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Risk factors, Macroeconomic context and forecasts - June 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



June 2019



Juin 2019



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





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


Central scenario (70% 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. They are signs of stabilisation but with risks being increasingly tilted to the downside.
  • Global trade: is under pressure but its importance must not be overestimated: Global trade has fallen over the past 18 months; it started 2018 at around 5% yoy but fell sharply in Q4 2018, zigzag over the last few months and should face challenge again given recent increase of tariff for Chinese imports to US. 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. Re-escalation on trade between China and the US doesn’t bode well such as the one between the US and Mexico and, 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 mid-2020). And in addition, we believe that the resilience of domestic demand is underestimated. True global trade strongly contributed to global growth over the past decades, but that's less and less the case: global growth is primarily driven by domestic demand. Services are increasingly becoming decoupled from industry, which can be explained by the relative strength of consumption vs investment and trade since the global financial crisis.
  • 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 (3.1% 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-up on a year on year basis from 3.0% in Q4 18 to 3.2% in Q1 19. Yet, nominal GDP growth slowed from 5.2% YoY in Q4 to 5.0% in Q1. Looking at the composition of quarterly growth, domestic demand slowed notably (both household consumption - especially in durables goods - and investment in equipment decelerated). Due to very accommodative monetary and financial conditions, we however think that growth should be able to gradually decelerate to its potential in 2020, barring any major shock on financial conditions or major confidence corrections from businesses and consumers. 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 and tariffs may get at least partially passed through. We do believe that a recession is 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) if trade and geo-politic tensions do not ease. And we must keep in mind that sub-par growth may trigger a profit recession.
  • Eurozone: Growth rebounded 0.4% QoQ in Q1, which came as a relief after a very weak H2 2018. Importantly, the figure for Germany, the Eurozone’s economic powerhouse, was also 0.4% after two quarters of quasi-recession. Strong spending by German consumers showed that the spill overs of manufacturing weakness to the overall economy had remained, so far, limited. However, Eurozone data for Q2 was mixed: Manufacturing indicators have stabilised, but some of them continue to show a contraction in activity. Indicators for services continue to show an expansion, although at a moderate pace. The labour market remains generally strong, although some minor cracks are visible in Germany. In terms of risks, the Eurozone economy remains exposed to trade tensions. While there was a reprieve concerning the threat of higher US tariffs on European autos, as D. Trump postponed his decision to mid-August, European corporations can nonetheless be hit by US-China tensions through global value chains. Brexit also came back to the spotlight, after the April lull, as T. May’s resignation seemed to increase again the probability of a UK exit from the EU without a deal. Finally, regarding the domestic political agenda, the European elections’ result were a relief as anti-system parties, while achieving some gains, did not obtain more votes than announced by the polls. Nonetheless, the confrontation could flare up again between the antisystem ruling coalition in Italy (as the Lega Nord may feel bolstered by its gains at the European election) and European authorities over the 2020 Italian budget. In Germany, following the poor showing of the two ruling coalition party at the European election, the risks that it could break up has also slightly increased.
  • United Kingdom: Political visibility in the UK is very limited after PM Theresa May announced she would resign as leader of the Conservative party (and therefore, subsequently, as PM). The Conservative party will elect a new leader over the Summer with a significant probability that she or he, as PM, could have a tougher approach on Brexit, increasing the risk of a no-deal exit from the EU. However, as Parliament remains strongly opposed to a no-deal, and may have the ability to prevent it, many Brexit scenarios remain possible, all the more so that a political gridlock leading to new elections cannot be ruled out.
  • China: The surprising turnaround in US/China negotiations and tariff increases on $200bn Chinese goods are adding new downward pressures to China’s economy. Uncertainty increased in near term following US announcement to restrict Huawei’s purchases from US suppliers. That said, we think the window for US/China to reach a deal is still open, as concrete works have been done with several major issues left to be decided by President Trump and President XI, while both sides are set to feel more pains. The current tariff increase still looks manageable for China, as policymakers are better prepared than last year, and policy supports since H2 last year are taking effects.
  • Inflation: Core inflation remains low in advanced economies. The slowdown in inflation in recent years is primarily structural in nature, as it is tied to supply-side factors, while the cyclical component of inflation has weakened (with a flattening of the Phillips curve). Core inflation is likely to pick up only slightly in advanced economies. In theory, an “inflationary surprise” remains possible with the pick-up in wages (in the US and the Eurozone) but it is striking to see that inflation slowed in the US in Q1 19 just as real GDP growth accelerated! In the Eurozone, in a low inflation environment, we consider that corporates have almost no pricing power (i.e., corporate margins more at risk than final sale prices). At the end of the day, with low inflation and subdued growth, most central banks have turned more dovish since the start of the year.
  • Oil prices: Oil prices have unexpectedly dropped over the past weeks due to the trade war escalation (with the Brent falling close to US$ 60 pb). Economic stabilisation remains supportive but geopolitical tensions can change dramatically the overall picture eroding demand projections in the next 12 months. OPEC and supply disruption concerns in Venezuela, Libya, Iran and recently in all middle East are here to stay. At the end of the day, oil prices will probably continue to move within a wide range, with some volatility. On the one hand, supply-side pressures will continue to push prices up while, on the other hand, fears about the evolution of aggregate demand should keep them under pressure. All in all, we are sticking to our range target of $60-70 (Brent).
  • Most central banks on the dovish side: The Fed is in a “wait and see” mode; we expect neither rate hike nor rate cut in 2019 except in the latest case if downside risks materialise, if financial conditions tighten, or if inflation surprises on the downside. Risks have clearly become asymmetric. 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); the technicalities are expected to be very accommodative: The ECB may ease further if growth slows further, with a new QE. 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 (25% probability): a marked trade-war-driven economic slowdown, a geopolitical crisis or a sudden repricing of risk premiums

