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Risk factors, Macroeconomic context and forecasts - October 2019


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


September 2019



Septembre 2019


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





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


CENTRAL SCENARIO (60% probability): resilient domestic demand and services despite the uncertainty adversely affecting trade

  • Slower global growth: the economic weakness seen worldwide during the summer has continued into the fall with very few exceptions. Industrial surveys and data continue to show that the global manufacturing sector is in recession. However, domestic demand remains more resilient, due primarily to household consumption, which continues to be buoyed by very low inflation and in certain economies by a vibrant labour market. Still, services have proved more resilient than manufacturing.
  • Global trade remains under heavy pressure: global trade has plummeted over the last 18 months. Protectionist rhetoric and measures have increased again recently, with the US imposing new tariffs on 1 September and China retaliating immediately. The level of uncertainty on a trade deal is still higher, although talks have resumed. Approaching the new round of negotiations, both sides have shown a more constructive attitude, with China’s announcing some exceptions lasting one year on some items under tariffs since 2018 (sensitive sectors included) and Washington’s postponing the tariffs rate increase to 15 October from 1 October. An interim deal looks like more likely. Having said that, trade is expected to remain under pressure for the time being, and it will grow at a slower pace than global GDP. That said, we must not underestimate the resilience of the domestic demand. While global trade has indeed made a strong contribution to global growth over the last few decades, this is less and less so, as global growth is now being driven primarily by domestic demand. And the services sector is less and less correlated to industry, which can be attributed to the relative importance of consumption in relation to investments and trade since the 2008 crisis.
  • United States: a gradual return to potential, with slightly higher downside risks. The US economy, boosted by very accommodative fiscal policy in 2018, began decelerating in H2 2018 and continued to do so in the following quarters. After peaking at 3.2% YoY in Q2 2018, GDP growth gradually decelerated and stood at 2.3% YoY in Q2 2019, recently revised data show. Fixed investments have been trending down markedly since the second half of 2019, while personal consumption expenditures have remained resilient overall. The protracted weakness in global trade and manufacturing, coupled with uncertainty over the implementation of tariffs, may have played a role in discouraging investments, partially offsetting the benefits of fiscal policy. Corporate and consumer confidence indeed worsened recently, raising concerns of a sharper deceleration in domestic demand. At this stage, while probabilities of recession have risen, we don’t think a recession is likely in 2019 or 2020. And yet, signals are starting to appear that the labour market is decelerating and perhaps turning, with a slower pace of growth in payrolls and new hiring intentions, supporting the view that domestic demand will keep decelerating as we go into 2020. Even so, risks remain tilted to the downside: if trade and geopolitical tensions persist, doubts on the extension of the current cycle could intensify over the next few quarters (less support from fiscal policy, and domestic demand under pressure with a contagion from manufacturing to services). Moreover, it is important to bear in mind that below-normal growth and tighter financial conditions could trigger a contraction in profits. With this in mind, the Federal Reserve should stick to its dovish stance, signalling reasonable pragmatism and cautiousness in using its “policy ammunition”: however, recent trends in trade disputes and risks to financial conditions (mostly driven by the strong USD) make an additional rate cut likely before the end of 2019.
  • Eurozone: the Eurozone economy expanded by 1.2% YoY (0.2% QoQ), denoting softening momentum as manufacturing weakness persisted and uncertainty remained high on the trade and political fronts, as a result of the continued risks of escalation with new tariffs, weak data on global trade, and political developments (e.g., Italy and the UK). The Eurozone economy’s declining trend is the result of different growth patterns from one country to another. Germany and Italy weakened further in Q2, and signs point to persistent weakness in Q3. No sharp reacceleration is in sight for now and risks of technical recession are still looming. Other economies remain broadly resilient, like Spain, France, and Portugal, albeit with moderating growth and other, more minor economies are keeping their fundamentals overall on track. The unemployment rate remains on a downward path but has stopped declining in a few member-states (e.g. Germany and the Netherlands), yet remains below its long-term average and at historically low levels. Risks remain tilted to the downside. Uncertainties are likely to persist in the coming months as potential further escalations in the trade war are possible, Brexit remains unresolved, with still open the possibility of a very disruptive no-deal Brexit. Some signs that member-states with fiscal room may be willing to engage in some fiscal expansion now appear more supported by news (e.g. Germany and the Netherlands), although a more coordinated fiscal effort at the EU level seems still far from reaching a consensus at this stage. At its September meeting the ECB delivered a comprehensive package, managing not to disappointing markets expectations. On the one hand, the 10bps deposit rate cut and EUR 20bn per month of QE were lower than the markets’ expectations. On the other hand, the improvement in TLTRO III conditions and the length of the QE passing from “date”- to “state”- contingent (meaning dependent on inflation projections) were the dovish surprises. Another 10bps depo rate cut in the next 12 months is possible, although in a context that offers very limited room for further cuts and with the need to compensate additional negative effects to the banking system. The next meeting is on 24 October.
