK will leave the EU in March 2019), and the risk of a no-deal scenario is increasing. Theresa May’s position remains weaker since her June election failure.


  • Shock of uncertainty related to Brexit
  • Foreign deficit is still very high





Growth showed signs of softening, but unlikely to be much disruptive

  • China’s economy looks to be softening (late Q3), and is expected to cool further in coming quarters, (base effects turning to be unfavourable). Nonetheless, the latest data suggested not too concerned yet, with the current slowdown mainly policy-driven, linked to anti-pollution campaign and property tightening, while other part of the economy held up relatively well. Overall credit growth slowed but so far moderately.
  • Meanwhile, nominal GDP growth held up stable at relatively fast pace, which demonstrated how supply side efforts to knock off real growth but to be offset in nominal terms. Capital outflows seem to remain under control. The latest messages from 19th Party Congress showed clearer direction of the country into medium-term by pledging to deepen structural reforms.


  • Policy mistakes in managing the expected slowdown
  • Geopolitical noises regarding North Korea and with US



A resilient growth in spite of shocks from demonetisation and GST

  • The negative impacts of demonetisation and the introduction of a new VAT look like temporary. More structural issues like NPL in Banking sector are weighing on a sustainable capex recovery.
  • Inflation is heading towards 4.5% by Q1-18. We do not expect further easing by RBI. More expansionary stance is expected on the fiscal side.


  • Lower-than-expected private investment prevents a sustainable growth
  • Slippage on fiscal target is possible in order to sustain economic growth


Toward the longest economic expansion since the early 1960s?

  • Growth was very strong in Q2 2017 (+2.5% annualised), well above its potential level (0.8%). The economy is benefiting from the fiscal stimulus, the improvement of the industrial cycle and trade in Asia. Real GDP is likely to grow 1.3% in 2017 although bad weather in the summer will induce temporary stagnation. Business investment will be sanguine reflecting all-time high profits, whereas the tighter labour market is failing to boost wages. The economy should maintain momentum in 2018 (+0.9%) as PM Abe will push his Abenomics reform further in education and child care after a snap election in October.


  • Heightened geopolitical
    risks with renewed
    tensions with North Korea




Macro and market forecast
BOROWSKI Didier , Head of Macroeconomic Research
ITHURBIDE Philippe , Global Head of Research
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Risk factors, Macroeconomic context and forecasts - November 2017
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