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Risk factors, Macroeconomic context and forecasts - May 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

 May 2018

Mai 2018


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


Risk factor 1
Risk factor 2




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

Central scenario (70% probability): global growth is stabilising.

  • Continued expansion of global activity: surveys, despite their recent deterioration, remain at high levels, mostly well above their long-term average. Global growth is expected to remain strong in 2018 and 2019. The advanced economies (with the notable exception of the UK) 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. The recovery in most economies is being driven by domestic demand with a positive contribution from investment in many areas simultaneously. The synchronous nature of expansion makes it more robust.
  • World trade:  world trade remained robust in Q1 2018 (+5.4% year-on-year) but seems to have lost some strength at the end of the quarter and at the beginning of Q2. The protectionist measures announced by Donald Trump on steel and aluminium (tariff increases) were once again postponed (to 1 June). If implemented, they will give rise to retaliatory measures (from the EU and China in particular) that will be damaging to trade. We observe that this threat has begun to weigh on the confidence of business leaders (uncertainty about the outlook), particularly in Europe. However, it should be kept in mind that the products being targeted account for a small share of world trade and partner retaliation is targeted at a few products. We continue to expect a slight decline in the world trade to global GDP ratio (i.e., trade growth slightly below that of global GDP). The probability of a real global trade war is low (see risk scenario).
  • United States:   growth came out slightly above expectations in Q1 and is expected to pick up. Surveys still point to GDP growth above potential. The fiscal stimulus voted in December, combined with the bi-partisan plan to increase public spending, will extend the duration of the US cycle. There is no recession to fear in 2018 or 2019.
  • Eurozone:   growth slowed down in Q1 and surveys declined sometimes quite sharply, albeit from historically high levels. This easing of growth does not come as a surprise after a highly robust end to 2017. The rising euro and tensions over trade likely had a negative impact. These developments confirm that the growth peak is behind us. We are expecting a slight slowdown in 2018 and again in 2019, although growth is expected to remain well above its potential. The Eurozone is in fact at mid-cycle, with the prospect of catching up for peripheral countries. The ECB has also promised to maintain its accommodative monetary policy. Furthermore, the perception of political risk has weakened significantly. It has not disappeared completely but has become more local. Specifically, the political situation in Italy remains unclear and new elections cannot be ruled out. However, local tensions are not enough to jeopardise the strengthening of the eurozone that the French and German governments are in the process of negotiating, ahead of the European Council meeting in late June.
  • UK:  EU countries and the UK are in the process of concluding an agreement for a transition period (limited in time until the end of 2020). But the dissensions on Brexit terms are still strong on the fact of remaining or not in the Customs Union. Uncertainty will continue to weigh on the UK economy, but in a more diffuse way. We expect growth to remain below potential in 2018-2019. The BoE prefers to wait a little longer before raising rates.
  • China:   growth is robust and the transition is under control. The reduction in overcapacity has reduced the downside risks. The economy’s growth drivers are now more diversified. Debt, essentially domestic has stabilised. We expect the gradual deceleration of growth to continue and a slow rebalancing (less growth, less debt).
  • Inflation: core inflation, which is 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 n 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 US (we expect wages to continue to accelerate), 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:  oil prices have increased sharply ($75 a barrel for Brent) and are at their highest level in 4 years. This rise is due to tensions in the Middle East (especially in terms of the uncertain future of the agreement over Iran’s nuclear activities), relatively low inventory in the United States and high global demand. Short-term risks are to the upside. However, we have  not revised our breakeven price assumption (of around $60), which we expect to reach within 12 months. 

Central banks will continue to whittle down their accommodative monetary policy. The Fed will continue to raise its key interest rates (we anticipate two additional 25bp hikes by the end of the year, maybe three if growth and inflation surprise to the upside) and reduce its balance sheet at the announced pace (with a gradual nonreplacement of papers reaching maturity); meanwhile, the ECB could put an end to its QE programme as soon as Q4 2018. However, its rhetoric remains particularly accommodating. The end of the Asset Purchase Programme (APP) is contingent on a rise in core inflation, which remains very low at this stage of the cycle. Forward guidance remains unchanged: the ECB will not begin to raise rates until “well after” the end of the APP. This implies that any increase in the deposit rate would not take place until at least mid-2019.

The protectionist measures announced by Donald Trump are dragging down confidence, especially in Europe. However, we believe that the risks to growth are now balanced. The likelihood of a widespread trade war remains low because the measures on the table (from Donald Trump and the retaliatory measures) will ultimately target products that account for a small share of world trade. Furthermore, it seems that the retaliatory measures being planned by the EU are making Donald Trump hesitate, causing him to once again postpone the implementation (until 1 June) of his tariffs on steel and aluminium.