  • United Kingdom: Another extension of the Brexit deadline now seems the most likely scenario. Indeed, Parliament has tied the hands of PM Boris Johnson by 1/ passing a motion instructing him to request an extension from the EU by 19 October (if no deal has been ratified); and 2/ refusing his request for a snap election before 31 October. Snap elections are probable (although not certain) after the extension. Their outcome would be very uncertain. Should the Tories win a clean mandate, the probability of a no-deal Brexit would increase although: 1/ concessions from the EU making room for a deal cannot be completely ruled out; and 2/ a no-deal could be accompanied by mitigation measures (for instance, a limited transition period or sectoral agreements to be negotiated with the WTO). On the other hand, should the Tories fail to obtain a majority, many possibilities would open up, such as a new referendum, new negotiations leading to a softer Brexit (e.g., ‘Norway+'), or even a unilateral repeal of Art. 50. However, unless Labour obtains an outright majority, forming a government coalition of “Bremainer” parties will be difficult, as they are opposed on most other issues. The risk of a hung Parliament’s only prolonging the uncertainty cannot be completely ruled out.
  • China: August’s string of data (released in September) has confirmed and, in a way, has accentuated the perception of the economic slowdown seen in July. At this point, we confirm our view of a GDP decelerating at the range floor at 6% YoY in H2 2019 and below 6% YoY in 2020 (at 5.8% YoY). Chinese authorities have signalled their determination to maintain growth above 6%. However, the latest data haven’t shown a uniformly dark picture. Housing, retail sales ex-auto, and infrastructure investments have been resilient in their weakness if not moderately growing as in the case below (supported by the special bonds issues). We expect the authorities will ramp up their stimulus to accommodate the deceleration mentioned above. More stimulus has to come in the form of monetary policy easing (RRR and LPR), front-loading of local government special bonds, support for the auto sector (relaxing or removing purchase restrictions) and the budget fund. More concessions to the US on the trade front should help to alleviate the short-term pain from the external side.
  • Inflation: underlying inflation remains low in the advanced economies (despite a recent advance in the US). The slowdown in inflation in recent years has a structural component, related to supply factors, while the cyclical component of inflation has weakened (with the flattening of the Phillips curve). Underlying inflation is only expected to accelerate slightly in the advanced economies. In theory, an “inflationary surprise” remains possible with the pick-up in wages (in the Unites States and the Eurozone), but it is striking to see that the 2018 acceleration in GDP growth was not accompanied by higher inflation. In the Eurozone, against a backdrop of slowing growth, we believe that companies have virtually no pricing power (with margins under pressure). Ultimately, in view of low inflation and the increase in downside risks, most central banks have made a U-turn in terms of communication since the beginning of the year. Under an adverse, recessionary scenario (not our central scenario), upside pressure on wages would not last long, anyway.
  • Oil prices: While the attack on major Saudi oil installations on September 14 generated a very sharp spike in oil prices, most of the effect was short-lived, as reports indicated that the country could rapidly restore most of the lost supply. Beyond this short term volatility, fears of a global slowdown and increased US production continue to exert downward pressure on prices (indeed, oil faltered in August on downward revisions in demand, while there was a surprise jump in OPEC production). On the other hand, continued OPEC+ coordination (following the July agreements to reduce production) will continue to manage supply. Therefore, all things considered, we reiterate our target of $60-70/barrel (Brent) and $55-65 (WTI).
  • Central banks’ incremental dovishness in September and more to come: As expected, the Federal Reserve lowered its target range for the Federal Funds rate by 25 basis points to 1.75%-2.00% at its September meeting. The policy decision was in response to slowing global growth, lingering uncertainty about trade policy, and muted inflation pressures. Going forward, we see more easing coming but we do expect fewer rate cuts (50bps) than the market. In a much-awaited meeting, the ECB announced an easing package, including a 10bps deposit rate cut, an open-ended QE program, a two-tiered reserve system, and improved TLTRO terms. As per the Fed, we expect a lower ECB deposit rate. On the EM side, we had the same incremental dovishness: Central banks cut their policy rates by 325bps (Turkey), 50bps (Brazil), and by 25bps (Russia and Indonesia), to name a few.

