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Risk factors, Macroeconomic context and forecasts - October 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

  October 2018

Octobre 2018


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


Risk 5





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


Central scenario (70% probability): global growth slows gradually but surely.


  • Growth is slowing worldwide: Since this summer economic trends have diverged. Growth has weakened in the Eurozone but remains solid in the US. Surveys remain high, especially in the services sector, in spite of rising risks. However, the business climate in the manufacturing sector is suffering from weaker global trade and rising oil prices. Emerging economies have been hit by the financial spillover from Argentina and Turkey, due to the broad-based appreciation of the USD (as a substantial proportion of their debt is in dollars). This has led to capital outflows from emerging economies and a depreciation of their currencies, which has, in turn, stoked local inflation. All in all, central banks have simultaneously begun to move their monetary policies to a more hawkish stance in many EM countries. Lastly, the economic slowdown has been more pronounced than expected in China, which has led the authorities to shift course in economic policy.
  • World trade:  Global trade has weakened since the start of the year (+3.8% year-on-year in July compared to 4.8% in December). Protectionist rhetoric has pushed down business confidence, particularly in Europe. However, keep in mind that the products targeted so far account for a small share of world trade and that retaliatory measures have been moderate. 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.
  • United States:  Unsurprisingly, 3%-plus growth is being forecast in Q3 2018, and the US economy continues to create jobs. The job market is becoming tighter and wages are beginning to accelerate. Surveys (the non-manufacturing ISM peaked in October) continue to point to above-potential growth in the coming quarters. Monetary and financial conditions remain accommodative despite Fed rate

    hikes and the dollar’s appreciation. Fiscal stimulus, including tax cuts and higher spending, is what is driving the economy at this point in the cycle. 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.

  • Eurozone:  Last month, we revised our growth forecasts slightly downward, to 2.0% for 2018 and to 1.8% for 2019. It is likely that we will revise our forecasts once again in light of the rise in oil prices, which is particularly significant in euros. Protectionism has undermined confidence (in the manufacturing sector), but the latest surveys (especially in services) suggest that the Eurozone is holding up well. At this stage, we do not expect the fiscal policy announced in Italy to have a significant impact on the economy: the gains from a relaxation of fiscal policy will probably be erased by the tightening of local financial conditions (increase in interest rates). Barring an exogenous shock, peripheral economies will remain in catch-up mode, especially as the ECB plans to stick to its ultra-accommodative stance, despite ending its securities purchase programme by the end of 2018. On the political front, illegal migration remains the main issue and is likely to keep tensions high in the run-up to May 2019 European elections. In Germany, elections in Bavaria on 14 October will serve as a test.
  • United Kingdom:  Brexit negotiations are teetering on the brink and the dissension within the Conservative party is particularly acute (especially regarding whether or not to remain in the customs union), to the extent that the deadline for reaching an agreement with the EU this year probably won’t be met. We should expect rising tensions over the coming months. The EU, meanwhile, wants to demonstrate that an exit is not in any country’s interest. All in all, we do expect a “last minute” agreement, but no doubt not until 2019, which will give the UK a transition period until December 2020. We expect this to weigh on growth for as long as the uncertainty persists.
  • China:  The Chinese economy is slowing, due, in part, to the weakening in global growth. Trade tensions with the US continue to grab headlines. The Chinese government’s retaliatory measures against the US  in the wake of Donald Trump’s customs tariffs are extremely measured. China seems to be expecting things to calm down once the US mid-term elections are behind us. China has shifted its economic policy in favour of a pro-growth fiscal policy and an accommodating monetary policy. Even so, the risks to growth now look to be on the downside.
  • 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 increased sharply ($86/bbl. for Brent as of 4 October) to an almost fouryear high. This is primarily due to expectations that supply will decline as US sanctions on Iran begin to take effect, which in practice will mean that many countries will halt their imports of Iranian oil. Currently, OPEC and Russia seem reluctant to offset this supply shortage and US producers say they are unable to do so (at least not in the short term). Short-term risks are therefore on the upside. Rebalancing by boosting supply will take time, with US production already very high. Our equilibriumprice assumption (around $75) could be revised up. Uncertainty over oil supply is very high – no-one can predict the extent of the supply shortage.
  • 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 billion in 2019) without clarifying its reinvestment policy in order to retain some flexibility. Its first rate hike is not expected until Q3 or Q4 2019.

