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Risk factors, Macroeconomic context and forecasts - March 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


March 2019


Mars 2019



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

RiskFactors Table 1
RiskFactors Table 2
RiskFactors Table 3






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


Central scenario (75% probability): slowdown in 2019 but more decoupling looking ahead


  • Growth is slowing worldwide: 2018 had begun 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. Moreover, economic activity has markedly weakened in the Eurozone since Q4 2018. Hence 2019 has started with a global synchronised slowdown with risks remaining tilted to the downside.
  • World trade: Global trade has surprisingly markedly weakened over the past 18 months; it started 2018 at around 5% YoY but fell sharply in Q4 (+1.4% yoy). The protectionist rhetoric has pushed up the level of uncertainty to an all-time high in December, dragging down investment. Since the start of the year, global trade remains particularly weak, with possibly another contraction in Q1. Having said that, the de-escalation on trade between China and the US bodes well and should lead to a stabilisation in trade. At the end of the day, we continue to expect global trade growth to stabilise around the level of global GDP growth (i.e. we would expect global trade to return to 3% yoy by the end of 2019).
  • United States: The US economy has been driven by a very accommodative fiscal policy but its impact should progressively erode this year. We expect growth to decelerate to its potential by early 2020, meaning in practice that the US economy will lose 1pp of growth by the end of the year. Indeed, we expect GDP growth at 2.4% on average in 2019 and 1.8% in 2020 (yoy growth, would thus slow from 3.1% yoy in Q4 18 to 2.1% in Q4 19). This situation will have a negative impact on corporate profits, especially if some inflationary pressure materialise by then, which is still possible, given the fact that the economy is operating at close to full employment. We do believe that a recession is highly unlikely in 2019 (household consumption should continue to benefit from higher disposable income). However the doubts about the extension of this cycle are likely to rise in the coming quarters (less support from fiscal policy, business investment expected to slow). And we must keep in mind that sub-par growth may trigger a profit recession.
  • Eurozone: We keep unchanged our forecasts at 1.2% in 2019 and 1.5% in 2020; however recent data tend to indicate that Q1 growth could still be very weak (meaning that risks to growth remain skewed to the downside in the short run). Despite a recovery that has started well after that in the US, Eurozone economies have begun to slow in 2018, much more sharply than other economies. Several transitory factors have contributed to the slowdown in EZ growth. For instance, Germany was close to fall in recession in Q4 due to an abrupt slowdown in world trade, disruptions in the auto sector caused by new pollution tests, and the weakness of the manufacturing sector. The shock on the EZ manufacturing sector at the end of 2018 has been clearly underestimated. In France, the yellow vest movement has weighed on economic activity. And the Italian economy has suffered from tighter credit conditions. In addition, political uncertainties have muddied the waters (Brexit, Italian budget). However, we stick to the view that domestic demand (in particular consumption) will remain supported by the strong labour market performance, by strong income growth and by the level of monetary policy accommodation. Subsequently, we believe that growth will gradually reaccelerate in H2. In the short term, the European elections (May 2019) and the Brexit will likely maintain the level of uncertainty at a high level. While we believe that mainstream parties will dominate the European parliament, the level of political fragmentation will increase. As a result, it will take time to form the new Commission and we do not expect any significant progress in strengthening the EU and the Eurozone before 2020.
  • United Kingdom:  The political situation in the UK is highly unstable. Many options are still possible regarding the Brexit. Everything will ultimately depend on the scenario (see section risk factors and our “investment talk” that will be soon published on the subject). We continue to believe that the probability of a deal is well above the probability of a no deal. And with a deal, we would expect a rebound in domestic demand in H2 2019.
  • China:  Chinese economic growth seems to have has stabilised in early 2019, thanks to the very expansionist policy mix, to the point that we cannot rule out a (short-lived) reacceleration of growth. That being said, the country’s economic model remains fragile: the excess of credit is visible, non-financial corporate debt has surged since the GFC. The de-escalation between the US and China on trade tensions should give valuable time for China to adjust its policy implementations and to better manage short-term risks. Keep in mind however, that trade tensions between the US and China are here to stay (intellectual property, high technology).
  • Inflation:  Core inflation remains low at this stage of the cycle in advanced economies. 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 the pick-up in wages (United States, Eurozone) but would not last long given the slowdown in global growth and the lack of pricing power (i.e. corporate margins more at risk than final sale prices). In emerging economies, inflation has recently slowed more than expected but it was mainly due to the decline in energy and food prices. At the end of the day, with low inflation and subdued growth, most central banks have turned more dovish.
  • Oil prices:  Oil prices have decreased sharply: from $86/b (Brent) in early October to $65 in late February. 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 around this level.
  • Central banks on the dovish side: the risk management approach prevails. The Fed is in a “wait and see” mode; we expect no rate hike in the coming months (1 hike at most and not before June). The ECB has ended its monthly asset purchases at the end of December and will continue to replace maturing securities (between €160 and 200 bn in 2019). We do not expect any rate hike from the ECB in 2019 or 2020.The ECB has no room for manoeuvre to normalise its monetary policy in the short run, given the economic slowdown and the absence of inflation. In order to maintain very accommodative monetary conditions and to alleviate tensions on the banking sector, we now expect the ECB to launch new TLTROs (probably announced in March).