DOWNSIDE RISK SCENARIO (30%): full-blown contagion to domestic demand

Two «families» of risks with different conclusions on monetary policies and scenarios 

1. Trade-related risks: global trade takes longer to «normalise», additional escalation on trade war and full blown contagion to consumption: 

  • Growth falls further, profit recession / the global recession comes back to the forefront
  • Central Banks: even more accommodative monetary policies than what is currently priced in by markets
  • Fiscal policies: would gradually take over from monetary policy to support growth

2. Market-related risks: sudden repricing of risk premia with a large impact on financial conditions exacerbated by low liquidity (various triggers: wars (e.g. Middle East), crisis in HK, credit event (HY) etc.)

  • The policy mix (fiscal & monetary) would become much more proactive (i.e. preemptive) in that case. While it would likely come somewhat lately with trade tensions alone.

UPSIDE RISK SCENARIO (10%): modest reacceleration of global growth in 2020

We are raising the probability of the upside risk scenario (and lowering the probability of the central to 60%)

  • Actually, we have substantially revised down our central scenario, by embedding part of the downside risk scenario in the central scenario. By definition, this means that it’s now much easier to be “positively surprised”. For instance, on the political level the most recent news flow is more positive (pro European coalition in Italy, possible trade de-escalation). 
  • Subsequently, going forward, we may see at the same time lower (political) risks and a more expansionist policy mix worldwide, which would pave the way for rebound in confidence and a quicker normalisation of global trade. 
  • A modest reacceleration of growth (slightly above potential) - vs. subpar growth in the base case – is a distinct possibility..










US growth gradually decelerates amid trade war concerns and geopolitical uncertainty 

  • The drivers of domestic demand keep slowing, with investment spending hit worse than private consumption. Business climate surveys are showing a weak spot in manufacturing and services.
  • Consumer confidence signals are mixed, but, on average, suggest that confidence is worsening in the future. Some signals point to a moderating pace of labour income with softening growth in payrolls and weaker newhiring intentions, and wages and salary growth moderating. On the investment front, spending plans are tending to decline. Inflation is low (1.7% overall, 2.4% for core inflation) but remains close to the Federal Reserve’s target.
  • The Fed delivered a second 25 bps cut at its September FOMC. It remains open to act again in case of need. The Fed signalled reasonable pragmatism and cautiousness in using its “policy ammunition”, but recent trends in trade disputes and risks to financial conditions (mostly driven by a strong USD) make an additional rate cut likely by the end of 2019
  • Tariffs risks may negatively impact economic performance, both directly (in prices and orders) and indirectly (in confidence). The longer the list of goods included in tariffs, the higher the impact on U.S. domestic demand
  • Renewed policy uncertainty may hold back new capex plans more than expected 
  • Geopolitical risks and tariffs, could represent an upside risk to oil prices and to our inflation outlook





Weaker industrial activity is adversely affecting the economy

  • The majority of business climate indicators saw a further deterioration in September. The situation is particularly bad in industry (especially in Germany), due to both specific difficulties (automotive sector) and external causes (trade war and risk of a no-deal Brexit).
  • While, for the moment, the spreading of industrial difficulties to the service sector and the labour market remains limited, it is an increasing risk.
  • Trade war and the threat of US tariffs on the European automotive sector
  • No-deal Brexit



Increased risk of no-deal Brexit

  • After the contraction in Q2 (+0.5%, largely due to precautionary spending), the data showed an improvement at the beginning of Q2. The labour market is strong and wages rise significantly. Political uncertainty, however, continues to weigh on investment.
  • Uncertainty about Brexit is extremely high. PM Boris Johnson continues to state that Brexit will happen on 31 October, even without a withdrawal agreement. However, Parliament has passed a motion instructing him to request an extension of the Brexit deadline from the EU, should there be no deal approved by 19 October.
  • A no-deal Brexit





External threats gradually impair the corporate sector

  • Corporate revenues have become anaemic and profits have plunged markedly, although exports show signs of stabilization. Private machinery orders lack strength, reflecting companies’ reluctance to boost capacity and/or renew plant and equipment amid growing uncertainties surrounding global trade.
  • So far resiliency in the service sector is keeping capital spending afloat as the MOF’s corporate survey shows a massive 8.3% increase in capex plans this year. However, business morale of non-manufacturers fell to a 3-year low, though much better than the case of manufacturers, which hit a 6-1/2-year low. Job vacancy dropped for the third month in a row, mirroring slower domestic economic growth.
  • In light of the above, consumption could be another source of pain for the economy. Real household spending is being affected by weaker earnings and fears of a consumption tax hike.
  • Economic package will not sufficiently alleviate the pain of consumption tax hike, as expected
  •  Companies will accelerate suspension or cancellation of capital investment as the global economy weakens farther