  • Rising trade tensions with no compromise between the US and China
  • Risk of further protectionist measures from the US, followed by retaliation from the rest of the world.
  • Repeated uncertainty shocks (global trade, Brexit, Italy) may 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, some inflation. That said, a global trade war would quickly become disinflationary by creating a shock to global demand. Counter cyclical fiscal and monetary policies would be rapidly put in place (but with a lag).
  • An abrupt repricing of risk on fixed income markets and a decline in market liquidity.
  • Recession fears in the US.
  • 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, as monetary policy and financial conditions smooth and accompany this normalisation.
  • Still-dynamic labour demand and wage growth, coupled with contained inflationary pressures, support resiliency in personal consumption, expected to be the main driver of domestic demand. Q1 personal consumption was weaker than expected but may be temporary (government shutdown, Q4 market correction).
  • Business confidence has moderated appreciably compared to last year and this translates into a moderation in capex intentions and investments.
  • Moderate domestic and external inflationary pressures are keeping both core and headline CPI in check, composing a benign inflation outlook until expectations remain stable. The Federal Reserve is expected to remain on hold this year, ending QT, and remaining alert to any changes in financial conditions, economic outlook and inflation dynamics.


  • Tariffs risks may negatively impact economic performance, both directly (in prices and orders) and indirectly (in confidence). The longer the list of good included in tariffs, the higher the impact on U.S. domestic demand
  • Renewed policy uncertainty may hold back new capex plans more than expected
  • Geopolitical risks (Iran, Venezuela) could represent an upside risk to oil prices and our inflation outlook





A gradual improvement expected despite significant risks

  • After a highly disappointing year in 2018, growth rebounded in Q1. However, despite robust domestic demand and a solid job market, industrial indicators remain very poor. We forecast a gradual improvement during the rest of 2019 but with lots of risks.
  • The euro zone is still heavily exposed to international trade tensions, although the direct threat of US customs tariffs on European vehicles is less imminent. After a lull in April, the risk of a no-deal Brexit has also risen.
  • Rise in protest political movements
  • External risks, including the trade war, and a slowdown in the US and China



Lots of uncertainty in the run-up to Brexit

  • Growth rebounded in Q1, but thanks in part to Brexit-related precautionary spending. The UK obtained an extension in the deadline from the EU until 31 October, but Prime Minister Theresa May was unable to reach an agreement with Labour to ratify the EU Withdrawal Agreement. The political situation is still highly volatile, with uncertainty regarding who will take over from May and a greater risk of a hard Brexit.
  • Despite political uncertainties, the job market is still strong, and wages have risen in real terms, driven by the receding in inflation.
  • A non-deal Brexit
  • The current account deficit remains is still very high





Remains precarious

  • Q1 GDP soared by 2.1% qq. However, this was due only to weak imports and inventory accumulation, both of which derive from ephemeral private demand. Both consumer spending and business investment retreated from Q4/18 levels.
  • Industrial production remains lacklustre, with inventories climbing to their highest level in six years. Stalwart exports to the U.S. have not fully offset weak shipments to Asia.
  • Investment in structure is buoyant on the back of urban development and office refurbishment. In contrast, spending on machines remains weak, as a green shoot in the Chinese economy has yet to stimulate manufacturers.
  • Steady wage increases underscore consumption, whereas galloping prices of daily necessities are discouraging households. The transition to a new era under the new emperor should partly encourage consumers.


