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Risk factors, Macroeconomic context and forecasts - June 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

 July 2018

Juillet 2018


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







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:   global expansion continues despite a decoupling at the «second derivative» level. Indeed, growth will slow in the Eurozone this year, while it will accelerate in the US. However, in both cases, growth is expected to remain significantly above its potential. Despite rising risks, surveys remain elevated by historical standards. Some EM countries appear particularly fragile but for very specific reasons (Turkey, Argentina or Brazil) and while monetary policy is starting to become more restrictive in some EMs simultaneously, growth remains firmly anchored in both emerging and advanced economies. The ongoing rebalancing in China is progressing quietly. Most economies continue to benefit from a favourable investment momentum. The synchronous nature of expansion makes it more robust.
  • World trade:    world trade has slightly weakened since the start of the year (+3.8% yoy). The tariff increases announced by Donald Trump on steel and aluminium were finally implemented on June 1 (on Canada, Mexico and EU countries). Retaliation measures will be put in place. We observe that the protectionist rhetoric has begun to weigh on business confidence, 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).
  • United States:    GDP growth is expected between 2.8% and 3.8% in Q2 2018 after 2.3% in Q1. Surveys remain upbeat. The fiscal stimulus (tax cuts and increased spending) extends the duration of the US cycle. No recession to fear in 2018 or 2019. But by summer 2019, the theme of the end of the cycle will probably resurface (end of fiscal multipliers, impact of the monetary tightening).
  • Eurozone:    we maintain our growth forecasts at 2.1% (2018) and 1.8% (2019). The rise in oil prices (+50% yoy) coupled with protectionist threats weigh on the outlook for H2 2018. At this stage, we do not anticipate that the policy of the new government coalition in Italy will have a significant impact on the economy. Peripheral economies should continue to benefit from a catch-up perspective. Despite the end of ECB’s Asset purchase program (APP) at the end of the year, the ECB is expected to maintain very accommodative monetary conditions. On the political side, the European summit (28-29 June 2018) was dominated by the migratory crisis. On the financial side, the only decision made concerns the ESM which will provide the common backstop to the Single Resolution Fund (SRF), to help the banks if needed. It is an additional small step in the direction of a banking union. The other proposals made by from France and Germany (transformation of the ESM into a EMF, creation of a budget for the Eurozone) will be examined at the European summit in December.
  • UK:   the transition period runs from March 2019 to the end of 2020. The dissensions on Brexit terms are strong on the fact of remaining or not in the Customs Union. Uncertainty will continue to weigh on the UK economy, but in a diffuse way. We continue to expect below-potential growth in 2018-2019.
  • China:  growth is robust and the transition is under control. The reduction in overcapacity has reduced downside risks. Debt remains essentially domestic and has stabilised. We expect the gradual deceleration of growth to continue and a slow rebalancing (less growth, less debt). The rise in tariffs on US imports from China (to the tune of USD 50 bn) has raised fears of a larger US-China confrontation. At this stage, however, the impact seems modest and, as an agreement is likely, we have not revised our growth forecasts.
  • Inflation:  core inflation remains low at this stage in the cycle (especially in advanced economies) and should 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.. 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.
  • Oil prices:   oil prices have increased sharply (USD 77 a barrel for Brent) and are at their highest level in almost four years. This rise is due to tensions in the Middle East, the OPEC policy, and high global demand. Short-term  risks are to the upside. Rebalancing through increased supply will take time to materialise (US production is already on a historic high). We have revised our equilibrium-price assumption (at around $75), which we is now our new forecast the 6- to 12-month horizons.
  • Central banks will continue to remove monetary accommodation at a gradual pace.  The Fed will continue to raise its key interest rates (we anticipate two 25bp hikes in H2 2018, 2 additional hikes in H1 2019 followed by a pause)) and reduce its balance sheet at the announced pace (with a gradual non-replacement of papers reaching maturity); meanwhile, the ECB will reduce its monthly asset purchases (from € 30 bn to € 15 bn) in Q4 and put an end to its APP at the end of the year. The 1st rate hike from the ECB is not expected before Q3 or Q4 2019.

The protectionist measures announced by Trump weigh on confidence, especially in Europe. And Donald Trump is ready to go further (he explicitly threatens to raise tariffs on imported cars from Europe from 2.5% to 20%). This threat is to be taken very seriously. The likelihood of a tougher trade confrontation is increasing, at a time when geopolitical risks in the Middle East remain elevated (with upside risks on oil).



