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Risk factors, Macroeconomic context and forecasts - September 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


September 2019



September 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 (60% probability): resilient domestic demand and services despite the uncertainty adversely affecting trade

  • Slower global growth: there was protracted economic weakness worldwide this summer with very few exceptions. Industrial surveys and data continue to 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 and low inflation. Still, services have proved more resilient than manufacturing.
  • Global trade is still very much under pressure: global trade has plummeted over the last 18 months. Protectionist rhetoric and measures have increased again recently: the US imposed new tariffs on 1 September, and China retaliated immediately. The level of uncertainty on a trade deal is higher, although talks should resume by early October. Investments have plunged in numerous trade-sensitive countries. Trade is expected to remain under pressure for the time being, and it will grow at a slower pace than global GDP. That said, we believe that the resilience of domestic demand is being underestimated. While global trade has indeed made a strong contribution to global growth over the last few decades, this is increasingly less so, as global growth is now being driven primarily by domestic demand. And the services sector is less and 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 potential, with slightly higher downside risks. The US economy, boosted by very accommodative fiscal policy in 2018, began decelerating in H2 2018 and continued to do so in the following quarters. After peaking at 3.2% YoY in Q2 2018, GDP growth gradually decelerated and stood at 2.3% YoY in Q2 2019, recently revised data show. Fixed investments have been trending down markedly since the second half of 2019, while personal consumption expenditures have remained resilient overall. The protracted weakness in global trade and manufacturing, coupled with uncertainty over the implementation of tariffs, may have played a role in discouraging investments, partially offsetting the benefits of fiscal policy. Corporate and consumer confidence indeed softened recently, but barring a major shock the slowdown should remain contained. At this stage, while probabilities of recession have risen, we don’t think a recession is likely in 2019 or 2020, as household consumption fundamentals remain in general supportive of a gradual slowdown and not set for a sudden stop. Yet, risks remain tilted to the downside: if trade and geopolitical tensions persist, doubts on the extension of the current cycle could intensify over the next few quarters (less support from fiscal policy, domestic demand under pressure with a contagion from manufacturing to services). Moreover, it is important to bear in mind that belownormal growth and tighter financial conditions could trigger a contraction in profits.
  • Eurozone:  the Eurozone economy expanded by 1.2% YoY (0.2% QoQ), denoting softening momentum as the manufacturing sector continues to weaken, and uncertainty remains high on the trade and political fronts, as a result of the new tariffs recently introduced and political developments in key members or partners (e.g., Italy and UK). The Eurozone economy’s declining trend is the result of different growth patterns from one country to another. Germany and Italy weakened further in Q2, with the former crippled by the sharp decline in its manufacturing sector, bringing the country towards the edge of a technical recession. This trend was partially offset by resilience in other important economies like Spain, France, Portugal and other minor economies whose fundamentals remain overall on track. The negative spillover from manufacturing to the domestic economy appears overall limited, as consumption on average confirmed its strength and the labour market strengthened further, albeit at a slower pace. Risks remain tilted to the downside: uncertainties are likely to persist in the coming months as potential further escalations in the trade war are possible, Brexit remains unresolved, and Germany’s willingness to engage fiscal stimulus did not seem to be considered as urgent as the new Italian government’s proving its staying power. The upcoming ECB meeting will provide important lessons on the potential impact that monetary policy could have in helping the Eurozone economy withstand a challenging environment.
  • United Kingdom: Snap elections in late 2019, after another extension of the Brexit deadline, now seem the most likely scenario (although still not a certainty, as more surprises could come in September). However, the outcome of these elections (which may be considered a quasi-referendum on a no-deal Brexit), is very uncertain. Should the Tories win a clean mandate, a no-deal Brexit could become the most likely scenario, even though: 1/concessions from the EU making room for a deal cannot be completely ruled out; and 2/a no-deal could be accompanied by mitigation measures (for instance, a limited transition period or sectoral agreements). On the other hand, should the Tories fail to obtain a majority, many possibilities would open up, such as a new referendum, a new negotiation leading to a softer Brexit (e.g., ‘Norway+') or even a unilateral repeal of Art. 50. However, unless Labour obtains an outright majority, forming a government coalition of “Bremainer” Parties will be difficult as they are opposed on most other issues. The risk of a hung Parliament’s only prolonging the uncertainty cannot be completely ruled out.
  • China: On the back of disappointing economic figures and a re-escalation of trade tensions (a new wave of tariffs and retaliation), the authorities have recently stepped up in their fiscal and monetary support to the economy to cushion the shock from the slowdown in global trade. After an initial delay, talks between China and the United States will resume in early October. Simultaneously in August, the temporary licenses for the US corporate to operate with Huawei were extended without a clearer and more comprehensive guideline. The pressure on global value chains should remain, particularly in the technology sector. Tensions with regard to these strategic issues (intellectual property rights and technology transfer) are not showing any sign of progress. We cannot rule out new tensions between the United States and China in a form different from tariffs. Therefore, the Chinese authorities cannot let down their guard.
  • Inflation: underlying inflation remains low in the advanced economies. The slowdown in inflation in recent years has a structural component, related 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 pickup in wages (in the Unites States and the 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 pricing power (margins under pressure). Ultimately, in view of low inflation and the increase in downside risks, most central banks have made a U-turn in terms of communication since the beginning of the year. In an adverse, recessionary scenario (not our central scenario), upside pressure on wages would not last long anyway.
  • 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 in early July, which de facto creates an 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 on global demand trends should keep them under pressure (indeed, oil faltered in August on downward revisions in demand, while there was a surprise jump in OPEC production). Therefore, all things considered, we reiterate our target of $60-70/barrel (Brent).
  • Central banks accommodative for some time to come: the Fed is in a dovish stance. We expect further preventive cuts in its rates of 50bp in 2019 (as an “insurance policy”). Another 25bps in 2020 is coherent under our central scenario in which consumption proves resilient. We consider market expectations (125bps in cuts over a period of 12 months) to be excessive unless, naturally, downside risks were to materialise. In terms of the ECB, Mario Draghi clearly opened the door to an easing policy with regard to policy rates and/or a securities purchase (QE) programme. We do expect a couple of cuts in the deposit rate by 2019 and a decent QE program announced in September with the same kind of securities in the radar (sovereign and corporate bonds). A two-tier system is seriously being considered for deposit rates, in order to lighten the burden on banks that have substantial surplus reserves (Germany).



