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Risk factors, Macroeconomic context and forecasts - April 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

 April 2018

Avril 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.

  • Global resynchronisation: Despite the recent financial turmoil, global growth is expected to remain strong in 2018 and 2019. Surveys remain at high levels and their recent deterioration does not signal a reversal of the cycle. The advanced economies (with the notable exception of the UK) will continue to experience above potential growth. The major emerging economies will also continue to grow at a sustained pace. The ongoing rebalancing in China is progressing quietly – such that the slowdown appears to be under control. The recovery in most economies is being driven by domestic demand, and we note a recovery in investment in many regions (US, Europe, Japan, Asia). The synchronous nature of the global recovery makes it more robust.
  • World trade: world trade recovered strongly in 2017 (+ 5% yoy). It has so far been stimulated by the resynchronization of the global cycle and investment in capital goods. The protectionist measures announced by Donald Trump on steel and aluminium (tariff increases) will lead to retaliatory measures (from EU and China in particular) that are theoretically damaging to trade. However, it should be noted that the products that are 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 in 2018 (i.e., trade growth slightly below that of global GDP). The probability that protectionist tensions will degenerate into a real global trade war is low (see risk scenario).
  • United States:  growth remains firmly anchored. Surveys still point to GDP growth above potential. The fiscal stimulus voted in December, combined with the bi-partisan plan to increase public spending, will extend the duration of the US cycle. No recession to fear neither in 2018, nor in 2019.
  • Eurozone:  the recovery is widespread, with a pick-up in investment in most countries. Growth is driven primarily by private domestic demand. The Eurozone is at mid- cycle, with the prospect of catching up for peripheral countries. The political risk has weakened, becoming more local. In Germany, the vote of SPD members in favour of the coalition with the CDU-CSU paves the way for a grand coalition favourable to Europe and a strengthened Franco-German couple. In another vein, the reduction in asset purchases by the ECB is likely to be accompanied by a rise in both long-term interest rates in the core countries and the Euro. Hence the slight slowdown in growth expected in 2019. However, thanks to accommodative credit conditions, growth should remain well above its potential in 2018 and 2019, despite the recent drop in business surveys.
  • UK: EU countries and the UK have concluded an agreement for a transition period (until the end of 2020). The dissensions on Brexit terms are strong about remaining or not in the Customs Union. In her speech of March 2, Theresa May rejects the Customs Union (recently defended in the UK by Jeremy Corbyn), without really clarifying the British approach. Uncertainty will continue to weigh on the UK economy, but in a more diffuse way. We still expect growth to weaken in 2018-2019. 
  • China:  growth still robust. The reduction in overcapacity has reduced the downside risks. The economy’s growth drivers are now more diversified. 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 transition looks to be under control.
  • Inflation: core inflation, which is excessively low at this stage in the cycle (especially in advanced economies), is expected to 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 (we estimate that the global output gap will close in 2018 for the first time since the great financial crisis). 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 and how certain temporary factors (such as the drop in mobile phone service prices in the spring of 2017) have disappeared, which will automatically push inflation upward at the end of Q1 2018 (base effect).
  • Oil prices: we expect prices to stabilise at a level close to their current level. At US$ 66 (Brent), the risk still seems to us to be asymmetric (more risk of seeing it drop). Indeed, if prices stay much above the breakeven pointfor US shale gas (estimated at around $40 pb), US production will eventually increase and weigh on prices.
  • In 2018, the central banks will continue to whittle down their accommodative monetary policy, which is excessive in view of the current recovery. The Fed will continue to raise its key interest rates (we anticipate three 25bp hikes in 2018) and reduce its balance sheet at the announced pace (with a gradual non-replacement of papers reaching maturity); meanwhile, the ECB could put an end to its QE programme as soon as Q4 2018, But his recent communication remains particularly accommodating. The end of its asset purchase program is conditional on the recovery of underlying inflation, which remains excessively weak at this stage of the cycle. Moreover, it will start raising its key rates only «well after» the end of the Asset Purchase Programme. This implicitly means that the first increase in its deposit rate would not occur until mid-2019 (at the earliest). Monetary policies will remain generally accommodative because even if a little cyclical inflation materializes, total inflation will remain well below its historical average for the structural reasons mentioned (flattening of the Phillips curve, continued downward pressure on the prices of many goods and services).

