Perspectives
    Perspectives - 16 April 2018
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    High confidence levels, a global economic upswing, cautious central banks, sustained job creation and companies’ stepped up investments: enough reasons to feel comfortable when assessing the outlook for world economic growth. Yet a feeling of unease has been on the rise in recent weeks. The softening of sentiment indicators confronts us with the question of what happens after the peak. Is the flattening of the yield curve in the US a harbinger of bad weather to come? Should the share price decline of certain tech companies be read with the experience of TMT stocks in 2000 in mind? Will US inflation end up overshooting the Fed’s objective? And last but not least, to what level will the trade disputes escalate?
    The United States is tightening its trade policy and moving increasingly away from the rules of the World Trade Organisation. After applauding President Trump’s tax cuts, the equity markets are less charmed by his protectionist threats. The transnational imbrication of trade means that it is unlikely to contract, but the atmosphere has certainly become more conflictual. For the moment, the US economy continues to boom. With GDP growth forecast at 3% in 2018, the economy is entering its ninth year of expansion. It is also beginning to show a few signs of tensions, which are likely to encourage the Federal Reserve to continue tightening its monetary policy gradually.
    The recovery is expected to continue at a robust pace in 2018. In any case, that is what the most recent confidence surveys indicate. From a more fundamental perspective, the absence of inflationary pressure suggests that the economy still has some unused resources. Persistently robust growth raises questions about the true levels of the output gap and potential growth rate. This double uncertainty explains why patience, persistence and prudence remain the ECB’s watchwords despite strong growth.
    Despite the strong recovery, the newly formed grand coalition agreed on an expansive fiscal policy. Infrastructure investment is stepped up and support to families and pensioners increased. On Europe, the coalition remains in favour of the Growth and Stability Pact. However, in the short-term the macroeconomic effects of the programme are likely to be limited, as the economy is already operating at full capacity. In the long-term, the economy should benefit from the investment in infrastructure. Enterprises might hold back on investing in Germany given the tight labour market, generous pay deals and high corporate taxation.
    In 2017, French growth moved up a gear: it reached 2% in annual average terms, after 1.1% in 2016, and accelerated in the fourth quarter to a pace close to 3% a year. 2018 is expected to be another year of strong growth (2.3%, in annual average terms, according to our forecasts) but with a different quarterly pattern and breakdown. Indeed, we see growth plateauing or decelerating slightly from one quarter to the next. The surveys data available for the first months of the 2018 are sending a similar message of a likely peak in growth in Q1. In terms of its engines, we expect average annual growth to be supported by an acceleration in household consumption and exports which would take over from private investment.
    The recovery has become more self-sustained, benefiting from stronger domestic demand and net exports turning positive again. In 2017, real GDP rose by 1.5%. Labour market conditions further improved, supporting household expenditure. Favourable financing conditions and fiscal incentives continued to bolster expenditure on capital goods and advanced digital technologies. In 2017 the number of housing transactions increased for the fourth year in a row, albeit at a slower rate than in the past. Several indicators predict a mild improvement in the real estate sector’s general conditions in the months to come.
    Seven years after Fukushima, Japan has seen a rebound in activity driven mainly by the international environment, but also by the expansionist policy of its Prime Minister, Shinzo Abe. Exports are running at full throttle, unemployment is down to a tiny proportion of the active population, and the stock market is nearing record highs. However, behind this economic upturn, the backdrop has changed little. Heavy, recurring public deficits, massive debt, low SME productivity, poor resource allocation, labour market duality, low female labour participation… the Japanese economy still faces a number of chronic problems at a time when population ageing is accelerating.
    Despite the current economic recovery and a persistently favourable international environment, it is still premature to hope for sustainable fiscal consolidation. The errors of fiscal policy in past years have left their mark in the form of deteriorated public finances. The new administration that will take power in January 2019 will face the formidable task of meeting high social expectations while laying down fiscal targets that reassure investors. Structural reforms will have to be reintroduced, such as the pension reform that was swept under the carpet by the Termer administration. Without structural reforms, Brazil’s public finance trajectory could become unsustainable in the medium to long term.
    Russia consolidated its macroeconomic fundamentals in 2017. The economy swung into growth of 1.5% after contracting 0.2% in 2016. The fiscal deficit narrowed sharply to 1.4% of GDP thanks not only to higher oil and gas revenues but also to spending cutbacks. The central bank has demonstrated its capacity to face up to rising credit risks and troubled banks. The creation of a “bad bank” should help clean up the banking sector even further. Despite persistently strong headwinds that are preventing growth from accelerating, the rating agency Standard & Poor’s has upgraded Russia’s sovereign rating to BBB-. However, new US sanctions against oligarchs should weigh on economic growth.
    On the positive side, growth is accelerating rapidly and should return to levels close to the potential growth rate as of fiscal year 2018/19. Private investment finally seems to be entering a sustainable recovery. As part of a bank recapitalisation plan, public banks, whose asset quality has deteriorated further, received an injection of nearly USD 14 bn in March, which should help ease the pressures on the most fragile banks and bolster the rebound in investment. On the negative side, the government has taken a pause from the consolidation of public finances. The current account deficit has widened slightly, reflecting a deterioration in the terms of trade and a decline in export market shares.