The protectionist measures announced by Trump have ratcheted up uncertainty worldwide, fed the appreciation in the dollar and capital outflows from emerging economies, which furthermore are quite vulnerable to international trade issues. Emerging economies overall are weaker. Advanced economies are sensitive to different kinds of risks (mid-term elections, Brexit, Italy, rising oil prices). Donald Trump’s political strategy after the mid-term elections is unclear. In the very short term, a more serious confrontation on trade remains likely, at a time when rising oil prices are putting pressure on the manufacturing sector and threatening corporate margins.



Downside risk scenario (25% 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 followed by retaliations from the rest of the world remains high as the 6 November mid-term elections draw near (as Trump seeks to satisfy his electoral base). China and the EU are particularly exposed to this risk.
  • Aggravation of geopolitical tensions in the Middle East. Oil prices could rise above $100.
  • The uncertainty over rising trade tensions (primarily between the United States and China) against a backdrop of geopolitical risks (with Iran), crises in several large emerging economies (Turkey, Argentina), political risk in Brazil, a slowdown in China and political tensions in Europe (a deteriorating budget 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 spreads on govies and credit, on both developed and emerging markets, and a decline in market liquidity.
  • Amidst the resulting financial turbulence, the cycle-end story would resurface 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:


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.
  • Risk of boom/bust











GDP growth remains strong amid buoyant confidence

  • Confidence remains strong among businesses while surveys are surprisingly positive; some signs of concern reported linked to the escalation in tariffs against China.
  • Industrial activity stabilised on an upward trend, supported by domestic demand, withsolid orders of capital goods and generally positive retail sales.
  • Inflation data remained broadly aligned with the Fed’s projections, with PCE measures now at target level.
  • As widely expected, the Fed hiked rates in September (2.00% to 2.25%), increasingly confident in its economic and inflation outlook, and suggested a further hike in 2018 followed by progressive gradual tightening of monetary policy in 2019.
  • After a first round of tariffs on imports of $50bn, a second round on $200bn of imports from China was implemented. NAFTA: after a preliminary Mexico-US agreement, Canada and US also reached an accord.
  • Tariffs and retaliation
    negatively impacting the
    economic performance, both
    directly (prices) and indirectly (confidence)
  • Fed tightening impacting
    interest rate-sensitive
    segments (housing, consumer
  • Abrupt and severe tightening of financial conditions
  • Geopolitical risks linked to a
    more hawkish shift by the US Administration






Growth still positive but decelerating in a context of rising risks.

  • After a very disappointing year’s start (GDP grew by only 0.8% in H1), economic indicators stabilised during the summer, although without validating a strong rebound. Core inflation remains stuck at around 1% per year, but wage increases should allow it to rise slightly in the coming months.
  • The announcement of a proposed Italian budget that does not comply with European rules threatens to increase internal tensions in the Eurozone. In addition, the Eurozone is more exposed to trade tensions than the United States.
  • Rise in anti-establishment parties 
  • Rise in the euro 
  • External risks (in particular trade war risks)



The job market provides an important support despite the Brexit uncertainty

  • Growth rebounded in Q2 (+0.4%), confirming that the weak Q1 figure (+0.2%) underestimated the real trend. The labour market remains in good shape and real wages returned to positive territory.
  • However, the uncertainty surrounding Brexit is dragging down confidence and investment. There are still major differences between the negotiating parties standing in the way of an agreement over withdrawal from the EU, and time is running out. The likelihood of a hard Brexit seems to be increasing.
  • A hard Brexit 
  • The current account deficit remains very high





Expecting retrieval activities after rounds of typhoons and earthquakes

  • Real GDP is likely to decline in Q3 18 as a result of earthquakes, heavy rains, floods and scorching heat waves. Inventory adjustment in producer goods continues to weigh on growth. The weaker yen has failed to boost exports as the global economic slowdown takes its toll on shipments. The good news is that PM Abe has managed to persuade US President Trump not to impose higher levies on vehicles for now.
  • The economy should regain strength in Q4 as producers try to recoup the losses incurred in the previous quarter. Disaster relief and reconstruction projects will amplify the upward momentum. Corporate Japan plans to expand capex at the highest pace since 2006 despite the serious trade dispute. In the meantime, wage growth is strong enough to absorb higher consumer inflation.
  • Tariffs and quotas imposed by the U.S. could raise costs and hamper supply chains



