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Macroeconomic and financial forecasts - February 2017

MACROECONOMIC OUTLOOK

  • United States: investment in capital goods rebounded in Q4 2016. Growth continues to be driven by domestic demand. However, wage growth is stagnating despite buoyant job creation levels. Furthermore, core inflation slowed down at the end of the year. Uncertainty over the United States’ budget and trade policies remains. From a macroeconomic standpoint, the bias is to the upside. However, certain measures implemented by the new administration may have negative medium-to-long-term effects (inflation, protectionism) or even cause a turnaround in the cycle earlier than expected.
  • Japan: wage increases are the key to a lasting recovery, given the sluggishness of global trade. Fiscal policy will remain a key growth driver. The BoJ’s policy which aims to keep the 10-year rate at zero for the foreseeable future will give the government room for manoeuvre. It’s a situation worth watching.
  • Eurozone: the recovery is consolidating. Surveys are indicating that the economy strengthened in early 2017. We have increased our growth forecast by 0.2pp to 1.5%. However, temporary drivers (decline in the euro and oil prices) are sputtering and political risks associated with elections (in the Netherlands, France, Germany and Italy) remain the region’s weak link. Keep watching.
  • Brazil: Q3’s GDP figure came out at -2.9% yoy, compared to -3.6% in Q2. Investment, which returned to positive territory in Q2, contracted once again. Industrial output contracted again in November (-1.1% yoy), which was the 33rd consecutive month of decline. As such, we continue to forecast a 0.5% recession in 2017.
  • Russia: Q3 GDP (-0.4% yoy) contracted less than in Q2Q2 (-0.6%). We are maintaining our scenario of an exit from crisis in 2017 and are forecasting growth of 1%.

 

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KEY INTEREST RATE OUTLOOK

  • FED: the Fed raised the fed funds target to 0.50-0.75% in December. The rise of inflation expectations has been a game changer. The Fed should hike two other times in 2017. The normalization of the balance sheet may become a market theme.
  • ECB: the ECB extended its QE until December 2017 at a reduced pace (€60bn/ month). Few changes have to be expected in the short-run but divergences within the governing council will be more and more clear.
  • BoJ: the BoJ will stick to its Yield Curve Control (YCC) policy and should not change its rate targets.
  • BoE: the BoE put itself in a wait-and-see mode. Developments around the Brexit negotiations will be crucial for the evolution of the BoE policy.

 

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LONG RATE OUTLOOK

  • United States: the continuation of inflation base effects can drive long-term rates slightly higher. This being said, inflation breakeven rates are not far from “normal” levels.
  • Eurozone: there is still a significant room for an increase of inflation breakeven rates. The short-end of the curve will steepen throughout the year with the comeback of the idea that the ECB will normalize its rate policy in the coming years.
  • United Kingdom: with the perspective of tough Brexit negotiations and without change of BoE policy, long-term rates are expected to stagnate around the current levels.
  • Japan: the BoJ controls the long-end of the curve and is probably in favour of a decline of short-term bond yields.

 

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CURRENCY OUTLOOK

  • EUR: with the rise of German long-term yields and the noise related to a possible change of ECB policies, the risks are tilted to the upside.
  • USD: the evolution of the USD is currently dictated by the long-term rate differential. The US authorities (Fed, new administration) would not tolerate a significant appreciation of the USD. However, big stimulus measures would boost the USD.
  • JPY: the yen became undervalued again. With the BoJ’s yield curve control policy, a rise of US yields triggers a yen depreciation.
  • GBP: the pound’s evolution will be dictated by political developments.
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ITHURBIDE Philippe , Senior Economic Advisor
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Macroeconomic and financial forecasts - February 2017
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