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Risk factors, Macroeconomic context and forecasts - December 2018


Risk factors

The table below presents risk factors with judgmental probabilities (i.e. not market based). It also develops the possible 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


 December 2018


Décembre 2018


The table below presents risk factors with judgmental probabilities (i.e. not marked based). It also develops the possible market impacts.


2018.12 -Risk Factors-Macroeconomic Context- Forecasts - Graph-1
2018.12 -Risk Factors-Macroeconomic Context- Forecasts - Graph-2
2018.12 -Risk Factors-Macroeconomic Context- Forecasts - Graph-3




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


Central scenario (75% probability): global growth slows gradually but surely.


  • Growth is slowing worldwide: 2018 began based on the theme of a synchronised global recovery. But, this did not last. Since the spring, the protectionist measures taken by Donald Trump have changed the game. Emerging economies, some of which are heavily indebted in dollars, have been weakened due to the broad-based appreciation of the US currency. The depreciation of their currencies has generated local inflation and led their central banks to tighten monetary policies, which has weighed on economies already negatively affected by massive capital outflows. Advanced economies have begun to slow down. In our view, the year will end with a global economy that is evolving in a disjointed fashion, with increased downside risks. A new factor that arrived lately in the picture has been the oil price drop (well below our fair value at USD 75/br for the Brent) that should offer a much needed support to European economies and to the EM oil Importers such as India and Turkey.
  • World trade: Global trade keeps weakening; it started 2018 at around 5% YoY and in September it has grown by 2.3% YoY. Protectionist rhetoric has pushed down business confidence, particularly in Europe. That said, uncertainty is tending to drag down investment and disrupt value chains that have developed in lock-step with the expansion in global trade over the past 15 years. In light of the above, we continue to expect the global trade to global GDP ratio to decline, with growth in trade lagging slightly behind global GDP. However, last G20 meeting in Argentina has resulted in a more positive than expected short-term scenario, where the further increase in US tariffs towards China from 10% to 25% at the 1st of January 2019 has been postponed by 90 days (1st of March 2019).
  • United States: The economy has been driven by very accommodative fiscal policy that is likely to continue to produce effects for some time; but, the fiscal multipliers should progressively erode next year. We expect growth to decelerate to its potential, but not before late 2019/ 2020, meaning that the US economy should lose 1pp of growth by 2020. This situation will have a negative impact on corporate profits, especially if inflationary pressures intensify by then, which is possible, given the fact that the economy is operating at close to full employment. We do confirm our expectation that a recession is highly unlikely in 2019, but the cycle-end story will probably return to the fore at some point by next summer, as the fiscal multiplier impact fades and as the effects of ongoing monetary policy tightening show up. We therefore forecast a slowdown in growth by 2020, with GDP growth closer to 2% by then and we keep our scenario of a moderate hiking by the Federal Reserve.
  • Eurozone: Last month, we revised our growth forecasts slightly downward, to 1.9% for 2018 and to  1.6% for 2019. Despite a recovery that has started well after that in the US, national economies have begun to slow in 2018. The output gap has closed in most countries, and Italy is the only one in the Eurozone (excluding Greece) where GDP has not recovered to pre crisis levels. Several factors have contributed to the slowdown in growth in 2018: the slowdown in world trade and until recently a high oil price have been the most relevant. In addition, political uncertainties have muddied the waters (Brexit, Italian budget). The possibility of a coalition change in Germany following the defeat of the two major government coalition parties (CDU and SPD) in local elections marks the end of the Merkel era. The loss of the chancellor’s leadership may hinder initiatives to strengthen the integration of the nEurozone that were under consideration. It will probably be necessary to wait for European elections in May 2019 and a new parliament, a new European Commission, a new Chancellor in Germany, and clarification regarding leadership of the institutions of the EU (Commission, ECB) to make significant progress in strengthening the financial architecture of the Eurozone. In Italy, incoming data on contracting economic growth in Q3 and weak coincident and leading indicators for Q4 increased the risks of another dip that prompted the Government to tone down rhetoric and seek for compromise. Discussions on revising down deficit targets are currently ongoing. The Excessive deficit procedure (EDP) likely will not be avoided with the revisions discussed currently, but could be less harsh.
  • United Kingdom: The political situation in the UK is very unstable: December parliamentary vote has been postponed the day before being held. We identify 3 broad categories of scenarios:
  1. Deal (65% probability): a deal (which can be May’s deal or another one, including an EEA membership with customs union regime) can be ratified by the UK Parliament. So, the UK exits the EU in March 2019 (or a few weeks after) and enters a transition period where it remains in the Single Market at least until end 2020 (or open-ended). However, it is important to note that this probability covers very rocky paths that include a political crisis and, possibly, new elections, but nonetheless a deal in the end.
  2.  No deal (15% probability), although there would probably be mitigation measures meaning that the probability for EU/UK trade relations to be regulated only by the WTO regime is lower.
  3.  A prolonged uncertainty (20% probability) well beyond March 2019 through a granted extension or unilateral repeal of Art. 50 by the UK. This could lead to new negotiations or to a new referendum, with probably new elections in between. This category of scenarios could then lead to various outcomes in the end (including a different deal, a Brexit reversal or new risks of no deal).
  • China: Chinese economic growth is slowing down but the authorities are working hard to stimulate the economy (through FX management, monetary and fiscal policies) so that the economy is expected to remain resilient. That being said, the country’s economic model is fragile: the excess of credit is visible, non-financial corporate debt has surged since the GFC. The good news is that the NFC debt to GDP ratio had started to drop since late 2017. Meanwhile, a cease of fire with US on trade tensions could gain valuable time for China to adjust their policy implementations and to better manage shortterm risks. In the case of hard landing or the bursting of the credit bubble, the Chinese authorities would be unable to avoid a stronger depreciation of the Yuan. Inflation: Core inflation remains low at this stage of the cycle in advanced economies, and should recover gradually. That said, the slowdown in inflation in recent years is primarily structural in nature, as it is tied to supply-side factors, while the cyclical component of inflation has weakened (with a flattening of the Phillips curve). Core inflation is likely to pick up only slightly in advanced economies. An “inflationary surprise” remains possible with rising oil prices and the pick-up in wages (United States, Eurozone) but would not last long (due to a lack of pricing power) and would drag down corporate margins more than final sale prices, all the more so if global growth slackens. Things are different in emerging economies, where inflationary pressures are greater in many countries, in reaction to which many central banks have raised their key rates.
  • Oil prices: Oil prices have decreased sharply: from $86/bbl for Brent as of 4 October to $60 the 12th of December. The main trigger at the very beginning of the decline have been the large amount of waivers conceded by the US administration to different countries with regard to the sanctions imposed to Iran oil exports. A moderate OPEC and Non-OPEC production cut decided at the beginning of December together with fear of a more pronounced economic slowdown are keeping oil prices at low levels.
  • The main central banks will continue to remove monetary accommodation at a gradual pace. The Fed will continue to raise its key interest rates. We expect the Fed to follow through with one more 25bp hike in December 2018 and two additional hikes in H1 2019, followed by a pause, and for it to reduce its balance sheet at the announced pace (with a gradual non replacement of maturing securities. Meanwhile, the ECB will halt its monthly asset purchases at the end of December, as announced. However, it will continue to replace maturing securities (between €160 and 200 bn in 2019) without clarifying its reinvestment policy in order to retain some flexibility. Its first rate hike (deposit rate) is not expected until late 2019 in the best case scenario. The ECB has no room for manoeuvre to normalise its monetary policy.



