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Risk factors, Macroeconomic context and forecasts - January 2018


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

January 2018

Janvier 2018



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

Risk and factors 1
Risk and factors 2



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

Central scenario (75% probability): continued expansion of global activity.

  • Global resynchronisation: 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. The major emerging economies will also continue to grow at a sustained pace. The ongoing rebalancing in China is progressing quietly – such that the slowdown appears to be under control. The recovery in most economies is being driven by domestic demand, and we note a recovery in investment in many regions (United States, Europe, Japan, Asia). The resynchronisation of the global cycle generates “multiplier effects” – via trade – that sustain the recovery on a global scale and make it more robust.
  • World trade: world trade recovered markedly in 2017 (+5% over one year). It continues to be stimulated by the resynchronisation of the global cycle and investment in capital goods. However, this effect is expected to gradually wane this year: we anticipate a stabilisation of the world-trade to world-GDP ratio in the future.
  • United States: Growth is solidly established as the year begins. Most of the surveys continue to improve. According to the regional Feds’ estimates, growth stayed above 3% on an annualised basis in Q4 for the third consecutive quarter. Low inflation, the ongoing accommodative monetary and financial conditions (despite the expected hike in the fed funds rate) and the fiscal stimulus voted through in December significantly reduce the risk of a recession in 2018-19.
  • Eurozone: the recovery is widespread, with a pick-up in investment in most countries. Growth is mainly being driven by domestic demand, but is also benefiting from a very robust global backdrop. Political risk has faded considerably, becoming more local (the status of Catalonia in Spain is primarily a domestic issue, while in Italy, the anti-euro parties have no chance of winning an absolute majority in the elections scheduled for 4 March). 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 growth expected in 2019 . Nonetheless, with credit conditions still highly accommodative, growth should remain significantly above potential in 2018 and 2019.
  • UK: in December, EU countries followed the Commission’s recommendations according to which “adequate progress” had been made to open trade negotiations between the United Kingdom and the EU.
    Moreover, EU countries are now accepting the principle of a time-limited transition period up to the end of 2020, during which the UK would retain de facto access to the single market. This being the case, the threat of a hard Brexit is no longer imminent, at least in 2019. Admittedly, uncertainty will continue to weigh down the British economy, but more diffusely. We are counting on growth to stabilise in 2018-2019 at 1.5%, clearly below the UK’s growth potential, but without any abrupt downturn.
  • 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 the gradual deceleration of growth to continue and a slow rebalancing (less growth, less debt). The transition looks to be under control. However, vigilance should still be exercised.
  • Inflation: core inflation, which is excessively low at this stage in the cycle (especially in advanced economies), is expected to recover gradually in 2018. That said, the slowdown in inflation over recent years is primarily structural (tied to supply factors), while the cyclical component of inflation has weakened (flattening of the Phillips curve). While the pick-up in core inflation promises to be modest, the likelihood of an “inflation surprise” is nonetheless increasing as surplus capacities disappear around the world (we estimate that the global output gap will close in 2018 for the first time since the great financial crisis). The risk is easier to spot in the United States, given how close the economy is to full employment and how certain temporary factors (such as the drop in mobile phone
    service prices in the spring of 2017) have disappeared, which will automatically push inflation upward at the end of Q1 2018 (base effect).
  • Oil prices: we expect (Brent) oil prices to ease back slightly from their current level. At $67 (Brent), the risk now looks lopsided to us (more risk of prices falling than soaring). In fact, if prices stay much above the breakeven point for US oil deposits, US production will end up increasing sharply.
  • Fiscal policies: Two countries are in the spotlight this year: the United States and Germany. In the US, the income and corporate tax cuts (among other measures) just approved by Congress in December are effective as this year begins, which will give growth a shot in the arm over the next 18 months. In Germany, there are also tax cuts slated for 2018. On average, fiscal policies will be neutral, or even slightly expansionist, in the large advanced countries.
  • In 2018, the central banks will continue to whittle down their accommodative monetary policy, which is excessive in view of the current recovery. The Fed will continue to raise its key interest rates (we now anticipate three 25bp increases in 2018) and reduce its balance sheet at the announced pace (with a gradual non-replacement of papers reaching maturity); meanwhile, the ECB could put an end to its QE programme as soon as Q4 2018, which would potentially open the door to the first increase in its deposit rate in early 2019. That said, monetary policies will remain accommodative overall, because even if some cyclical inflation does materialise later in the year, inflation will stay well below its historic average for the structural reasons we mentioned (flattening of the Phillips curve, continued downward pressure on the prices of many goods and services).

Pessimistic risk scenario (10% probability): economic slowdown due to incorrect economic policy (excessively quick monetary policy normalisation or protectionist measures) or a geopolitical crisis


  • The pro-cyclical fiscal policy forces the Fed to accelerate the monetary policy normalisation process.
  • Protectionist measures (US) as mid-term elections draw nearer.
  •  International crisis stemming from acute aggravation of current geopolitical tensions (Middle East, Korea).


  • An abrupt re-evaluation of risks on the fixed income markets, with a global decompression of spreads (govies and credit, on the developed and emerging markets alike). Decline in market liquidity.
  • Risk of disorderly deleveraging.
  • With the resulting financial turbulence, the cycle is abruptly interrupted and inflation cannot stabilise.
  • Central banks are forced to turn to unconventional tools once again (expanding their balance sheets).

