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Risk factors, Macroeconomic context and forecasts - July 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



July 2019



Juillet 2019



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

Risk Factors-G1
Risk Factors-G2
Risk Factors-G3
Risk Factors-G4




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


Central scenario (65% probability): resilient domestic demand and services despite the uncertainty adversely affecting trade

  • Slower global growth: after rebounding in Q1, growth slowed significantly in Q2 in the United States and Europe. Industrial surveys show that the global manufacturing sector is in recession. However, domestic demand remains resilient due primarily to household consumption which continues to be buoyed by the labour market. In these conditions, the services sector has proved resilient.
  • Global trade is under pressure, but its importance must not be overestimated: global trade has plummeted over the last 18 months. Protectionist rhetoric has increased the level of uncertainty and caused investments to plunge in numerous trade-sensitive countries. Trade is expected to remain under pressure in H2 and grow at a lower pace than global GDP. That said, we believe that domestic demand’s resilience is underestimated. While global trade has effectively made a strong contribution to global growth over the last few decades, this is increasingly less so, with global growth being driven primarily by domestic demand. And the services sector is increasingly less correlated to industry, which can be attributed to the relative importance of consumption in relation to investments and trade since the 2008 crisis.
  • United States: gradual return to its potential. The US economy has been boosted by a very accommodative fiscal policy, whose impact is expected to gradually diminish in H2. Real GDP growth significantly exceeded expectations in Q1 2019 (3.1% quarter-on-quarter on an annualised basis after 2.2% in Q4 2018) but growth slowed sharply in Q2. However, given the very accommodative monetary and financial conditions, we believe that in the absence of a major shock affecting these conditions or significant change in corporate and consumer confidence, the slowdown should remain contained. Investment looks set to slow. However, we think it unlikely that there will be a recession in 2019 or 2020, as household consumption is expected to continue to benefit from the increase in disposable income. Nevertheless, if trade and geopolitical tensions persist, doubts concerning the extension of the current cycle could intensify over the next few quarters (less support from fiscal policy, domestic demand under pressure with contagion from industry to the services sector). Moreover, it is important to bear in mind that below normal growth could trigger a contraction in profits.
  • Eurozone: growth rebounded by 0.4% quarter-on-quarter in Q1, which was a relief after a very weak H2 2018. In Germany, the main economic power in the eurozone, growth also came out at 0.4% after two quarters of virtual recession. The high level of German consumer spending demonstrated that the repercussions of the weaknesses in the manufacturing sector on the economy as a whole had, hitherto, remained limited. However, there was a fairly significant deterioration in the eurozone's Q2 data, particularly with regard to manufacturing indicators. The services sector continues to expand, albeit at a moderate pace and the unemployment rate continues to decline. In terms of risk, the eurozone economy remains exposed to trade tensions. Despite the deferment of increased US customs duties on European cars, Donald Trump having postponed his decision to mid-August, European companies may nevertheless be affected by China-US tensions via the global value chains. Brexit has also returned to centre stage since, with the arrival of a new Prime Minister, the probability of the United Kingdom withdrawing from the EU with no deal has increased. Finally, with regard to domestic policy, the result of the European elections was a relief since anti-system parties did not obtain more votes than the polls anticipated, despite making progress. However, confrontation could resume between the anti-system coalition in power in Italy (the Northern League feeling strengthened by its gains in the elections) and the European authorities over the 2020 Italian budget issue. In Germany, following the poor performance in the European elections of the two coalition parties in power, the risk of rupture has also slightly increased.
  • United Kingdom: political visibility in the United Kingdom is very limited. Boris Johnson will probably succeed Theresa May and adopt a tougher approach on Brexit, increasing the risk of the country withdrawing with no deal. However, given that Parliament remains firmly opposed to a no deal, a number of Brexit scenarios remain possible. There are likely to be heightened tensions between the UK government and the EU with the approach of the deadline (31 October). A no deal withdrawal from the EU remains the default option if the two parties fail to reach an agreement. Therefore, uncertainty will continue to adversely affect the economy over the coming months.
  • China: the authorities have multiplied monetary and fiscal stimulus measures over the last year, which has helped cushion the shock related to the slowdown in global trade. Negotiations between China and the United States will resume following the G20 summit in Osaka. There is some good news (absence of a deadline, suspension of the prohibition on US companies continuing to provide Huawei). The pressure on global value chains should therefore subside, particularly in the technology sector. However, tensions look set to return to centre stage sooner or later with regard to strategic issues (intellectual property rights, technology transfer), on which no progress has been made. We cannot rule out renewed tensions between the United States and China. Therefore, the Chinese authorities cannot let down their guard.
  • Inflation: underlying inflation remains low in the advanced economies. The slowdown in inflation over recent years is primarily structural, since it is tied to supply factors, while the cyclical component of inflation has weakened (with the flattening of the Phillips curve). Underlying inflation is only expected to accelerate slightly in the advanced economies. In theory, an “inflationary surprise” remains possible with the pick-up in wages (in the Unites States and eurozone) but it is striking to see that inflation has slowed in the United States, whereas real GDP growth has accelerated! In the eurozone, against a backdrop of low inflation, we believe that companies have virtually no power to fix prices (margins under pressure). Ultimately, in view of low inflation and the increase in downside risks, the majority of central banks have done a U-turn in terms of communication, since the beginning of the year.
  • Oil price: fears of a global slowdown and the increase in US production are exerting downward pressure on oil prices which is creating concern among Middle Eastern countries. In response, OPEC countries and 10 other countries including Russia signed a cooperation agreement at the beginning of July, which de facto creates enlarged OPEC. All these countries (OPEC+) – which account for 50% of global production (vs. 30% for OPEC) - have renewed (for nine months) their agreement of last December aimed at reducing their cumulative supply by 1.2 million barrels/day in relation to their production in October 2018. Ultimately, we believe that supply pressures will continue to drive prices upwards, whereas fears concerning the trend in global demand should keep them under pressure. Therefore, all things considered, we maintain our target of $60-70/ barrel (Brent).
  • Central banks durably accommodative: the Fed is in “wait-and-see” mode. We expect a preventive cut in its rates of 25bp in 2019 (as an “insurance policy”), but barely more in the case of our central scenario in which consumption proves resilient. We consider market expectations (decline of 100bp in 12 months) to be excessive unless, naturally, downside risks were to materialise. In terms of the ECB, Mario Draghi clearly opened the door at Sintra to a cut in its rates and/or a securities purchase programme (QE) if the situation does not improve. We do not expect a cut in the deposit rate (unless the Fed aggressively lowers its rates and/or the euro appreciates significantly above $1.15). However, we expect the announcement of a new corporate bond purchase programme in September. A two-tier system is seriously being considered for deposit rates, in order to reduce the charge on banks that have substantial surplus reserves (Germany).