DOWNSIDE RISK SCENARIO (30%): full blow contagion to domestic demand

Two «families» of risks with different conclusions on monetary policies and scenarios 

1. Trade-related risks: global trade takes longer to «normalise», additional escalation on trade war and full blown contagion to consumption: 

  • Growth falls further, profit recession / the global recession comes back to the forefront
  • Central Banks: even more accommodative monetary policies than what is currently priced in by markets
  • Fiscal policies: would gradually take over from monetary policy to support growth

2. Market-related risks: sudden repricing of risk premia with a large impact on financial conditions exacerbated by low liquidity (various triggers: wars (e.g. Middle East), crisis in HK, credit event (HY) etc.)

  • The policy mix (fiscal & monetary) would become much more proactive (i.e. preemptive) in that case. While it would likely come somewhat lately with trade tensions alone.

UPSIDE RISK SCENARIO (10%): modest reacceleration of global growth in 2020

We increase the probability of the upside risk scenario (at the expense of the central scenario, of which the probability was lowered to 60%)

  • Actually, we have substantially revised down our central scenario, by embedding part of the downside risk scenario in the central scenario. By definition, this means that it’s now much easier to be “positively surprised”. For instance, on the political level the most recent news flow is more positive (pro European coalition in Italy, possible trade de-escalation). 
  • Subsequently, going forward, we may see at the same time lower (political) risks and a more expansionist policy mix worldwide, which would pave the way for rebound in confidence and a quicker normalisation of global trade. 
  • A modest reacceleration of growth (slightly above potential) - vs. subpar growth in the base case – is a distinct possibility..