Optimistic risk scenario (15% probability): continued sharp pick-up in global growth in 2018


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

  • Sharp pick-up driven by business investment, global trade, and synchronisation of the overall cycle.
  • In a very promising environment, the pro-cyclical US tax policy generates a stronger than expected pick-up in domestic growth. Continued acceleration cycle in the eurozone, stabilisation in China, confirmation of the trend in Japan, etc.
  • With inflation remaining extremely low, central banks would continue to maintain easy monetary conditions, at least at first, enabling a “mini-boom.”


  • A marked pick-up in global growth for the second consecutive year would increase inflation expectations, forcing the central banks to consider normalising their monetary policy much more quickly.
  • Rise in real key interest rates (in the US especially).
  • Given the resulting financial turbulence, the mini-boom of the first half would not last long. There would be a greater risk of a boom/bust (i.e. the bust after the boom).









  • Growth remains above potentialCoincident indicators for the US economy point to a very positive momentum for growth in the second half of 2017, with Q4 GDP posed to reach again the 3% range. Business and Consumer optimism remain at high historical levels thus supporting our expectations for a resilient internal demand and upturn in Capex going into 2018. The recent approval of the Tax Cut and Job Act will provide further boost to Personal Consumption and Investments, making the US economy growing above potential again in 2018 and likely in 2019. The labour market keeps improving, although at a slower pace, which is not abnormal at this stage of the cycle. Inflation instead remains subdued, but going into 2018 we expect some of the forces that kept inflation low to dissipate, while some cyclical inflation is expected to materialise, but without any significant and prolonged overshooting.
  • Debt Ceiling: Treasury’s
    extraordinary measures
    extend borrowing till late
    March 18
  • Protectionist risk
    still present, NAFTA
  • Lower potential growth


Recovery well on track

  • Brazilian economy is continuing on its recovery track thanks to a vibrant domestic demand. Households have been benefitting from high real wages/low inflation and a deleveraging process well ahead in the schedule. Capital Goods production and imports together with higher earnings will support future Capex. Inflation is stabilizing within BCB target and the easing cycle is almost done. An inflation under control will allow BCB to stay on hold over 2018. Reforms program for current legislature is finishing with many smaller successes but without Pension reform. Such needed reform to put Brazil on a fiscal sustainable path will be likely dealt with in the next legislature.
  • Improving economic
    conditions with
    unsustainable fiscal path
  • Rise in political risks
    with the 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. 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, some residual uncertainty remains in Italy (general election due on 4 March.
  • Rise in the Euro
  • Political risk (rise in antiestablishment
    parties, notably in Italy)
  • External economic risk



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.
  • EU countries decided to open trade negotiations. Negotiations will be strained but the Europeans have opened the door to a transition period that would maintain unchanged relationships between the UK and the EU until the end of 2020. There is less uncertainty in the short term. We slightly revised upwards our growth forecast in 2018 (from 1.2% to 1.5%) to the same (low) level as in 2017.


  • Strained negociations ahead on trade
  • Weak government
    (no majority without the
  • Foreign deficit is still very high





Cooling of growth is likely to be moderate

  • The latest in-house China Coincident Indicator, PMIs and high-frequency data towards end-2017 suggested a mild slowdown in Q4, with activity recovered slightly after a weak October. The annual Economic Work Conference reaffirmed the reform direction in 19th Party Congress, while also emphasize to carefully manage the pace in balancing “stability” and “progress” of structural measures, to keep growth in reasonable range. The lingering concerns about investments are perhaps overdone, as monthly Fixed Asset Investments (FAI) data are probably distorted due to anti-corruption campaign, while other sources of data implied a less worried picture. According to the BIS, the pace of increase in credit/GDP slowed. Capital outflows remain under control.
  • Policy mistakes in
    managing structural
  • Geopolitical noises
    regarding North Korea
    and with US



A resilient growth but Capex still far from coming

  • As in the expectations, Indian economy managed to recover in the second half of CY 2017, after the GST implementation early in July. The recent decision of recapitalizing the banking sector suffering of bad loans exposure will support a more sustainable growth through credit and private investments but it will take time to be effective. Inflation is increasing faster than expected due to Vegetable prices. Our forecast of a peak between 4.5%-5% is so far confirmed. Risk is to the upside. RBI is expected to stay on hold for a while.


  • Recovery is proceeding
    and banking sector funding
    will help. Private Capex
    acceleration will take time.
  • Inflation is increasing faster
    than expected. RBI on hold.
  • Fiscal slippage likely


Toward the longest economic expansion since the early 1960s?

  • The government revised up Q3 real GDP to annualized 2.5% from 1.4%. Subsequently our GDP forecast for 2017 is upgraded to 1.7% (previous: 1.4%) followed by 1.3% growth in 2018 and 2019. Corporate sentiment breached an 11-year high for large companies and a 26-year high for small firms in the BOJ Tankan. More companies are confident of a higher sales price. Capital spending plan for this year failed to be upgraded albeit much stronger than historical average. The government asks companies to raise wage and salaries by more than 3% in the next spring negotiation, with providing corporate tax break for eligible companies.


  • Heightened geopolitical
    risks with renewed
    tensions with North Korea




Macri and marsket forecasts
BOROWSKI Didier , Head of Macroeconomic Research
ITHURBIDE Philippe , Global Head of Research
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Risk factors, Macroeconomic context and forecasts - January 2018
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