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


  • Risk of further protectionist measures from the US, followed by retaliation from the rest of the world.
  • Repeated uncertainty shocks (global trade, Brexit, European elections) would weigh heavily on global demand.


  • All things being equal, a trade war would drag down global trade and trigger a synchronised and durable 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.
  • Recession fear in the US.
  • 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, 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.
  • 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.









Slowing down amid policy uncertainty

  • Economic growth is still above potential and consistent with a gradual slowdown, but downside risks are rising. The fiscal support that played an important role in 2018 will be fading gradually.
  • Still solid labour market, wage growth and contained inflationary pressure are supporting personal consumption resilience, which is expected to be the main driver of domestic demand.
  •  Business confidence has moderated appreciably among small and larger businesses, while uncertainty on the growth and demand outlook may drive moderation in capex intentions and investments.
  • The inflation outlook remains benign, with modest domestic and external inflationary pressures keeping both core and headline CPI in check. Lower energy prices will likely put a ceiling on the increase in annual headline inflation.
  • As growth moderates and inflationary pressures remain in check, the Federal Reserve does not seem to be in a hurry to hike soon. Later in the year any hike will likely be subject to inflation trends. We expect one more hike in 2019, around mid-year.


  • Concerns over global growth, and external and domestic demand may hold back new capex plans
  • Tariffs risk may negatively impact economic performance, both directly (prices and orders) and indirectly (confidence)
  • Geopolitical risks linked to a more hawkish shift by the US administration
  • Federal Reserve tightening too soon and perceived to be too hawkish





The recovery continues despite disappointing figures and rising political risks

  • After a highly disappointing 2018, numerous indicators fell further in early 2019. However, whereas a substantial portion of this was due to export-exposed sectors (such as manufacturing), the job market weathered this well and should support consumption and services. We forecast a gradual improvement, especially from the second half of the year on.
  • Brexit and the threat of US customs tariffs on vehicles are substantial risks. Major political uncertainties persist, such as the European elections and the situation in Italy.
  • Stronger political protest movements
  • Euro appreciates
  • External risks (trade war, slowdown in United States and China)



Major uncertainty as Brexit approaches

  • Brexit is undermining confidence and investment. After an initial rejection, on 15 January, the UK Parliament’s ratification of the Brexit agreement reached with the EU in November is looking highly uncertain. Many scenarios are possible, including a postponement of Brexit beyond 29 March. While that is not the most likely outcome, a no-deal Brexit is not impossible.
  • Despite political uncertainties, the job market remains strong, and wages are increasing in real terms, driven by the receding in inflation.
  • A no-deal Brexit
  • The current account deficit remains very high





A glimpse of sour flavour in the corporate sector

  • Machinery orders have recently weakened, in contrast to the resilience in 2018, amid increased global uncertainty. The accelerating global economic slowdown, especially in China and Europe, is whittling exports.
  • Meanwhile steady income growth, an indispensable solution to labour shortage, is supporting domestic demand. Relatively mild weather is fostering construction.
  • However, steady domestic demand is insufficient to avoid the downforce from the flagging tech sector and global auto sales, hindering inventory adjustment.
  • Nevertheless, the government’s infrastructure investment should ease downward pressure. The decline in imported energy prices will improve companies’ terms of trade, while a sharp mark-down in mobile phone charges scheduled in April will encourage spending in other areas.
  • A lop-sided appreciation of the yen could threaten companies, leading to further downward revisions to capex plans