Downside risk scenario (20% probability): a marked trade-war-driven economic slowdown, a geopolitical crisis or a sudden repricing of risk premiums.


  • The risk of further protectionist measures from the US (even after the 90 days agreed during last G20 meeting), followed by retaliation from the rest of the world, remains high. China and the EU are particularly exposed to this risk.
  • Aggravation of geopolitical tensions in the Middle East with a possible oil price resurface.
  • Uncertainty regarding rising trade tensions (primarily between the US and China) against a backdrop of geopolitical risks, crises in several large emerging economies (e.g., Turkey, Argentina), political risk in Brazil, a slowdown in China, and political tensions in Europe (a deterioration in the budget situation in Italy, Brexit) is encouraging companies to remain cautious.


  • All things being equal, a trade war would drag down global trade and trigger a synchronised slowdown in growth and, in the short term, inflation. That said, a global trade war would quickly become deflationary by creating a shock to global demand.
  • An abrupt repricing of risk on fixed income markets, with an across-the-board rise in government or credit spreads, for both advanced and emerging economies, and a decline in market liquidity. 
  • The resulting financial turbulence, the end of the cycle risk would resurface in particular in the US. 
  • Central banks would cease recalibrating their monetary policies and, in the worst - albeit highly unlikely case would once again resort to unconventional tools, such as expanding their balance sheets.