The protectionist measures announced by D. Trump weigh on the markets. Nevertheless, we believe that the risks weighing on growth are balanced. The likelihood of a generalized trade war remains low because the measures envisaged by Donald Trump (as well as the retaliatory measures) ultimately target products that weigh little on world trade. In fact, it seems that the retaliation envisaged by the EU has led Donald Trump to postpone the increase in tariffs on steel and aluminum from Europe.

Downside risk scenario (15% probability): marked economic slowdown due to incorrect economic policy (excessively quick monetary policy normalisation or protectionist measures), a geopolitical crisis or a sudden repricing of risk premiums.

  • The risk of increasing protectionist measures (US) rises with the approach of the mid-term elections (Trump seeking to satisfy his electoral base). Retaliation from the rest of the world would be inevitable, provoking an open trade war (US, China, EU).
  • The pro-cyclical fiscal policy forces the Fed to accelerate the monetary policy normalisation process.
  • International crisis stemming from acute aggravation of current geopolitical tensions (Middle East, Korea).


  • All things being equal, a global 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 most extreme case, resort to unconventional tools (expanding their balance sheets).

Upside risk scenario (15% probability): pick-up in global growth in 2018.


Several factors, which are likely to generate higher growth, should be closely monitored.

  • 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. Continued acceleration cycle in the Eurozone, 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).









Economy set to expand above potential after Q1 temporary weakness

  • Some temporary weakness but the economic outlook remains solid.
  • The Fed hiked again by 25 bp, delivering upbeat message on growth and inflation. The economic projections were revised higher for growth and the inflation path moved marginally higher too from 2019. The dots now imply three hikes this year and next.
  • A positive environment continues to be supportive for an expanding domestic demand: ISM surveys show very upbeat sentiment among U.S. businesses, with the manufacturing index reaching the highest level in more than a decade; consumer sentiment continues its upward trend, lifted by the tax-cuts positive effects on personal disposable income.
  • Inflation scare recedes as US inflation report shows a more measured pace of growth for Consumer Price Index and aligns with Fed view of gradual convergence to the target. 

    Labour market keeps absorbing residual slack, as labour force participation rate increases and unemployment rate remains stable. Payrolls post again upside surprise.

  • Tightening of labor market generates much stronger inflationary pressures
  • Abrupt tightening of financial conditions
  • More unilateral protectionist trade measures from the
    U.S. prompting escalated retaliations from other countries
  • Geopolitical risks linked
    to a more hawkish shift of the U.S. Administration
    (Iran, North Korea)






The recovery continues with a lot of remaining potential

  • The recovery remains strong even though some recent business confidence indicators disappointed mildly. The Eurozone economy is being supported by many factors, including a recovery in capex and consumption, lower political risk than in 2017, and strong growth in the USA and Asia. Core inflation remains subdued but is likely to rise slightly over the next few months.
  • The indecisive outcome of the Italian elections does not carry an immediate systemic risk for Europe. In Germany, the government coalition deal should allow new initiatives to strengthen Eurozone institutions.
  • Rise in anti-establishment
  • Overreaction by the euro
  • External risks



Growth being slowed by uncertainty over Brexit

  • The economy is slowing. Confidence is being undermined by uncertainty over how Brexit will play out. The increase in inflation due to a weaker pound is likely to be temporary. However, unemployment is still very low, at 4.3%, and wages are showing some signs of accelerating.
  • An agreement has been reached with the EU for a post-Brexit transition period, from March 2019 until the end of 2020, and this boosted sterling. However, for the agreement to be implemented, an agreement still must be found on thornier issues, such as the Irish border and the future framework of trade relations between the EU and the UK.