    Trade tensions between China and the US are growing. China continues to enjoy a very strong external financial position, and exports to the US account for only 4% of its GDP. Therefore, any implementation of tariff hikes by the US should have a moderate direct impact on China’s macroeconomic performance. However, protectionist measures could dampen its export growth and constrain the industry’s efforts to climb the value chain, whereas China is starting to see a slight loss of its world market share. Moreover, weaker-than-expected growth in exports and GDP could shake the determination of the authorities to slow the rise in domestic debt.
    Greece is preparing to exit the European bailout programme. Activity is slowly picking up, driven by a positive economic environment and renewed confidence boosted by the programme’s smooth progress and prospects of it coming to an end. The country must now kick start its economic recovery. Greece has a large budget surplus before debt interest payments, and is preparing its return to the capital markets. Public debt is high (180% of GDP), but will only be refinanced very gradually. Negotiations currently in progress with Brussels could further strengthen its sustainability.
    Economic growth is expected to accelerate slightly in 2018 as Norway benefits from the favourable cyclical environment of its main trading partners. Investment is also expected to boost activity thanks to favourable growth prospects and persistently advantageous financing conditions. Job creations and wage growth are expected to boost household consumption while the government will make use of a more favourable environment to pursue a less expansionist fiscal policy.
    Perspectives - 25 January 2018
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    It looks like 2018 will be a year of strong growth across the globe, with very few countries left behind. In the United States and the eurozone, business climate indicators are close to the peaks last seen in the mid-2000s. Although pressure on production capacity has been rather mild so far, business leaders are beginning to feel it more acutely. Asset prices – both financial and real estate – continue to rise, and some now fear the emergence of bubbles. The time is ripe for the normalisation of monetary policies. The central banks are cautiously pulling out of the government bond market, which is likely to spark an upturn in interest rates. This risks placing a damper on activity as of 2019.
    The US economy is being fuelled by oil and debt, a familiar story. Growth is expected to approach 3% in 2018, which is no longer such a common feat. The massive tax cuts approved by Congress will support growth in the short term. But they will also widen the Federal deficit, which could pave the way for higher interest rates. The Fed is expected to continue tightening its monetary policy, in keeping with the moves initiated by Fed chairwoman Janet Yellen, who will be replaced in February by Jerome Powell.
    We expect growth to remain robust in 2018. In addition to a solid, self-sustaining cyclical recovery, the monetary environment is especially favourable, despite the central bank’s reduction in the monthly volume of security purchases (QE). Persistently low inflation means that European growth has not yet run up against supply-side constraints, and justifies maintaining an accommodating monetary policy. Yet the cyclical recovery should not mask the need for the eurozone to strengthen its institutions.
    The economy is booming and even showing signs of overheating. Wage costs have been rising, in particular in sectors which have been confronted with severe labour shortages. Nevertheless, in the framework of negotiations to form a new coalition government, the CDU/CSU and SPD agreed on delivering a substantial fiscal boost. The coalition could be in place by mid-March. After strong growth in 2018, the economy is expected to slow substantially next year, because of shortages of production capacity and skilled labour and of monetary tightening in the US and in Europe.
    Supported by robust domestic demand and rapid global growth, the French economy continues to grow at a decent pace, even showing signs of acceleration on the eve of the new year. We expect its growth rate to reach 2% in annual average terms this year, from 1.9% in 2017. A cornerstone of our scenario is the expected continued strength of private sector employment. It is a key support of purchasing power gains while the net impact of fiscal policy is a matter of some debate, even if this net impact should nonetheless prove limited. Thanks to job gains, the unemployment rate should continue to decline, and household consumption should regain the dynamism it has lacked thus far.
    Domestic demand remains the main driver of the Italian recovery. Investment rebounded, rising by 3% in Q3 2017, and private consumption moderately increased. Strong demand from non-EU countries sustained Italian sales abroad, with a positive contribution of net exports to the overall growth. In 2018, as well as in 2017, the economy is expected to increase by about 1.5%. Micro-firms in Italy remain the backbone of the productive system: they account for 95% of total firms (97% in services), employ 46.8% of total workers (ranging from 23.1% in industry to 66.7% in construction) and produce 29.7% of total value added (52% in construction).
    Economic activity across the country as a whole does not really seem to have suffered from the crisis in Catalonia. Against a background of an extremely vigorous European economy, Spain’s growth has remained solid and the manufacturing sector has accelerated. The unemployment rate continues to fall. In Catalonia, the regional elections did not provide a decisive factor to identify a route out of the crisis. Political pressure is forcing each side to take tough positions. In the short term dialogue is likely to be strained and unproductive, maintaining a climate of uncertainty around the Catalan question.