  • There are many near-term challenges to the economy, while there are signs that policy supports are becoming more visible.
  • Exports are suffering and the property sector could soften somewhat going forward, but drag from the auto sector looks to become smaller. 
  • Overall credit growth showed signs of bottoming out in Q1 with strong lending figures in January.
  • More policy measures are under way. Next focus is on the fiscal side, including potentially further tax cuts, larger local government special bond issuance and higher fiscal deficit, due to be announced by early March.
  • US/China trade negotiations remain a key uncertainty. Recent signs have shown meaningful progress, working towards a memorandum of understanding (MOU).
  • Pressures on RMB and capital outflows have eased somewhat, helped by a more dovish Fed and a softer dollar, as well as improving market sentiment.
  • Uncertainty in US/China trade talks
  • Policy mistakes in managing near-term risks and the structural transition
  • Geopolitical noise regarding North Korea


(ex JP & CH)


  • The full set of GDP releases for Q4 2018 confirmed some resilience in the area, driven mainly by domestic demand, capex and household consumption. The soft external demand late last year has weakened further in early 2019 (data available as of January).
  • The region’s inflation figures remained very benign. Oil and food prices pushed inflation to levels lower than expected: in Malaysia January inflation came in at -0.7% YoY, with a -1.1% drag from transport (with a weighting of around 15% ).
  • Overall, CBs in the region are in a wait-and-see mood before shifting towards a more dovish stance, thanks to a more favourable global financial environment. India cut its policy rates by 25bps.
  • India announced its Budget Law for fiscal year 2020. As expected, the government has introduced more expansionary aspects and schemes in support of rural India and consumers.


  • Growth outlook decelerating but still resilient
  • Inflation still very benign, driven by oil and food prices
  • RBI cut its policy rates by 25bps
  • India announced an expansionary Budget Law, pausing its fiscal consolidation path


  • Still preliminary Q4-18 GDP figures confirmed better economic conditions in mid-sized and smaller countries in the region than in the largest countries. In Mexico, headline GDP is pointing lower (1.8% YoY), with a possible revision in 2019 expectations, once components are available. In Peru, Q4 GDP came in at a strong 4.8% YoY, supported too by a favourable base effect on Q417.
  • On the inflation front, the overall environment remained benign. In Mexico, inflation again declined more than expected, to 4.4% YoY from 4.8%.
  • The region’s main central banks kept their monetary policy rates unchanged.
  • In Brazil, the new president and his economic team decided to present a very bold pension reform plan to Congress. Such a brave decision will make the approval process longer and more uncertain than having opted for a more diluted version of the reform.
  • Better economic conditions in
    smaller countries
  • Inflation is overall benign, with Mexico inflation back on the convergence path
  • No changes in monetary policy in the region
  • Very bold pension reform announced in Brazil

EMEA (Europe Middle East & Africa)

Russia: real GDP growth is expected to be around 2% in 2018 and slightly lower in 2019, but growth is expected to accelerate over the medium-term, thanks to 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 will be among the few emerging market sovereigns with “twin surpluses” in 2019, while accumulating assets in the National Wealth Fund.
  • The central bank is likely to stay on hold for the time being.


South Africa: exit of recession but no miracle

  • South Africa emerged from recession in Q3, and real GDP growth is expected to be around 0.7% in 2018. For 2019, we expect a slight improvement and 1.5% growth of GDP.
  • In terms of policy mix, there is very little room for manoeuvre. Due to the government’s support for the national electricity company, Eskom, the fiscal outlook is worse than forecast for 2019. Inflation expectations remain high and limit the possibilities for monetary easing, even though GDP growth remains relatively weak.


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

  • The aggressive tightening of interest rates, the rebound in the pound, the drop in oil prices and the implementation of discretionary measures on certain goods have given little respite to inflation. However, it should not fall below 20% for another several months, thus limiting the central bank’s margins of manoeuvre.
  • In this context, household purchasing power and corporate margins are at their lowest. We therefore expect a GDP recession for 2019 of at least 1%. The downside risks are huge and the outcome of the elections at the end of March will be decisive.
  • Drop in oil prices, steppedup US sanctions and further geopolitical tensions
  • Increased risk aversion, risk of sovereign rating downgrading, and rising social demands in the run-up to elections
  • A too rapid easing of the central bank, a cooling of budgetary policy, and a slowdown in activity in the Eurozone


RiskFactors Table 4
BOROWSKI Didier , Head of Global Views
ITHURBIDE Philippe , Senior Economic Advisor
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Risk factors, Macroeconomic context and forecasts - March 2019
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