US growth gradually decelerates amid trade war concerns and geopolitical uncertainty 

  • The drivers of domestic demand are slowing, with investment spending worse affected than private consumption. Business climate surveys are showing a downturn in manufacturing and services, although small business confidence was slightly higher. 
  • Consumer confidence rose slightly, but is still showing expectations of a downturn. However, the labour market continues to provide good news for consumer spending – while wages are rising slightly more slowly than expected, the labour force participation rate is rising and lower inflation is boosting real earnings. On the investment front, spending plans are tending to decline, but the latest capital goods orders surpassed expectations. Inflation is low (1.8% overall, 2.2% for core inflation) but it remains close to the Federal Reserve’s target. 
  • In foreign trade, after China announced reprisals, the US announced a further increase in customs duties on imports from China. 
  • The Federal Reserve has maintained its expansionary stance, emphasising the need to help the economy towards a soft landing and to offset the negative effects of trade tensions and geopolitical uncertainties.
  • 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





2020 forecasts downgraded due to the gloomy outlook for world trade

  • Growth was disappointing in Q2 (+0.2%) and indicators for the start of Q3 are very weak. Activity remains strong in the services sector but the manufacturing sector is struggling, especially in Germany. Newsflow over the summer (the heightening trade war between the US and China and the growing risk of a hard Brexit) dragged down confidence.
  • We have lowered our GDP growth forecast for 2020 to 1.0% (from 1.2% previously).
  • Trade war and the threat of US tariffs on the European automotive sector
  • No-deal Brexit



Increased risk of no-deal Brexit

  • After the rebound in growth in Q1 (+0.5%, largely due to precautionary spending), the economy contracted in Q2 (-0.2%), although the labour market remains strong.
  • Uncertainty about Brexit is extremely high. Boris Johnson is determined that Brexit will happen on 31 October, even without a withdrawal agreement. However, while the EU seems unwilling to make any additional concessions, the UK parliament is opposed to a no-deal Brexit.
  • A non-deal Brexit





Exhilaration is long gone, and the spectre of austerity haunts in coming quarters

  • GDP expanded by an annualized 1.8% in Q2, following a sprint of 2.8% in the previous quarter. The escalating US-China trade spat did not hamper the economy, as consumer spending gained, driven by the unprecedented 10-day consecutive holidays on the accession of new Emperor, and capex gobbled up by construction and refurbishment.
  • However, consumer morale fell to a five-year low in July. Somehow, a longer rainy season and the subsequent sudden change in temperature spoiled consumers’ appetite. More importantly, elusive real income growth compounded concerns about the consumption tax hike in October, prompting savings rather than early-purchases ahead of the heavier levy.
  • Monthly machinery orders started weakening, although every survey on capex plans continues to radiate unbridled optimism. More companies are expected to suspend or downsize business investment, as the US-China trade squabble lingers.
  • Supply chain disruption on the back of the US-China and Japan-Korea trade dispute 
  • Companies accelerate suspension of capital investment as global economy weakens farther
  • A consumption tax hike in October 2019 could exacerbate the economic downturn


  • In a re-escalation of trade tensions, China retaliated against the US tariffs increase, with 5%-10% hike on some of the $75bn of targeted goods (1717 items, not clear at this point what their value is), starting on 1 September 2019.
  • Chinese macroeconomic data are showing a certain degree of deceleration that is quite broad-based, including in the manufacturing sector, consumer goods and property. The latest export data have shown some resilience, due to the front-loading of incoming tariffs.
  • The policy mix continues to support the economy in a limited way, both monetarily and fiscally. More stimulus is expected (RRR cuts and increases in the quota of local government bonds).
  • In August, a move was made towards greater liberalization of interest rates, including the loan prime rate (LPR). The path to full liberalization is still far off, while China has gradually eased its monetary policy.
  • Still some uncertainty in the US/China relationship
  • China’s economy is decelerating more than expected
  • Policy mix only mildly supportive