Downside risk scenario (15% probability): marked economic slowdown due to incorrect economic policy (excessively quick monetary policy normalisation or protectionist measures), a geopolitical crisis or a sudden repricing of risk premiums.

  • The risk of increasing protectionist measures (US) rises with the approach of the mid-term elections (Trump seeking to satisfy his electoral base). Retaliation from the rest of the world would be inevitable, provoking an open trade war (US, China, EU).
  • The pro-cyclical fiscal policy forces the Fed to accelerate the monetary policy normalisation process.
  • International crisis stemming from acute aggravation of current geopolitical tensions (Middle East, Korea).


  • All things being equal, a global trade war would be negative for growth and, in the short term, would prove inflationary.
  • 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.
  • With the resulting financial turbulence, the theme of the end of the cycle resurfaces brutally in the US.
  • Central banks cease recalibrating their monetary policies and, in the most extreme case, resort to unconventional tools (expanding their balance sheets).

Upside risk scenario (15% probability): 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 in the US. Continued acceleration cycle in the Eurozone, stabilisation in China, confirmation of the trend in Japan, etc.
  • Central banks react late, maintaining excessively accommodative monetary conditions, hence 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 would not last long. There would be a greater risk of a boom/bust (i.e. the bust after the boom).









Economy set to expand above potential after Q1 temporary weakness

  • While indicators point to softer first quarter activity data, the economic outlook for theyear remains solid.
  • Domestic demand still posed to be strong: business and consumer surveys show very upbeat sentiment in aggregate, although moderating from the highs. Further improvements in labour market and disposable income, lifted also by the tax-cuts positive effects, support consumption while strong sales and only modestly rising production costs allow for healthy dynamics in corporate profits.
  • A slower than usual inflation generation process in the U.S. economy has produced a gradual convergence of core inflation to the Fed’s target and current economic conditions support the possibility of a modest overshoot. Headline inflation will be instead higher than core on annual basis, yet remaining on check. Risks tilted to the upside.
  • Two more hikes from the Fed now expected, based on this economic backdrop. One additional hike could be in the cards, should inflation surprise on the upside.
  • Stronger acceleration of wage
    inflationary pressures
  • Abrupt and protracted
    tightening of financial
  • Unpredictability of U.S. Trade
    Policies and risks of escalated
    retaliations impact confidence
    an real economy
  • Geopolitical risks linked to a
    more hawkish shift of the U.S.
    Administration (Iran, North






Despite a series of disappointing figures in Q1, the recovery will continue.

  • Business climate indicators and a number of hard data sharply disappointed in Q1. The rising euro, uncertainties related to world trade and other temporary factors weighed on activity after the peak of late 2017. However, the recovery should continue, supported by strong internal drivers (consumption, investment, less restrictive fiscal policies and less political risk than in 2017). Underlying inflation remains weak but should increase slightly in the coming months
  • Italian political uncertainty does not carry an immediate systemic risk to the Eurozone. Under the impulse of the German-French couple, institutional changes aimed at improving the robustness of the Eurozone’s financial architecture will probably be decided before the 2017 European elections.
  • Rise in anti-establishment
  • Overreaction by the euro
  • External risks



The job market provides an important support despite the Brexit uncertainty

  • The weak Q1 GDP growth figure (+0.1%) underestimates the real trend. Brexit-related uncertainty remains detrimental to business confidence. However, job market figures are strong (the unemployment rate reached a new low at 4.2% in February. Nominal wages are increasing while real wages are back in positive territory thanks to the slight decrease in inflation.
  • The agreement reached in March with the EU on a transition period after the UK leaves the Union (from March 2019 to end 2020) has not removed all the obstacles to a “soft Brexti”. However, this is now by far the most likely scenario, with even a significant probability
    that the UK will remain in the EU’s customs union.
  • A hard Brexit
  • The current account deficit remains very high






Pace of growth will be inevitably slower, though still above potential

  • Brisk global economic growth has benefited exporters, and their buoyancy will ultimately feed through to the domestic economy. Producers are likely to accelerate capital investment to revamp productivity through factory automation. In addition, increasing numbers of foreign visitors and a chronic labour shortage should stimulate capex by service sector. However, the adverse impact of a stronger yen and global economic deceleration will emerge in H2/18.
  • On the consumer front, wage growth will remain lacklustre, despite the government’s request for a 3% increase. Core CPI should hover in the neighbourhood of 1% as downward pressure from the stronger yen will not completely offset upward pressure from staffing shortages. Depressed real income will therefore continue to weigh on spending.
  • Further appreciation of the
  • Political confusion on the back
    of a number of scandals
  • Geopolitical risks (tensions
    with North Korea)



