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Risk factors, Macroeconomic context and forecasts - April 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



April 2019



Avril 2019



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

Risk Factors - Table




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 has slowed worldwide: 2018 had begun based on the theme of a synchronised global recovery. But this did not last. Since spring 2018, the protectionist measures taken by Donald Trump have changed the game. Emerging economies, some of which are heavily indebted in dollars, were weakened last year by the broad-based appreciation of the USD. Moreover, economic activity has weakened markedly in the Eurozone since Q4 2018. Hence, 2019 has begun with a global synchronised slowdown with risks remaining tilted to the downside.
  • Global trade: Surprisingly, global trade has weakened markedly over the past 18 months; it started 2018 at around 5% yoy but fell sharply in Q4 (+1.4% yoy). Protectionist rhetoric has pushed uncertainty to an all-time high, dragging down investment. Global trade rebounded in January but will remain particularly weak in Q1. Having said that, the deescalation 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 at around the level of global GDP growth (i.e. we would expect global trade to return to around 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 pressures 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, 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, more mixed signals from sentiment and hard data). And we must keep in mind that sub-par growth may trigger a profits recession.
  • Eurozone: We have cut our 2019 GDP growth forecasts to 1.0% and left our 2020 forecast unchanged at 1.5%; The data for Q1 has been mixed, with some figures improving, but also some persistent weakness in manufacturing. Although they began recovering well after the US, Eurozone economies began to slow in 2018, much more sharply than other economies. Several transitory factors have contributed to the slowdown in EZ growth. Germany was close to falling into recession in Q4, due to an abrupt slowdown in world trade, disruptions in the auto sector caused by new pollution tests, and weakness in the manufacturing sector. The late-2018 shock to the EZ manufacturing sector 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 (Brexit, Italian budget) have muddied the waters. However, we are sticking to the view that domestic demand (in particular consumption) will remain supported by the strong labour market, strong income growth, the level of monetary policy accommodation, and a significant fiscal stimulus (especially in Germany and France). Subsequently, we believe that growth will gradually reaccelerate in H2. In the short term, the May 2019 European elections, Brexit, and the threat of US tariffs on European autos will likely maintain 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 Brexit. Everything will ultimately depend on the scenario (see section risk factors and our “investment talk” 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 Q1 2019, thanks to a 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, and non-financial corporate debt has surged since the GFC. The de-escalation between the US and China on trade tensions should give China valuable time to adjust its policy implementations and better manage short-term risks. Keep in mind, however, that trade tensions (on intellectual property, high technology) between the US and China are here to stay.
  • 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 (in the United States and the 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 this 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/bbl. (Brent) in early October to $66 in late March. The main trigger at the very beginning of the decline was the large number of waivers 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 in early December, together with fears 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 2019. The ECB ended its monthly asset purchases in late December and will continue to replace maturing securities. For the ECB, we expect a status quo (regarding interest rates) in 2019 or 2020. The ECB has no room for manoeuvre to normalise its monetary policy, given the economic slowdown and the absence of inflation. The ECB announced new TLTROs in March (to come in September, with the technicalities probably announced in June) and surprised with its dovish stance: 1) Immediate decisions on TLTRO3 and rates forward guidance; 2) downward revisions to GDP growth/inflation outlook larger than expected by the consensus; and 3) balance of risk still tilted to the downside, meaning that the ECB may ease further if growth slows further. A two-tiered system is being seriously considered for the deposit rate, to alleviate the burden on banks that have very large excess reserves (Germany).



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) weigh heavily on global demand


  • All things being equal, a trade war would drag down global trade and trigger a synchronised and sustained 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 fears in the US.
  • Under a worst-case scenario, CBs could once again resort to unconventional tools, such as expanding their balance sheets (particularly true for the ECB).



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 reaccelerates in the Eurozone after a dip. Growth picks up again in China on the back of a stimulative policy mix.
  • Central banks 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: patience and data dependency

  • Economic growth is decelerating gradually amidst mixed data, with a shift in drivers of domestic demand away from (decelerating) investments and towards still-supported personal consumption. The fiscal boost supportive to 2018 growth will fade.
  • US consumers remain broadly upbeat. Still-dynamic labour demand and wage growth, coupled with contained inflationary pressure, support resiliency in personal consumption, 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 seems to be driving moderation in capex intentions and investments.
  • Moderate domestic and external inflationary pressures are keeping both core and headline CPI in check, within a benign inflation outlook. Lower energy prices will likely put a ceiling on the increase in annual headline inflation.
  • In this context, at its March meeting the Federal Reserve signalled no further rate hikes this year, announced the end of QT, and revised economic projections significantly downward on growth and inflation.