  • Capital spending plan for this year is subject to reduction
  • Companies may stop, downsize or postpone business investment on anaemic corporate earnings and the escalating US-China trade dispute


  • The surprising turnaround in US/China negotiations and tariff increases on $200bn Chinese goods are adding new downward pressures to China’s economy.
  • Uncertainty increased in near term following the US announcement to restrict Huawei’s purchases from US suppliers, but the window is still open for a trade deal ahead. Keep a close eye on the next steps by US and China in the run-up to the G20 in Japan in late June.
  • Exports are expected to be hit again, but perhaps less so than in Q4, with less distortion.
  • Policymakers look better prepared than last year, with all measures on the table ready to use if and when necessary.
  • Meanwhile, there are signs that policy supports since Q3 are starting to pass through into real economy and are becoming more visible.
  • RMB should be able to avoid large depreciation barring any further major escalations, helped by policy supports and capital control.
  • Uncertainty in US/China relationship
  • Policy mistakes in managing near term risks and the structural transition
  • Geopolitical noise regarding North Korea


(ex JP & CH)

  • Q1 2019 growth figures have been broadly disappointing in the region, with few exceptions (China and Taiwan). Overall, the negative momentum has been confirmed by hard data, with very weak export figures and softening domestic demand, too.
  • The region’s inflation figures have remained very benign. Oil and food prices reverted their contribution from negative to positive, pushing inflation levels up mildly. CB targets are not at risk for the time being.
  • Finally, we saw two central banks in the region (Philippines and Malaysia) cut their policy rates by 25bps on weaker economic conditions and low inflation. More easing is in the pipeline.
  • Three important election outcomes have been officialised, in Thailand, Indonesia and India. In all three cases, the status quo prevailed with the victory of the incumbent president/ coalition. Modi’s victory in India was much stronger than expected.


  • Q1 2019 GDP generally weaker than expected
  • Inflation still very benign. Oil and food prices are driving inflation up
  • Central banks in the region start to move on the easing side
  • Election outcomes in Thailand, Indonesia and India confirm the status-quo


  • Overall, Q1 GDP in the region has shown a broad based weakness in several countries (Mexico, Chile and Colombia to name few). Domestic demand has been impacted by specific temporary factors.
  • On the inflation front, the overall environment remains benign. However, in the region’s main economies inflation went up: in Mexico to 4.4% YoY (above Banxico’s target) and in Argentina to the worrisome level of 55.1% YoY.
  • The region’s main central banks left their monetary policy rates unchanged. The Argentina central bank has made its no-intervention zone to defend the peso more flexible.
  • The approval ratings of the presidents of the two main countries (Brazil and Mexico) are on very different paths. Bolsonaro’s is sliding fast while AMLO’s is holding high. Recently, AMLO announced a halt in tax breaks for many companies. These kinds of decisions will add little to revenues but they’ll work in term of popularity.
  • Overall poor Q1 GDP figures released so far
  • Inflation is benign overall, but higher than wanted in Mexico and Argentina
  • BCRA makes the no-intervention zone more flexible
  • Brazilian President Bolsonaro’s popularity is sliding

EMEA (Europe Middle East & Africa)

Russia: Real GDP growth was 2,2% 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 from recession, but no miracle

  • High-frequency indicators are still very weak, and recent currency pressures due to a weak external environment for emerging countries and a cabinet reshuffle are only making things more complicated. With a null Q1 GDP figure, we have revised our forecast for 2019 from 1.4% yoy down to 0.8% yoy.
  • 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 a recession in 2019

  • Turkey's GDP decreased by 2.7% yoy in Q1-19, slightly less than in the previous quarter (-3% yoy). While private consumption slowed down less than in Q4-18, investment fell again by 13% yoy. As expected, the Government's expenditure increased sharply (+ 7.2% yoy).
  • 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, steppedup 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


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