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Risk factors, Macroeconomic context and forecasts - May 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



May 2019



Mai 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): end of the soft patch in sight, 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. We however believe that the pronounced soft patch is over.
  • Global trade: Global trade has fallen over the past 18 months; it started 2018 at around 5% yoy but fell sharply in Q4 2018 and slipped further in Q1 2019 (from +0.1% yoy in Jan to -1.1% yoy in Feb). The economic slowdown in China probably played a role in late 2018. But most importantly, the protectionist rhetoric has pushed uncertainty to an all-time high (with a peak in Jan), dragging down investment. On the one hand, the de-escalation on trade between China and the US bodes well, but on the other hand a trade war between the EU and the US remains a distinct possibility. At this stage, we however 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 early 2020).
  • United States: The US economy has been driven by a very accommodative fiscal policy; its impact should progressively erode this year. True, real GDP growth was well above expectations in Q1 19 (3.2% qoq at annual rate after 2.2% in Q4 18). This was the third quarter the US economy grows at a rate above 3% in the last 5 quarters. GDP growth also picked on a year on year basis from 3.0% in Q4 18 to 3.2% in Q1 19. Yet, nominal GDP growth slowed from 4.1% qoq (ar) in Q4 to 3.8% in Q1. And looking at the composition of quarterly growth, domestic demand slowed sharply (both household consumption - especially in durables goods - and investment in equipment decelerated). Due to very accommodative monetary and financial conditions, we however revised slightly higher our GDP growth forecast for 2020 from 1.8% to 2.0%. We continue to expect growth to decelerate to its potential in 2020 but at a very gradual pace. Corporate profits will remain under pressure, especially if inflation re-accelerates, which is still possible, given that the economy is operating at close to full employment. We do believe that a recession is highly unlikely in 2019 and in 2020 (as 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, domestic demand under pressure, mixed signals from sentiment and hard data). And we must keep in mind that sub-par growth may trigger a profit recession.
  • Eurozone: 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 believe the level of pessimism is excessive and we stick to the view that domestic demand (in particular consumption) will remain supported by the 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. The May 2019 European elections coupled with 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, populist/anti-system parties will gain ground and 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 at the earliest.
  • United Kingdom: The political situation in the UK is highly unstable. The UK government and the EU have agreed on a new deadline (31 Oct) to fix the problem; all options remain on the table. Everything will ultimately depend on the scenario (see the ‘risk factors’ section for scenarios with indicative probabilities). We continue to believe that the probability of a deal is far above the probability of a no-deal. And with a deal, we would expect a rebound in domestic demand with diminishing uncertainty.
  • China: China’s headline data for March and Q1 broadly surprised on the upside, even more than we had expected. When coupled with recent credit and trade data, we do see enough positive signs to revise our forecasts. We revised up our GDP growth forecast from 6.2% to 6.3% (2019), and from 6.1% to 6.2% (2020). We also revised up slightly our inflation forecasts. In other words, we are close to bottom for both real and nominal GDP growth. Policymakers are not likely to ease further, but they are still working on targeted measures to support SMEs and consumers, which are slower to take effects and supposed to be healthier. That said, all measures are still on the table if and when necessary. Indeed the country’s economic model remains fragile: the excess of credit is visible, and non-financial corporate debt has surged since the GFC.
  • Inflation: Core inflation remains low 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. In theory, an “inflationary surprise” remains possible with the pick-up in wages (in the US and the Eurozone) but it is striking to see that inflation slowed in the US in Q1 19 just as real GDP growth accelerated! In the Eurozone, in a low inflation environment, we consider that corporates have almost no pricing power (i.e., corporate margins more at risk than final sale prices). In emerging economies, inflation had recently slowed more than expected, but this was mainly due to the decline in energy and food prices. The recent rebound in oil prices should not last long. At the end of the day, with low inflation and subdued growth, most central banks have turned more dovish since the start of the year.
  • Oil prices: Rollercoaster has continued after OPEC cut production by 3 million barrels a day, the most significant cut since the GFC. Oil is still mainly driven by supply factors. On the one hand, OPEC and supply disruption concerns in Venezuela, Iran and lately Libya support oil prices in the short run, on the other hand, the expected rise in US shale oil production should weigh on oil prices. The surprise announcement by the US administration that the US is ending waivers allowing several countries to keep importing Iranian crude has pushed up oil prices to $75 (Brent). True, the objective of the US administration is to drive Iran’s oil exports down from the current level of around 1.5 million barrels a day to close to zero and the waivers expire on 2 May. However, the White House also announced a close coordination with Saudi Arabia and the United Arab Emirates to avoid market disruption (they have the means to compensate for the fall in Iranian exports). In addition, OECD oil inventories (end of February 2019) were at 2.9 million barrels, which is above the five-year average. All in all, we are thus sticking to our range target of $60-70 (Brent). Oil prices may remain however volatile.
  • 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 and 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: The ECB may ease further if growth slows further. A twotiered 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. 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 pronounced soft patch. 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.