  • Approaching the new round of negotiations, China has announced some exceptions for some items placed under tariffs in 2018. These exceptions will last one year and will involve some sensitive sectors for the US (like agriculture). Moreover, China has announced and started larger purchases of farm goods from the US.
  • Chinese macroeconomic data continue to decelerate on a broad basis, including in manufacturing, consumer goods and fixed capital investments.
  • The policy mix continues to support the economy in a limited way, through both the monetary and fiscal levers. The LPR fell by another 5bps on 20 August.
  • In a recent speech, the PBoC Governor, Yi Gang, said that, unlike other central banks, the PBoC will not slash its policy rates or introduce any quantitative easing. The PBoC wants to pursue an orthodox monetary policy.
  • A likely interim deal between China and the US after the October talks
  • China’s economy is decelerating more than expected.
  • Policy mix still mildly supportive


(ex JP & CH)

  • Economic conditions in the region keep worsening, driven by a further decline in external demand and soft domestic demand. The outlook for exports is poor, due to a re-escalation in trade tensions. The new round of negotiations between China and the US could offer some relief if an interim deal is achieved.
  • The region’s inflation figures have remained very benign. Inflation in August picked up mildly, except in South Korea (0% YoY from 0.6% YoY) and the Philippines (1.7% YoY from 2.4% YoY).
  • In September, Bank of Indonesia resumed its easing with a 25bp rate cut, while the Bank of Thailand remained on hold. We expect more easing in the area.
  • In September, the Indian government surprisingly cut the corporate income tax rate from its current level from 35% to 25% for companies already operating, and to 17% for companies set up after 1 of November 2019 in an attempt to revive domestic investments and attract foreign investments.
  • Still weak macro momentum in the region. A trade deal is crucial.
  • Inflation still very benign, with a mild pick up in August.
  • Central banks in the region still accommodative.
  • India lowered the corporate tax rate for existing and new companies significantly.



  • The growth outlook has worsened significantly in all countries. However, macro momentum has improved very slightly in Chile and Brazil. Mexico is in recession, while Brazil’s growth outlook looks more resilient.
  • On the inflation front, the overall environment remains benign. Mexican inflation has converged nicely towards the central value of the target, with its latest figure at 3.2% YoY, down from 3.8% YoY. Argentina inflation is still above 50%, stable around 54% YoY in August, and will not converge soon.
  • The central bank of Brazil cut its policy rate again by 50bps and left the door open to a further significant easing.
  • Pension reform deliberations have been postponed to mid-October, while the economy minister is trying to form a consensus on fiscal reform, starting with the introduction of a new VAT system at the federal level. The $5.4bn tranche of disbursement by the IMF to Argentina has been postponed until there is more clarity on the new government’s intentions
  • Economic conditions continued to weaken; Mexico is in a recession.
  • Inflation is benign overall. Argentine inflation in August remained above 50%.
  • BCB once cut again the Selic rate by 50bps.
  • The $5.4bn tranche of disbursement by the IMF to Argentina has been postponed.

EMEA (Europe Middle East & Africa)

Russia: Real GDP growth was 2.2% in 2018 and is expected to slow down to 1.2% in 2019. However, growth is expected to accelerate over the medium term on the back of a significant infrastructure spending programme from 2019 to 2024.

  • Despite the threat of potential US sanctions down the road, the macroeconomic scenario remains supportive. Russia is one of the few emerging market sovereigns with “twin surpluses” in 2019, while accumulating assets in its National Wealth Fund.
  • As expected, the CBR cut its policy rate in August by 25bps. We expect another 25bp cut in the next few months, given decelerating inflation.

South Africa: exit from recession, but no miracle

  • Recently released Q2 GDP showed more resilience than the market was expecting mainly thanks to post strike recovery in mining. We confirm our 2019 GDP forecast of 0.8% YoY with downside risks.
  • Given deteriorating fiscal dynamics, creeping inflation and Rand weakness the SARB is likely to remain on hold.

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

  • The growth report for the second quarter of the year showed only a marginal improvement in the recessionary phase that Turkey is going through. We do confirm our GDP forecasts at -1.8% over 2019, and +1.5 for 2020.
  • The Central Bank of Turkey cut its policy rates significantly in September, by 325bps to 16.5%. We expect some more easing to come in support of very weak economic conditions.


  • Drop in oil prices, stepped-up US sanctions and further geopolitical tensions



  • Increased risk aversion, risk of sovereign rating downgrades, rising social demands in the run-up to elections and the risk of fiscal slippage


  • A too rapid easing of the central bank, a cooling of budgetary policy, and a slowdown in Eurozone activity.

BOROWSKI Didier , Head of Global Views
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Risk factors, Macroeconomic context and forecasts - October 2019
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