Downside risk scenario (30% probability): marked economic slowdown due to the trade conflict, geopolitical crisis or sudden revaluation of risk premiums

  • The G20 truce is not lasting: new escalation in trade tensions between the United States and China, or between the United States and Europe.
  • Series of uncertainty shocks (global trade, Brexit, Italy) that could cause global demand to plummet.


  • All other things being equal, a trade war would lead to global trade plunging, triggering a synchronised and durable slowdown in growth and, in the short term, inflation. That said, a global trade war would rapidly become deflationary by creating a shock on global demand. Counter-cyclical fiscal and monetary policies would be rapidly implemented.
  • Sudden revaluation of risk on bond markets and decline in market liquidity. Fears of recession in the United States.

Upside risk scenario (5% probability): recovery in global growth  in global growth in 2020

Donald Trump does a U-turn, reducing the obstacles to trade. On the domestic front, the subject of the increase in infrastructure spending could return to the forefront and help extend the cycle in the United States.

  • Acceleration driven by corporate investment and the recovery in global growth. The United States’ procyclical fiscal policy leading to a stronger than expected acceleration in domestic demand. Acceleration of growth in Europe after a marked decline. Recovery of growth in China due to a stimulating policy mix.
  • Belated reaction by central banks which, initially, are likely to maintain accommodative monetary conditions


  • An acceleration in global growth that would increase inflation expectations, obliging central banks to consider normalising their monetary policy more quickly.
  • Rise in real key interest rates, particularly in the United States.










The Fed shifts to a risk management approach in order to engineer a soft landing

  • Key drivers of domestic demand are decelerating progressively, especially on the investment side, while fundamentals remain more supportive for the US consumer; we expect monetary policy to smooth financial conditions and accompany this normalisation.
  • Labour market and wage growth, albeit starting to convey more mixed data, coupled with contained inflationary pressures, are supporting resilience in personal consumption; expectations also remain broadly upbeat, while retail sales are normalising around their longer term trends.
  • Business confidence has moderated appreciably compared to last year, and this is translating into a moderation in capex intentions and investments, which are expected to slow going forward.
  • Moderate domestic and external inflationary pressures are keeping both core and headline CPI in check, although the Federal Reserve may start being concerned by the persistence of low inflation and the risk of a downward shift in inflation expectations, for the effectiveness of its monetary policy transmission. The central bank conveyed a dovish message at its June meeting, anticipating possible cuts in response to heightened risks to the outlook from trade issues. We are now pencilling in three rate cuts in the next 12 months, linked to the Fed’s “risk management approach”, rather than to increased recessionary risks. A soft landing remains the target.
  • Tariffs risks may negatively
  • impact economic performance, both directly (in prices and orders) and indirectly (in confidence). The longer the list of goods 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) and tariffs, could represent an upside risk to oil prices and to our inflation outlook





Moderate growth expected. Risks are considerable

  • After the rebound in Q1 growth (+0.4%) Q2 indicators are pointing to a slowdown. Activity remains robust in services but the manufacturing sector is sluggish. Things are returning to normal in the automotive sector after the shocks of 2018, but rising trade tensions are dragging down confidence and investment.S
  • A no-deal Brexit in October would have an economic cost to the euro zone (albeit less so than for the UK itself). Tense fiscal negotiations are expected between Italy and the European Commission.
  • Trade war and threat of US tariffs on the European automotive industry
  • A no-deal Brexit
  • Political tensions in Italy



The possibility of a no-deal Brexit cannot be ruled out.