Downside risk scenario (20% probability, revised up from 15%): marked economic slowdown due to a trade war, a geopolitical crisis or a sudden repricing of risk premiums.

  • The risk of increasing protectionist measures (coming from the US) rises with the proximity of the mid-term elections in November (Trump seeking to satisfy his electoral base). Retaliation from the rest of the world would be inevitable, provoking an open trade war (between the US and EU notably).
  • Aggravation of current geopolitical tensions in the Middle East (upside risks on oil prices)


  • All things being equal, a 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 worst case (very unlikely) resort to unconventional tools (expanding their balance sheets).



Upside risk scenario (10% probability): pick-up in global growth


The probability is revised downwards due to the global uncertainty induced by the rise of (1) geopolitical tensions (with Iran), (2) political tensions (between Italy and the EU) and (3) of tensions on trade (between the US and Europe in particular). These factors encourage companies to remain cautious, making the upside risk scenario more unlikely to materialise.

  • 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. Growth is picking up again in the eurozone after a soft patch in Q1. 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).











The economy’s coincident and leading indicators point to above 3% growth in Q2 2018

  • The U.S. outlook remains solid as metrics representing leading indicators of economic activity show a strong pick-up.
  • Business indicators, both Manufacturing and Services picked up in May, positioning close to their highs. Consumer confidence indicators improved in June too, remaining consistent with a resilient consumption path.
  • Industrial activity disappointed by contracting in May, but its overall trend is still stable. Retail sales proved to be strong. The gap between disposable income and consumption growth has been narrowing. The saving rate declined marginally. All of which supports the case for an acceleration in Q2 consumption growth.
  • The inflation outlook keeps firming, with Core PCE now closer to the Fed Target and headline CPI at 2.8%. The labour market continues to tighten, driving wages gradually higher. Import and energy prices continue to support headline inflation.
  • The Fed, more confident about its economic outlook, raised its rates in June, hinting at an additional 2 hikes in 2018.



  • Decline in confidence,
    due to U.S. trade policies
    and risk of trade partners’
  • Inflation: upside risks
    from higher oil prices and
    stronger acceleration
    of wage pressures
  • Tighter financial conditions
    impacting growth and
    policies at a global level
  • Geopolitical risks stemming
    from a more “muscular”
    approach by the U.S.
    Administration (e.g. Iran,
    North Korea)






Despite the rise in risks, the recovery will continue.

  • After numerous disappointments at the beginning of the year, data have tended to stabilise, in line with GDP growth of around 2% per year. Underlying inflation, which has been stuck for a long time at around 1% per year, should increase slightly in the coming months.
  • Political risks have increased due to the new “anti-system” coalition government in Italy and recent internal tensions in the German government on the immigration issue. Moreover, the Eurozone is more exposed than the United States to the trade war risk.
  • Rise in anti-establishment
  • Overreaction by the euro
  • External risks  (in particular

    trade war risks)



The job market provides an important support despite the Brexit uncertainty

  • Despite the slight upgrading of Q1 growth (0.2% vs. 0.1% announced previously), the economy has certainly slowed due to Brexit-related uncertainty. However, job market figures remain strong (the unemployment rate reached a new low at 4.2% in March). Nominal wages are increasing while real wages are back in positive territory thanks to the slight decrease in inflation.
  • Brexit negotiations have crystallised on the theme as to whether the UK can (partially or fully, temporarily or permanently) remain in a customs union with the EU. However, the sharp internal disagreement within Theresa May’s government is making it difficult for the UK to build its negotiating position.
  • A hard Brexit
  • The current account deficit remains very high






Economy submerges but the surface is within reach

  • The activities of manufacturers, constructors and the tertiary industry are all losing momentum. The economy needs a few more months to regain strength as an inventory adjustment is now in progress, particularly in the electronic parts and devices industry.
  • However, there are increasing green shoots of hope as the automobile industry has almost finalised a stock adjustment, with a rebound in exports to the U.S. Meanwhile, an acceleration in labour income is gradually stimulating consumption expenditure.
  • Capital investment is durable notwithstanding slower global economic growth and faltering corporate earnings. Machinery orders reached the highest level since June 2008. Capex by manufacturers is surprisingly resilient despite the threat of protectionism.
  • Further appreciation of the
  • Intensified trade dispute
    with the U.S