  • The economy looks more resilient than expected, with Q1 growth roughly stable, although credit slowed slightly more quickly recently.
  • New property starts were stronger than expected, exports are holding up relatively well and consumption remains healthy, although infrastructure spending looks to have cooled somewhat.
  • The CPI is back to the low end of the PBoC’s comfortable range after seasonal swings.
  • Signs of China’s policy stance easing, including recent RRR cuts and messages from the latest Politburo meeting, seem to be offsetting potential downside risks ahead.
  • Reforms look to be gathering speed. Following XI’s speech in Boao, China revealed its timetables for opening up the financial and manufacturing markets further, which could also help ease tensions with the US.
  • Despite recent rumblings over the US/China trade relationship, there are more signs for the two sides to talk.
  • Rumblings over the trade
    relationship with the US may
    continue. Keep an eye on US
    visits to Beijing in May
  • Geopolitical noises regarding North Korea: positive developments with Kim Jong-un making his first visit to China and agreeing to meet US later
  • Policy mistakes in managing
    structural transition

ASIA (ex JP & CH)

India: still on an expansionary path

  • Brazil is preparing for general elections on October 7th 2018. April 7th was the deadline for the affiliation by potential candidates to a political party or to resign from executive branch positions in order to be able to run. Official registration will begin in July and will end on August 15th. There is a lot of uncertainty regarding the number of potential candidates, which can range from 11 to 16. There is also a small probability that Lula may be in the race, depending on the decision of the Electoral Supreme Court (the trial will begin on August 15th). The election landscape is fragmented and polarized.
  • Compared with past elections, it seems like the focus has shifted away from the economy to other priorities such as corruption, crime and violence and health. The population seems to resent the establishment and to mistrust political institutions, favouring more “nonestablishment” candidates.


  • The recovery has begun
    to moderate since February 2018
  • March inflation still low
  • RBI on hold
  • The oil price becoming more
    and more challenging


Brazil: preparing general electionsThe Brazilian economy keeps expanding at a consistent pace throughout different sectors, driven both domestically and externally. However, as reflected in the capacity utilization ratio (78.1% in January), there is still lots of slack in the economy. Therefore, we do not see any pressure on inflation; in fact, recent CPI prints were still very low (below the lower end of the 3%-6% inflation target range). CBC has cut the Selic rate by a further 25bps in March, showing more dovishness than expected for the near future. Further easing is consistent with the fact that inflation dynamics are more subdued than expected.

  • Having given up on passing pension reform, the government is now focusing on bills such as the Eletrobras privatization and federal tax simplification. The risk on these bills is now that a possible resignation by MoF Mireilles, announcing his ticket for the presidential elections, followed by some senior staff, could delay approval.


  • The election landscape is
    fragmented and polarized
  • On the October 7th the first
    round and on the 28th the
    second round
  • Non-establishment candidates
    seem to be the favourites

EMEA (Europe Middle East & Africa)

Russia: we are forecasting growth of 1.7% yoy for 2018-2019

  • Despite the sanctions imposed by the Trump administration, we maintain our growth scenario unchanged. Indeed, even if the central bank had to pause in its cycle of falling rates, the rise in the price of oil at a high level is an important support of growth.

South Africa: we are forecasting growth of 2% yoy in 2018

  • Growth surprised to the upside in 2017 (1.3% yoy) and short-term indicators are looking solid in early 2018. Inflation is continuing to slow and should allow the SARB to begin easing its monetary policy before long. The ongoing fiscal consolidation and recent political
    changes should have a positive impact on the economy.

Turkey: we are forecasting a slowdown in growth to 4.3% in 2018

  • The base effects associated with the coup d’État and the end of Russian sanctions are likely to fade. Due to the increasing domestic and external imbalances (increased public and current account deficits) and geopolitical tensions, the Turkish lira will remain under pressure and continue to hamper the economy via imported inflation. This month, the central bank has finally raised one of its key rates in anticipation of the June elections that could weigh on the currency also.
  • Decreasing oil prices and
    increasing sanctions from US
  • Less fiscal consolidation, lack of reforms
  • Lax monetary policy, rising inflation and twin deficits, currency depreciation


Risk factor 3
BOROWSKI Didier , Head of Macroeconomic Research
ITHURBIDE Philippe , Global Head of Research
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Risk factors, Macroeconomic context and forecasts - May 2018
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