    Brazil’s economy expanded for the third consecutive quarter in Q3 2017 after eight quarters of recession. Our scenario continues to favour a gradual rebound in activity in 2018, buoyed by domestic and global demand. Inflation is under control and monetary easing is winding down. Yet with reforms on hold and elections wrapped in uncertainty, the financial markets may be in for a rough ride in the months ahead. Despite job market improvements in 2017, the economic and political crisis has left deep social and psychological scars that could raise the spectre of a radical election outcome, jeopardising what is already a challenging macroeconomic and fiscal consolidation in 2019.
    Economic growth slowed in the third quarter and all the indicators suggest that this slowdown continued in the final quarter. The economy is still driven by domestic demand, whilst investment has stalled, despite more favourable monetary conditions. The sharp fall in inflationary pressures (reducing inflation below the central bank’s target) has allowed the monetary authorities to cut policy interest rates by 225 basis points. The government continues to focus on the control of public spending in order to reduce its deficit and rebuild its sovereign wealth fund. It hopes to use this fund to uncouple its spending from oil revenue from 2019 onwards.
    Economic growth rebounded slightly in India in the second quarter of fiscal year 2017/18. Third-quarter indicators confirmed this recovery, which is driven by industry’s dynamic momentum. In contrast, household consumption slowed and private investment is struggling to pick up again, despite a more favourable institutional and monetary environment than in the year-earlier period. Moreover, with rising inflationary pressures and the risk of budget overruns, the central bank might decide to tighten monetary policy. Despite the economic slowdown and growing social tensions, the NDA, the ruling coalition party, could win a majority in Parliament’s upper house before the 2019 general elections.
    China reported economic growth of 6.9% in 2017, up from 6.7% in 2016, according to the figures released on January 18th. The impact of policy stimulus measures on domestic demand and then the rebound in exports contributed to this slight upturn. However, the slowdown trend at work since 2010 started to resume again in H2 2017. It is expected to extend into 2018 as a consequence of structural factors and tighter domestic credit conditions. Getting “better quality” economic growth, attenuating financial risks and reducing corporate debt must remain the top priorities of the authorities. Yet there will continue to be uncertainty for quite some time over their determination to make the economy less dependent on credit at the price of slower growth.
    The Dutch economy is experiencing a strong recovery. This bodes well for the new four party centre-right coalition that took over end October. The government aims at keeping a small budget surplus. Household and business will profit from substantial tax reductions. On Europe, the government would like a return of the strict rules of the Maastricht treaty. Growth is expected to remain strong in the coming years. However, production constraints are likely to appear. As a result, wage should rise more rapidly and inflation could reach 2%.
    Having pointed in the wrong direction last autumn, economic indicators have rebounded slightly since. As we move into 2018, the UK economy is growing only slowly, but has not completely stalled. The fall in the pound has stopped. Is this just a temporary respite? The Brexit process is now moving into its second, and more difficult, phase. This will see the definition of the future framework of relations between the United Kingdom and European Union, with a view to agreement in October 2018 prior to effective withdrawal in March 2019. The main risk is of deadlock; negotiators have very limited time in which to reconcile positions which are still very divergent.

On the Same Theme

Tensions flare up 1/25/2018
It looks like 2018 will be a year of strong growth across the globe, with very few countries left behind. In the United States and the eurozone, business climate indicators are close to the peaks last seen in the mid-2000s. Although pressure on production capacity has been rather mild so far, business leaders are beginning to feel it more acutely. Asset prices – both financial and real estate – continue to rise, and some now fear the emergence of bubbles. The time is ripe for the normalisation of monetary policies. The central banks are cautiously pulling out of the government bond market, which is likely to spark an upturn in interest rates. This risks placing a damper on activity as of 2019.
The recovery continues, but… 7/11/2017
A wave of optimism is sweeping the economy, especially in the eurozone, where growth is accelerating and spreading to all member countries. As we enter summer 2017, all economic indicators are looking upbeat, job creations are picking up, and unemployment is declining at a faster pace. The horizon looks bright, with just one exception, China, where a few clouds are forming. Beijing is taking action to curb credit growth again, which is bound to strain activity, notably in the real estate sector. Heavy industry is already showing a few signs of relapsing, and global commodity prices are easing.
Stronger momentum 4/25/2017
Economic indicators are picking up in most of the developed countries. Eurozone growth is more robust, at an annualised rate of nearly 2% in first-quarter 2017. The rebound is also better distributed, as the economic cycles of the 19 eurozone member countries are tending to move more in sync. The United States reported an upturn in oil and shale gas- related activities, and corporate investment in this sector probably rebounded at the beginning of the year. Inflation rebounds, approaching or overshooting the official 2% target. The central banks keep calm, however.
Change of scenery 1/24/2017
Donald Trump’s election as president of the United States opens a vast range of possibilities, including a possible surge in activity in the short-term. Consequently, we are raising our outlook for US growth, inflation and interest rates for the horizon 2017 and 2018. Upcoming tax cuts – the size of which remains to be seen – will occur at a time of quasi full employment, which is bound to accentuate wage and price pressures. Inflation is likely to rise above the official 2% target, which would encourage the US Federal Reserve (Fed) to raise its key rates a bit faster. This would boost the dollar, notably against the euro, whose weakness is largely due to the European Central Bank (ECB).

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