  • Underlying economic activity still holding up, although some weakness in recent headline figures.
  • Effects from financial deleveraging more visible, with credit slowdown and pick- up in individual corporate bond defaults.
  • Increasing uncertainty in US/China trade relationship, though China still pushing for talks and delivering reforms.
  • In response, policy further fine-tuned towards less tight stance, with a second RRR cut this year so far and policy support to private and small businesses.
  • RMB showed some weakness recently, mainly due to short-term factors.
  • That said, the medium-term outlook is still constructive in a gradual recognition of the RMB as a reserve currency, and structural transition continuing towards a New Economy less dependent on credit and the external environment.
  • In reality, Trump’s pressures seem to have pushed China to speed up the necessary reforms for its transition.
  • US/China Trade tensions,
    with considerable uncertainty
    in the near term
  • Policy mistakes in managing
    structural transition
  • Geopolitical noise regarding
    North Korea, still to watch
    despite initial agreement
    reached between US and
    North Korea towards peaceful
    solution following Trump/Kim
    Summit on 12th June


(ex JP & CH)


  • Macro momentum in the region has been stable, with Thailand and India the drivers, while Malaysia has acted as a drag. Export dynamics are still very sound and broadly distributed among Manufacturing and Commodity Exporters.
  • Inflation environment after May data releases remains very benign. Oil price spikes have only partially been reflected in the cost of living. India and the Philippines are still the two countries with inflation at uncomfortable levels.
  • The Monetary Policy outlook in the region has been confirming the shift towards a tighter stance. Again, the Philippines is going ahead with its hiking cycle to rein back inflation towards the target. The RBI raised Monetary Policy rates at the beginning of June as a preventive intervention against inflation risk.
  • The most relevant political news in the region has been the harshening attitude of the US Administration towards China with potentially $200bn of further tariffs.


  • Stable and still constructive
    macroeconomic momentum
  • May inflation still very benign
    with few exceptions
  • Central banks shifting towards
    a tighter stance
  • Higher geopolitical risk


  • In the region, Brazil was in the spotlight due to expectations of its economic growth outlook cooling down. Although GDP growth is generally still growing, downside risks have been increasing in the Consumer sector following higher unemployment and weaker real wages.
  • Inflation figures in May still signalled a very benign outlook. Risks are on the upside, due to currency weakness pass-through, together with high oil prices.
  • As expected, the Banxico has continued with a very orthodox Monetary Policy, hiking policy rates (25bps), following the Federal Reserve and a weaker Mexican Peso. Brazil has confirmed the end of the easing cycle and the BCB is adopting a very pragmatical approach, monitoring CCY volatility and inflation expectations.
  • The Mexican elections are close (1 July) and the AMLO (Morena Party), the more populist candidate, continues to lead the polls (double-digit figures).
  • Brazilian economy less
    buoyant than consensus
  • The Banxico hiked policy rates
    by 25bps
  • Inflation outlook still benign
  • Busy political agenda, with
    elections coming up in Mexico
    and Brazil

EMEA (Europe Middle East & Africa)

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

  • Despite the threat of potential US sanctions down the road, the macroeconomic scenario remains supportive helped by high oil prices. Russia will among the few emerging market sovereigns with the “twin surpluses” in 2018, while accumulating assets at the National Wealth Fund.

South Africa: growth forecast down to 1.5% YoY in 2018

  • The GDP figure came out well below market expectations. In a generally unfavourable environment for “risky” assets, we have downgraded our growth forecasts especially as the authorities have little room for manoeuvre to boost domestic demand.

Turkey: we forecast a slowdown in growth in 2018 to 4.3%.

  • Erdogan has comfortably won the elections and obtained the majority in parliament. The day after the results, the markets purchased the decline in political uncertainty and the lira appreciated. However, the country has considerable economic vulnerabilities which still represent a real challenge for the new government. If Erdogan wants to maintain the support of the markets, he will have to ensure the credibility of his policy mix.
  • Lower oil prices and steppedup US sanctions
  • Less fiscal consolidation, failure to enact reforms
  • A lax monetary policy, higher inflation and twin deficits, depreciation in the currency


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