  • Concerns over global growth, and external and domestic demand may hold back new capex plans more than expected
  • 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





A gradual improvement expected despite considerable risks

  • After a highly disappointing 2018, figures have so far been mixed in 2019. However, while most of the difficulties involve export-intensive (manufacturing) sectors, the job market is holding up well and is likely to support consumption and services. We expect a gradual improvement, especially beginning in the second half of the year.
  • Brexit and the threat of US trade tariffs on the auto sector are significant risks. There are still some considerable political uncertainties, particularly the upcoming European elections and the situation in Italy.
  • Stronger political protest movements
  • A appreciation in the Euro
  • External risks (trade war, slowdown in the US and China)



Major uncertainty as Brexit approaches

  • Brexit is undermining confidence and investment. The United Kingdom has won an additional extension from the European Union (until at least 12 April), but there is still lots of uncertainty over whether the UK Parliament can reach a majority to approve any option in the coming weeks. Many scenarios are possible, including a long postponement. While the default option, no-deal Brexit, is not the most likely outcome, the possibility of it cannot be ruled out.
  • 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





Drifting into the worst phase

  • Global economic deceleration has dampened the corporate sector and finally started threatening capital spending. Shipments of capital goods and machinery orders have weakened as an increasing number of companies postpone, downsize, or cancel business investment.
  • Although three quarters of corporate executives worry about the state of the Chinese economy, exports to, and machine-tool orders from, China have recently bottomed out. Exports in general remain precarious. Yet, shipments to the U.S. continue to grow while those to the EU are surprisingly resilient.
  • On the domestic economy front, the government is accelerating disaster restoration projects, infrastructure investment and urban development for the 2020 Tokyo Olympic Games. A sharp mark-down in mobile phone charges scheduled in April should encourage spending on other goods and services.
  • A lop-sided appreciation of the yen could threaten companies, leading to further downward revisions in capex plans



  • Overall economic activity looks to slow further in Q1, while policymakers have reaffirmed their supportive stance. The annual NPC sent a clear signal that growth is the top priority this year. The fiscal package came out larger than widely expected, with confirmation of a meaningful corporate VAT cut and heavier issuance of local government special bonds.
  • While exports are suffering and the property sector is softening, drag from the auto sector is becoming smaller, and the state sector has begun stabilisation efforts, helped by policy supports. Overall credit growth seems to be bottoming out.
  • US/China trade negotiations remain a key uncertainty. Recent signs have shown meaningful progress, with planned tariff increases being postponed for now.
  • Stress in RMB and capital outflows have remained under control, 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 region, driven mainly by domestic demand. The first two months of 2019 confirmed very weak export dynamics across the region.
  • The region’s inflation figures remained very benign. Oil and food prices pushed inflation to levels lower than expected. In the Philippines February inflation finally went down within the BSP range, at 3.8% YoY.
  • Overall, CBs in the region are in a wait-and-see mode before shifting towards a more dovish stance, thanks to a more favourable global financial environment. India cut its policy rates by 25bps.
  • In Thailand, House of Representatives elections have been held. 95% of the votes have been counted, while the remaining 5% is under investigation for irregularities. Currently, no parties or alliances (as per the information available) have any majority. Final results will be announced after the 9th of May.
  • Exports dynamics still very weak in early 2019
  • Inflation still very benign. In the Philippines and finally within CB target range.
  • Central banks in the region in wait-and-see mode
  • Election outcome in Thailand is not showing any clear victory by parties or current alliances


  • Q4-18 GDP figures have confirmed better economic conditions in mid-sized and smaller countries in the region than in the largest countries. Latin America is the region with the most mixed dynamics between domestic and external demand, as exports have been less heavily negative in Argentina and Brazil.
  • On the inflation front, the overall environment remained benign. Finally, in February Mexican inflation came in at a level just within Banxico’s target range at 3.9% YoY, continuing to decline from the 4.4% figure of January.
  • The region’s main central banks left their monetary policy rates unchanged. We have changed our monetary policy outlook for Banxico to an easier one.
  • In Brazil, the new president and his economic team decided to present a very bold pension reform plan to Congress. The first vote by the Constitution and Justice Committee in the lower house is scheduled to take place by April but will probably be further delayed.
  • Better economic conditions in
    smaller countries
  • Inflation is benign overall, with Mexican inflation back within Banxico’s target range
  • We do expect Banxico to ease earlier than anticipated
  • The very bold pension reform announced in Brazil is at risk of delay

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 Q4 2018 GDP figure released higher than expected, at 1.1% YoY. Overall, 2018 GDP growth was 0.7% YoY (yearly average), instead of the 0.5% YoY forecast. Better-than-expected GDP figures should not distract from the fact that investment performance (mainly in public SOEs) remains very poor. We expect higher growth in 2019 +1.7% YoY.
  • Growth data, along with more benign inflation could dictate easier monetary policy; however, a certain degree of cautious is in order, due to the deteriorating fiscal outlook. Due to the government’s support for the national electricity company, Eskom, the fiscal outlook is worse than forecast for 2019.


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%.
  • Drop in oil prices, stepped-up 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


Macro & Economics Forecasts
BOROWSKI Didier , Head of Global Views
ITHURBIDE Philippe , Senior Economic Advisor
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Risk factors, Macroeconomic context and forecasts - April 2019
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