  • After the rebound in growth in Q1 (+0.5%, driven mainly by precautionary spending), the economy is likely to slow down, as the risk of a no-deal Brexit and trade tensions weigh on confidence.
  • Boris Johnson and Jeremy Hunt, the two remain candidates in the race to replace Theresa May as prime minister, say they would be willing to accept a no-deal Brexit if the EU refuses to make new concessions. Parliament, however, is opposed to this, which points to a very tense political situation in autumn 2019.
  • A non-deal Brexit
  • The current account deficit remains very high





Get there, but hurdles remain

  • The Ministry of Economy and Industry upgraded its assessment of production to “stabilization” from “weakening”, due to modest progress in inventory adjustments. Machinery orders rose in April for the third straight month, suggesting that spending on equipment will be sanguine in the next few quarters. An official corporate survey shows that companies plan to boost capital spending by 9% this year.
  • However, the corporate sector is vulnerable to escalation in the US-Sino trade conflicts. Export volume plunged in May to its lowest level in three years as US President Trump hinted at imposing higher levies on a wider range of Chinese products.
  • Wage growth has levelled off, reflecting a somewhat eased labour market. As a consequence, households have started saving more and consuming less, and retail sales were therefore slightly less strong.
  • Supply chain disruption on the back of the intensified trade dispute between the US and China
  • Global economic deceleration dampens companies’ capital expenditure motivations
  • A consumption tax hike in October 2019 could exacerbate the economic downturn


  • The surprising turnaround in US/China negotiations and tariff increases on $200bn of Chinese goods have been adding new downward pressures to China’s economy.
  • A new truce was achieved at the G20 in Osaka in late June, providing that no further tariffs would be imposed on the remaining US imports from China and talks between the two countries would resume. In addition, a partial relaxation on the Huawei ban was announced. This is an overall positive outcome for the time being.
  • Exports in May were hit again (0.5% YoY), but less so than in Q4.
  • 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 the US/China relationship
  • Policy mistakes in managing near-term risks and the structural transition
  • Geopolitical noise regarding North Korea


(ex JP & CH)

  • In Q2 2019, the region (with regard to emerging countries) experienced the weakest macro momentum in terms of spillover from the external demand shock to domestic demand. In relative terms, the strongest deterioration was in Malaysia, Thailand and South Korea.
  • The region’s inflation figures have remained very benign. Food prices have been pushing up the cost of living quite broadly on the back of agro prices, which have increased lately. Having said that, CB targets are not at risk for the time being.
  • In June, we saw central banks in the region in wait-and-see mode even though we keep expecting more easing to come. BoT and BoK showed more dovishness in their rhetoric.
  • On 27 June, two months after the national elections, the Constitutional Court in Jakarta declared Jokowi as the Indonesia president, dismissing Prabowo Subianto’s appeal.
  • Still weak macro momentum in the region
  • Inflation still very benign. Food prices have been driving inflation up
  • Central banks in the region in a wait-and-see mode. More easing to come
  • Jokowi officially confirmed as President of Indonesia for a second term



  • Based on second-quarter readings, we do see some persistent weakness in the two main countries in the region: Mexico and Brazil. These poor macroeconomic figures relate more to domestic than external demand.
  • On the inflation front, the overall environment remains benign. Mexican inflation has resumed converging towards the target, with its latest figure at 4.3% YoY, down from 4.4% YoY. Argentina inflation disappointed, at 57% YoY in May.
  • The region’s main central banks left their monetary policy rates unchanged. On 8 June, Chile’s central bank cut its Policy Rate by 50bps, from 3.0% to 2.5%.
  • During the month of June, the pension reform discussion in Brazil gathered some positive momentum. Votes are expected soon from the Special Committee and the Lower House (in a plenary session).
  • Moody’s and Fitch downgraded Mexico sovereign and Pemex.
  • Economic conditions continued to weaken in the second quarter of the year
  • Inflation is benign overall. Argentine inflation in May disappointed on the high side
  • Chile’s central bank cut its Policy Rate by 50bps.
  • Mexican sovereign rating and Pemex downgraded


EMEA (Europe Middle East & Africa)

Russia: Real GDP growth was 2,2% in 2018 and should be close to 1.5% 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 is among the few emerging market sovereigns with “twin surpluses” in 2019, while accumulating assets in the National Wealth Fund.
  • As expected, the CBR cut its policy rate in June by 25bps. We expect more cuts given decelerating inflation.


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


Risk Factors-G5
BOROWSKI Didier , Head of Global Views
ITHURBIDE Philippe , Senior Economic Advisor
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Risk factors, Macroeconomic context and forecasts - July 2019
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