  • China’s economy is slowing, but the potential slowdown still looks manageable. 
  • US/China trade tensions have continued. The US announced a 2nd tranche of tariffs on $200bn of Chinese goods, with 10% of the tariff effective from 24th September, and 25% from 1st January 2019. China retaliated on $60bn of US goods with a 5-10% tariff.
  • There are signs of the export momentum cooling in China and its neighbours. 
  • That said, policy supports are also becoming more visible. Credit growth is stabilising, local government bond issuance has been accelerating, while the PBOC has committed to keeping ample liquidity. 
  • In addition, China continued to push ahead with reforms and initial measures, including a 3rd cut in import tariffs this year, to offer more tax benefits to foreign investors on their FDI, and also cut personal income tax.
  • Policymakers are looking to protect the RMB from a further significant depreciation for now.
  • There is likely to be continued uncertainty regarding US trade measures, the effectiveness of policy supports, and whether China could push further serious structural reforms.
  • US/China trade tensions, with considerable uncertainty in the near term 
  • 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 the US, trade in the region is proving fairly resilient. Some measures have been implemented to weaken the import dynamics in India and Indonesia in order tocorrect the negative dynamics of the Trade Balance and Current Account. 
  • Inflation figures have remained fairly benign in the region, with the usual exception of the Philippines, where headline inflation is above 6% versus a Central Bank upper threshold of 4%. 
  • Monetary policies confirmed their hawkish stance. BSP and BI once again increased their monetary policy rates by 50bps and 25bps respectively. In both cases, we expect further tightening to come.
  • Tariffs have been implemented on $200bn of Chinese exports to the US, with China retaliating soon after with $60bn of tariffs. Trade protectionism escalation is a risk factor for the countries in the region that are most integrated in the Chinese supply chain.


  • Trade in the region still
    holding up
  • Inflation still very benign
    with the exception of the
  • BSP and BI continued with
    their hiking cycle
  • Increasing risks for countries
    integrated in the supply chain with China


  • Macroeconomic data in Q3 2018 are still signalling some weakness in the largest countries of the region such as Brazil, Mexico and Argentina while the smallest economies keep running at a more robust pace.
  • On the inflation front, the overall environment remained benign. In Mexico, inflation in the first half of the month was lower than expected indicating a possible return to a converging path towards the target interrupted in June.
  • The region’s main Central Banks maintained monetary policy unchanged in their recent meetings. Following the revised IMF plan in support of Argentina, BCRA has changed its Monetary Policy framework, abandoning the inflation target in favour of Monetary aggregate targets.
  • According to September polls, the elections in Brazil (on October 7th) will see J. Bolsonaro (PSL) and F. Haddad (PT) going through to the second round (on October 28th).
  • Three largest countries producing a weaker performance than the smaller countries
  • Inflation turning benign in Mexico
  • Change of Monetary Policy framework in Argentina
  • Busy political agenda continues, with upcoming elections in Brazil on 7th and 28th October

EMEA (Europe Middle East & Africa)

Russia: we forecast 1.7% YoY growth 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: we lower growth forecast to 0,7% YoY in 2018 

  • With sizeable current account deficit financed by portfolio inflows (not FDI) and inadequate external liquidity, SA remains vulnerable to EM turmoil.
  • These risk are supplemented by vulnerabilities from the fiscal side and contingent liabilities from SOEs.


Turkey: we downgrade forecast a slowdown in growth in 2018 to 1.8%.

  • The TRY has depreciated significantly given large external imbalances, poor external liquidity and non-orthodox policies of the government.
  • Despite a size able hike in interest rates in September, Turkish assets will remain under pressure. Turkish corporates have begun to default. This will impact the health of the heavily indebted (in foreign currency) and very large banking sector very negatively.
  • Lower oil prices and stepped up US sanctions
  • Fall in commodity prices,
    capital outflows, fiscal
    slippage, and delays in
    structural reforms
  • Continued market turmoil,
    further drop GDP and in asset prices


BOROWSKI Didier , Head of Global Views
ITHURBIDE Philippe , Senior Economic Advisor
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Risk factors, Macroeconomic context and forecasts - October 2018
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