Upside risk scenario (5% probability): a pick-up in global growth in 2019:


Donald Trump makes an about turn after the US mid-terms, reducing barriers to trade and engaging in bilateral negotiations with China. Domestically, the theme of increasing infrastructure spending could return to centre stage and extend the cycle in the United States.

  • Acceleration driven by business investment and a rebound in global growth.. 
  • Pro-cyclical US fiscal policy generating a greater-than-expected acceleration in domestic growth. Growth is reaccelerating in the Eurozone after a dip. Growth picks up again in China on the back of a stimulative policy mix in H1.
  • Central banks would react late, initially maintaining accommodative monetary conditions.


  • An acceleration in global growth would boost inflation expectations, forcing central banks to consider normalising their monetary policies more rapidly.
  • An increase in real key rates, particularly in the US.









United States: few signs of deceleration

  • The overall pace of economic growth remains above potential, consistent with a gradual slowdown. 
  • Domestic demand remains the key driver of growth, although data started to show a change in growth composition, with a higher contribution from consumption over investments.
  • Business confidence remains strong but data show a moderation in capex intentions, non-residential investments and a slowdown in durable goods orders, which point to a deceleration in business investments that bears watching.
  • The labour market remains strong.
  • The inflation outlook remains aligned with the Fed’s projections, with modest domestic inflationary pressures as CPI remains at 2.5% YoY and Core CPI at 2.1%
  • The Fed met on 8  November, leaving rates unchanged in the 2.00% to 2.25% range as expected; the Fed’s rhetoric has become somewhat more dovish during the month. The next FOMC meeting will take place on 19 December.
  • On the trade front, the G20 meeting reopened negotiations between China and US, suspending escalation for 90 days.








  • Fed tightening impacting
    interest rate-sensitive
    segments (housing, consumer credit)
  • Abrupt, protracted and severe tightening of financial conditions
  • Tariffs and retaliation
    negatively impacting the
    economic performance, both directly (prices) and indirectly (confidence)
  • Geopolitical risks linked to a more hawkish shift by the US Administration





The recovery continues despite disappointing figures and rising political risks

  • After a very disappointing year’s start (GDP grew by only 0.8% in H1), growth stalled again in Q3 at just +0.2%. Temporary negative factors (auto sector in Germany) played a role, but cannot be the only reason behind this weakness. Rising oil prices (until October), tension over trade and political risks also dragged down growth. The recovery will continue, but at a slower pace than previously expected (2019 growth forecast lowered from 1.8% to 1.6%).
  • The Italian budget continues to fuel tensions. In France, government reforms are coming up against increasingly fierce resistance.
  • Stronger political protest
  • Euro appreciates 
  • External risks (especially of a trade war)



Major uncertainty as Brexit approaches

  • Growth picked up in Q3 (+0.6%) after having already rebounded in Q2. The labour market remains in good shape and real wages are trending up once again. 
  • However, the lack of visibility over Brexit is dragging down confidence and investment. There is great uncertainty over whether the UK Parliament will ratify November’s deal struck by the UK and the EU, and many scenarios are possible, although we believe that a “no deal” situation is unlikely.
  • “No Deal Brexit”
  • The current account deficit remains very high





Buoyant domestic economy versus wobbly exports

  • The economy rebounded sharply in October, as producers and retailers recovered in an attempt to recoup earlier losses in the disaster-affected third quarter. Disaster relief projects (0.2% of GDP) should boost growth in the near term.
  • The government revealed a blueprint for more economic stimulus, showing a strong commitment to preventing any setback after a VAT hike in October 2019. The government has already decided on benefits to pensioners and free nursery school tuition. These plans will be included in the FY2019 plenary budget.
  • Meanwhile, exports have been weakening, not because of the stepped-up US-China trade dispute but because of a synchronized economic slowdown in the non-US sphere.
  • GM’s decision to shut down factories could fuel criticism of the car industry by the Trump administration