  • A hard Brexit
  • The current account deficit remains very high






Historical long-running economic expansion has farther to go

  • The current expansion has entered its fifth year. While the pace of growth will decelerate from the exhilarating level in 2017, business investment to cope with the chronic labour shortage and the Tokyo Olympic games in 2020 will continue to drive the economy. Meanwhile, investment for the purpose of capacity expansion will taper off on the appreciation of the yen and subsequent faltering exports. On the consumer front, wage growth is likely to remain lacklustre despite the government’s request for a 3% pay raise. Depressed real income will continue to weigh on spending.
  • The recent surge of the yen: a further appreciation would
    weigh on confidence
  • Geopolitical risks (tensions
    with North Korea)



  • The economy has shown no major worrying signs yet. Exports remain strong; property is holding up; and credit is not yet slowing significantly, although monthly data were volatile due to Chinese New Year distortion.
  • There have been more convincing signs that structural reforms are ready to accelerate, with the direction reaffirmed, one of largest and widest institutional restructuring plans announced to improve governance efficiency, and pro-reform people in key positions.
  • Regarding measures that Trump proposed to target certain Chinese products and sectors under USTR 301 investigation, China’s responses so far have been relatively contained, which should help avoid serious escalation and limit macro impacts.
  • Further developments bear watching, while there also looks to be some meaningful probability of some kind of trade deals with or without fewer tariffs.
  • The trade relationship with US, with noises perhaps to last for a while
  •  Policy mistakes in managing structural transition
  • Geopolitical noises regarding North Korea: positive developments with Kim Jong-un making his first visit to China and agreeing to meet US later

ASIA (ex JP & CH)

India: moderating recovery since February 2018

  • January 2018. February figures weakened slightly with regard to electricity generation, freight traffic, exports and government revenues. Overall, the economic cycle is expected to accelerate in 2018 vs. 2017. Inflation data have recently surprised on the downside (4.4% in February), due to weakening food prices. We do expect inflation slightly higher in the next months and then reverting towards 4% in H2 2018. Risk on the upside should come from the increase in Minimum Support Prices (budgeted) announced in June.
  • We do expect a neutral stance by the RBI over the course of 2018. A tighter stance is coming from more severe decisions in the credit sector following the PNB fraud.
  • The political scenario is becoming more challenging for the BJP on the way to national elections, thanks to a unifying opposition at state level.


  • The recovery has begun
    to moderate since February 2018
  • February inflation
    was unexpected low.
    Expected slightly higher
    in the next few months
    and reverting in H 2018


  • RBI on hold


Brazil: subdued inflation leaves room for further easing

  • The Brazilian economy keeps expanding at a consistent pace throughout different sectors, driven both domestically and externally. However, as reflected in the capacity utilization ratio (78.1% in January), there is still lots of slack in the economy. Therefore, we do not see any pressure on inflation; in fact, recent CPI prints were still very low (below the lower end of the 3%-6% inflation target range). CBC has cut the Selic rate by a further 25bps in March, showing more dovishness than expected for the near future. Further easing is consistent with the fact that inflation dynamics are more subdued than expected.
  • Having given up on passing pension reform, the government is now focusing on bills such as the Eletrobras privatization and federal tax simplification. The risk on these bills is now that a possible resignation by MoF Mireilles, announcing his ticket for the presidential elections, followed by some senior staff, could delay approval.


  • Recovery still on track but lots of slack in the economy
  • Surprisingly low Inflation gives room for more easing by BCB
  • Fiscal bills in the pipeline could be delayed by a possible Mireilles  designation

EMEA (Europe Middle East & Africa)

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

  • With our inflation projection at 3% yoy, which is below the CBR’s target (4%), we are expecting further key rate cuts. Oil prices remaining above $50/barrel would help to bolster the recovery. 

South Africa: we are forecasting growth of 2% yoy in 2018

  • Growth surprised to the upside in 2017 (1.3% yoy) and short-term indicators are looking solid in early 2018. Inflation is continuing to slow and should allow the SARB to begin easing its monetary policy before long. The ongoing fiscal consolidation and recent political changes should have a positive impact on the economy.

Turkey: we are forecasting a slowdown in growth to 4.3% in 2018

  • The base effects associated with the coup d’État and the end of Russian sanctions are likely to fade Due to the increasing domestic and external imbalances (increased public and current account deficits) and geopolitical tensions, the Turkish lira will remain under pressure and continue to hamper the economy via imported inflation.
  • Decreasing oil prices
  • Less fiscal consolidation, lack of reforms
  • Lax monetary policy, rising inflation and twin deficits, currency depreciation




2018.04 - Macro
BOROWSKI Didier , Head of Global Views
ITHURBIDE Philippe , Senior Economic Advisor
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Risk factors, Macroeconomic context and forecasts - April 2018
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