(ex JP & CH)

  • Economic conditions in the region keep deteriorating, driven by a further decline in external demand and soft domestic demand. The outlook for Korean exports is dark, due to a re-escalation in trade tensions. India’s growth outlook, broadly based, is weaker than expected.
  • The region’s inflation figures have remained very benign. Indonesian inflation picked up on food prices mainly, while Thai inflation is experiencing new minimum levels.
  • In August, many central banks in the region moved towards a more accommodative monetary policy, including Indonesia, the Philippines and Thailand, which all cut their policy rates by 25bps, while India cut its by 35bps.
  • Several countries are trying to stimulate their economies through fiscal leverage. The Philippines, Thailand and India recently announced different fiscal packages/measures. On the opposite side, in its 2020 budget announcement, Indonesia is pursuing its virtuous fiscal consolidation path.
  • Still weak macro momentum in the region. India’s growth is disappointing
  • Inflation still very benign. Food prices have been driving inflation up
  • Central banks in the region are more accommodative
  • Fiscal expansion has started to join monetary policy in the policy mix to support the economic cycle



  • The growth outlook has deteriorated significantly in Mexico. It is in recession and the GDP forecast for 2019 has been more than halved, from 1.3% YoY to 0.5% YoY. Brazilian growth has weakened more moderately.
  • On the inflation front, the overall environment remains benign. Mexican inflation has resumed converging towards the target, with its latest figure within the band at 3.8% YoY, down from 4% YoY. Argentina inflation is still above 50%, at 54% YoY in July and it will not converge soon.
  • The main central banks have recently started to ease their monetary policies, including Brazil by 50bps, and Mexico, Peru, the Dominican Republic and Paraguay by 25bps.
  • In a surprising result in the PASO elections in Argentina, the FernandezFernandez Peronist couple won by a wide margin over President Macri. Both Fitch and S&P downgraded Argentina’s sovereign ratings: Fitch by three notches from B to CCC, and S&P from B to B- with a negative outlook.
  • Economic conditions continued to weaken; Mexico is in a recession
  • Inflation is benign overall. Argentine inflation in July disappointed on the high side
  • Many central banks in the area adopted an easier monetary policy
  • Argentina on its way to default


EMEA (Europe Middle East & Africa)

Russia: Real GDP growth was 2.2% in 2018 and is expected to slow down to 1.2% in 2019. However, growth is expected to accelerate over the medium term on the back of 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 one of the few emerging market sovereigns with “twin surpluses” in 2019, while accumulating assets in its National Wealth Fund.
  • As expected, the CBR cut its policy rate in July by 25bps. We expect more cuts, given decelerating inflation.


South Africa: exit from recession, but no miracle

  • Recently released Q2 GDP showed more resilience than the market was expecting. We confirm our 2019 GDP forecast of 0.8% YoY, a good result amid the strong deterioration that most of the EM economies are currently experiencing.
  • In an environment of incremental dovishness among developed- and emerging-market central banks, we do expect the SARB to adopt a very mild accommodative stance in 2019.


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

  • The growth report for the second quarter of the year showed only a marginal improvement in the recessionary phase that Turkey is going through. We do confirm our GDP forecasts at -1.8% over 2019.
  • The Central Bank of Turkey cut its policy rates significantly at the end of July, by 425bps. We do expect more easing to come soon in support of very weak economic conditions.


  • Drop in oil prices, stepped-up US sanctions and further geopolitical tensions




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



  • A too rapid easing of the central bank, a cooling of budgetary policy, and a slowdown in Eurozone activity.


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