  • Downward risks should have eased somewhat, at least in the near term, with a temporary deal reached by the US and China during the G20 meeting.
  • For now, US has agreed to pause the tariff increase planned for 1 January 2019, with negotiations to begin immediately for 90 days.
  • Despite questions regarding how real this trade truce was, contrary what some suspected, China has already matched its words with deeds, by announcing some detailed measures on intellectual property protection.
  • Looking ahead, we expect more structural measures to come, which the US asked for but that China also needs, in order to facilitate its own structural transition.
  • Meanwhile, policymakers have made new efforts to unblock the pass-through into the private sector, which should become more visible in coming months, to help partially offset an ongoing slowdown.
  • In such a case, downward pressures on RMB should also ease somewhat.
  • Uncertainty remains in US/China trade talks
  • Policy mistakes in managing near-term risks and the structural transition
  • Geopolitical noise regarding North Korea


(ex JP & CH)


  • Notwithstanding all the noise related to the escalation of the trade issue between China and Overall growth in the area deteriorated: our GDP forecasts have been revised down throughout the region, with the contribution of external demand weaker than domestic demand.
  • The region’s inflation figures remained benign, with the usual exception of the Philippines, where headline inflation stayed put, at 6.7% YoY, well above the CB target. India’s inflation surprised to the downside at 3.3% in October, on the back of weak Food prices.
  • The BSP and BI increased their rates by 25bps once again. Despite the August announcements from the Governor the BoT is yet to change its Monetary Policy stance.
  • During the last two months a clash between the RBI and the Indian Government was brought to the public’s attention. In the run-up to the elections, the government would like to see the RBI more proactive in letting Public Banks ease credit conditions for SMEs.


  • Growth outlook revised downwards in the region
  • Inflation still very benign with the exception of the Philippines
  • BSP and BI continue their hiking cycle
  • The RBI signals interferences from the Government


  • The recently released Q3 2018 GDP figures highlight a mixed macroeconomic picture in the area: Brazil and Peru accelerated more than expected, while Colombia, Chile and Mexico slowed down.
  • On the inflation front, the overall environment remained benign. In Mexico, inflation finally reversed and after a 5-month long increase started to decelerate mildly in October. In Peru inflation picked up quite significantly yet remaining within the CB’s target.
  • The region’s main Central Banks maintained monetary policy unchanged in their recent meetings, while Banxico and Chile Central Bank raised their policy rates by 25bps at 8% and 2.75% respectively.
  • In the area’s two main countries, fiscal policy is in the spotlight: in Brazil a very diluted Social Security reform is expected in a relatively short term and in Mexico, more details about budget implementation are expected.
  • Brazil still on track for recovery
  • Inflation turning more benign in Mexico
  • Tighter monetary policy in Chile and Mexico
  • Contrasting signals on the fiscal side by the new Mexican administration

EMEA (Europe Middle East & Africa)

Russia: we forecast 1.7% YoY growth for 2018 and slightly lower for 2019

  • Despite the threat of potential US sanctions down the road, the macroeconomic scenario remains supportive. Russia will be among the few emerging market sovereigns with the “twin surpluses” in 2018, while accumulating assets at the National Wealth Fund.
  • The Central Bank may hike sometime in 2019 depending on rouble weakness and inflation expectations.

South Africa: exit of recession but no miracle

  • South Africa emerged from recession in Q3 thanks to the recovery of manufacturing and services. On the expenditure side, household consumption rebounded as well as inventories while private and public investment declined. The contribution of net exports was also negative.
  • In terms of policy mix, there is very little room for manoeuvre. The SARB has raised its rates and it is not excluded that it still has to do it in 2019.

Turkey: we expect double-digit inflation and recession in 2019

  • The strong tightening of interest rates, the rebound in the Turkish lira, the fall in the price of oil and the implementation of discretionary measures on some goods, have provided some respite to inflation. However, it should not fall below 20% for several months.
  • In this context, household purchasing power and corporate margins are at their lowest. We therefore expect a sharp drop in activity in the second half of 2018 and a GDP recession of 1% in 2019.
  • Drop in the price of oil, stepped-up US sanctions and further geopolitical tensions
  • Increased risk aversion, rising social demands, lack of structural reforms
  • A too rapid easing of the central bank, a cooling of budgetary policy, a slowdown in activity in the euro zone


2018.12 -Risk Factors-Macroeconomic Context- Forecasts - Graph-4
BOROWSKI Didier , Head of Global Views
ITHURBIDE Philippe , Senior Economic Advisor
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Risk factors, Macroeconomic context and forecasts - December 2018
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