Perspectives

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EcoPerspectives // 4 quarter 2018  
economic-research.bnpparibas.com  
Editorial  
Softer growth amid increased uncertainty  
Growth has eased during the course of this year with the US being the major exception largely thanks to fiscal stimulus. The ensuing  
cyclical desynchronization has caused a broad-based appreciation of the US dollar, in particular versus emerging currencies. In some  
cases (Argentina, Turkey), the depreciation has been considerable due to country-specific developments. Global growth should  
continue to ease further next year and lead to a certain resynchronization: the impact of the US fiscal boost will wane, Fed tightening  
should start to have an effect and corporate investment is expected to slow, which in turn should weigh on world trade growth. Even  
in the absence of additional tariff increases, fears of more tit-for-tat measures could sap business confidence.  
Towards slower growth  
done. Worries that discussions between the US and the EU might  
fail help explain the significant increase of uncertainty among  
German corporates. Similarly, China, which is already confronted  
with a slowing economy, has faced tariff increases by the US and  
more may follow. This adds to the challenges of the authorities to  
boost domestic demand to compensate for weaker export growth.  
As good as it gets seems to be the conclusion when looking at the  
IMF’s latest growth forecasts for the advanced economies: coming  
after 2.3% in 2017, they are for 2.4% this year and 2.1% next.  
Perhaps more important is the projection for 2023 of only 1.5%  
growth with 1.4% in both the US and the eurozone. For the US, this  
implies a quite significant cooling-off of the current overheated  
environment. Overheatedapplies in terms of a range of labor  
market indicators and certain asset prices, though not as far as  
wage growth and inflation are concerned. This allows the inflation-  
and growth-targeting Federal Reserve to proceed with its tightening  
cycle in a cautious, data-dependent way, which sustains investors’  
large appetite for risk. The slowdown of next year and beyond is  
based on the waning impact of this year’s (unnecessary) fiscal boost,  
higher interest rates, the lagged effects of a stronger dollar, slower  
growth in corporate earnings, the impact of tariff increases (more  
inflation) and the retaliatory measures that hit exports. The ongoing  
tug of war with China on trade implies that risk is tilted to the  
downside.  
Market nervousness adds to uncertainty  
Slower growth in China doesn’t bode well for the country’s trading  
partners, in particular developing economies that have seen a  
decline in sentiment indicators. In addition, several of them have  
seen a depreciation of their currencies in recent months that through  
the impact on inflation, central bank tightening and higher bond  
yields, weighs on their growth outlook. Market nervousness has not  
been limited to developing economies. Indeed, in recent weeks, we  
have seen a pick-up in bond market and equity market volatility in  
the US that is reminiscent of the jump in volatility seen last February.  
Should this higher volatility last, it would be another factor that might  
end up weighing on the growth outlook.  
Whereas the US is in a very mature stage of the business cycle, the  
position of the eurozone is less advanced. This should leave room  
for the expansion to continue despite the output gap that has finally  
been closed and an unemployment rate that has converged to its  
structural level. Indeed, growth of disposable income on the back of  
job creation and an acceleration of wage growth should support  
consumer spending whereas earnings growth, rising capacity  
utilization and easy access to financing create a favorable backdrop  
for corporate investment. However, cyclical dynamics have lost  
some momentum. Most sentiment indicators are now below their  
peaks registered towards the end of last year. The construction  
sector is an exception, and services are also holding up well. In  
manufacturing, however, the decline has been more pronounced.  
Nevertheless, considering the high baseline levels, current readings  
of survey indicators still correspond to above-potential GDP growth.  
Manufacturing & Services PMI  
Euro zone --- US  Developing countries  
6
2
Manufacturing  
Services  
6
0
8
5
56  
54  
5
5
4
2
0
8
Protectionist threat, a major concern  
Given the openness of the eurozone economy, the slowdown in  
world trade has acted as a headwind this year. It also implies  
significant exposure to the protectionist threat, which is now  
generally considered to be the major risk factor for the world  
economy: model-based simulations like the one in the IMF’s latest  
World Economic Outlook show that tariff increases and retaliatory  
measures end up creating a lose-lose situation. Moreover, even if  
eventually tariffs are not raised, the harm may have already been  
2
015 2016 2017 2018  
2015  
2016  
2017  
2018  
Source: Markit, BNP Paribas  
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