Normalisation progresses

  • As the fiscal boost fades, key drivers of domestic demand are slowing progressively and getting closer to long-term trends gradually, as monetary policy and financial conditions smooth and accompany this normalisation.
  • US consumers remain upbeat in general. Still-dynamic labour demand and wage growth, coupled with contained inflationary pressures, support resiliency in personal consumption, which is expected to be the main driver of domestic demand.
  • Business confidence has moderated appreciably compared to last year among small and larger businesses, and this reflects a moderation in capex intentions and investments, which anyhow remain in line with our outlook.
  • Moderate domestic and external inflationary pressures are keeping both core and headline CPI in check and somewhat subdued, composing a benign inflation outlook. The Federal Reserve is not expected to deliver further rate hikes this year, will end QT, and will remain alert to any changes in financial conditions, economic outlook and inflation dynamics
  •  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 (in prices and orders) and indirectly (in 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 during the rest of 2019.
  • The risk of a no-deal Brexit has become less imminent, but there is still the threat of US trade measures against Europe. Moreover, there are still some considerable political uncertainties, particularly the upcoming European elections and the situation in Italy.
  • Stronger political protest movements
  • 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 Brexit extension from the European Union (till 31 October), but the domestic political situation could be volatile in the coming months. The UK’s participation in European elections could generate tensions, and a change of government, new elections or the holding of a new referendum are all possible scenarios.
  • 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





Out of the woods, but still on a bumpy road

  • Global economic stagnancy has crippled manufacturers, with exports marking a y/y fall for four months. The BoJ corporate survey points to decent capital spending plans for 2019. In fact, sluggish shipments are undermining investment. Machinery orders showed only a meagre gain in February after three months of contraction.
  • However, non-manufacturers held up well on urban redevelopment, job placement and the coming 5G Telecom standard. Despite the weak export snapshot, shipments are likely to gather strength as the Chinese economy rebounds solidly.
  • On the consumer front, settled pay raises are slightly higher than last year. Nonetheless, a 2% increase in disposable income is being partly offset by a higher savings rate, reflecting households’ apprehension over corporate earnings and the upcoming VAT tax hike. They are also being discouraged by higher consumer staple prices.
  • Further rise in oil price could hamper corporate and consumer activities
  • Companies may reduce / postpone business investment on a slow recovery in corporate earnings


  • Economic activity recovered some strength after a poor performance ahead of the Chinese New Year. With policy gradually taking effect, growth seems to be near bottom. Credit growth is bottoming out, while fiscal spending has been accelerating.
  • Already, local orders are recovering, as PMI data implied. The latest data also suggested that the auto and smartphone sectors, which were major drags in H2 2018, are past the worst time.
  • The property sector is holding up better than expected and the slowdown ahead could be manageable, with further relaxation of Hukou and policy easing at a local level.
  • Meanwhile, exports in the region have avoided another sharp slowdown for now, after a bad Q4.
  • The RMB is seeing slight upward pressures, helped by a resilient growth outlook and a dovish Fed.
  • US/China trade negotiations showed further positive progress, with possible results in the next few weeks.
  • 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)

  • Growth dynamics continued to be very weak, mainly in the first two months of the year. On the exports side, figures have been less negative since March (in South Korea, India and Indonesia).
  • The region’s inflation figures remained very benign. Oil and food prices pushed inflation to levels lower than expected. In India, inflation remains very benign (2.9% YoY), but March data showed some inversion towards higher food prices.
  • 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 a further 25bps.
  • While waiting for final elections results in Thailand (announced after the 9th of May), the region is holding new electoral campaigns (India just started and Indonesia).
  • Exports dynamics weakness eased in March
  • Inflation still very benign. India inflation increased in food prices.
  • Central banks in the region in wait-and-see mode. India cut rates again.
  • Election outcome in Thailand not final yet. India and Indonesia holding elections.


  • Mexico and Brazil continue to experience two soft patches in terms of economic growth. However, differently from each other. Mexico is expected to decelerate in 2019 versus 2018 while Brazil is expected to slightly accelerate.
  • On the inflation front, the overall environment remains benign. In March, Mexican inflation went back up to 4% from the 3.9% previously published (Banxico target range is 2%-4%). In Brazil, inflation jumped to 4.6% YoY from 3.9%.
  • The region’s main central banks left their monetary policy rates unchanged. We see Banxico starting the easing process if the domestic policy uncertainty reduces.
  • 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 expect Banxico to ease if there is less policy uncertainty
  • The very bold pension reform announced in Brazil is at risk of delay

EMEA (Europe Middle East & Africa)

Russia: Real GDP growth was 2,3% in 2018 and should be slightly lower in 2019. However, 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 has kept its key rates on hold, but we expect a rate cut in Q4.


South Africa: exit of recession but no miracle

  • This month Moody’s decided not to downgrade the Sovereign note which gives some respite to South Africa at least until November. However, due to the weakness of high frequency data and the slowdown of global growth, we have downgraded our forecast for this year (2019) to 1.4% yoy from 1.7% previously.
  • Despite a weak economic and subdued inflation environment and a dovish Fed, we expect the SARB to remain cautious and to keep a neutral stance at least for the first half of the year.


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

  • High Frequency Data released so far for Q1 2019 are still very weak. However, some improvements have materialised in manufacturing PMI, industrial production, retail sales etc. The worst could be behind us. We forecast real GDP growth to be -1.5% in 2019 and +1.5% in 2020.
  • The CBRT is still under pressure, with CPI inflation set to remain high and pressures on the currency to continue in an unfavourable political environment.
  • Drop in oil prices, stepped-up US sanctions and further geopolitical tensions





  • Increased risk aversion, risk of sovereign rating downgrading, rising social demands in the run-up to elections and risk of fiscal slippage


  •  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 - May 2019
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