Macroeconomic forecasts #3 – Can the gap between financial hope and macroeconomic reality be bridged?

Market outlook - 6/7/2017

Can the gap between financial hope and macroeconomic reality be bridged? This is among the questions considered in the third edition of “Macroeconomic Forecasts”. This bi-annual publication, which is overseen by our Chief Economist, Mathilde Lemoine and her team, analyses macroeconomic dynamics and sets out the outlook for the main regions in the world.

The man for global growth is President Xi Jinping, not Donald Trump

The renewed growth that has been seen since the beginning of 2016 stems from the change in Chinese economic policy. Chinese president Xi Jinping decided to increase infrastructure spending to support Chinese growth. This led to a rise in commodity prices, acceleration in world trade – of which 84% was driven by commodity-exporting countries, which is considerable – and therefore an acceleration of global growth. It is very important to be aware of the causes of this rebound in growth and the improvement of industrial output, as this helps us understand that this rebound is cyclical and temporary, and that world growth will logically decelerate in the second half of 2017, prior to the implementation of tax cuts in the US at the beginning of 2018.

Money illusion could temporarily sustain growth

The rise in commodity prices has resulted in accelerated inflation and has restored entrepreneurs’ as well as households’ confidence. The real surprise of the beginning of the year is that, while growth has been driven by the Chinese economic policy, we also saw households and entrepreneurs regain some form of confidence due to the halt in declining prices. This has been labelled “reflation”. The counterpart is a fairly large lag between surveys - suggesting a very strong acceleration of growth - and the macroeconomic reality, which is much more measured. For instance, industrial output has accelerated only very modestly, while surveys are at their highest level in six years. If households and business leaders consider that prices will continue to be on the rise relative to 2016, this could suffice to support consumption in developed countries and thus compensate for the slowdown in Chinese growth expected end of 2017.

In the euro area, there are several reasons to be optimistic

The euro area will continue to strengthen. The election of Emmanuel Macron as President of France has lifted some of the doubts as to the very solidity of the Eurozone. Beyond that, the European project that he and other governments advocate will improve the growth prospects within the euro area. What will be the consequences for investors?

  • First, interest rates will remain relatively low and, above all, disconnected from US rates, as the European Central Bank has managed to become independent from the Federal Reserve.

  • The second consequence concerns growth prospects which could increase somewhat thanks to the creation of a “Bad Bank”, a project advocated by the European Central Bank, which would enable the euro area to move away from a Japanese-like deflation scenario.

  • Finally, a currency that, by remaining relatively solid, would therefore provide a source of security to investors.

This cocktail of factors allows us to be relatively confident regarding the economic outlook of the euro area.

We therefore continue to forecast US growth to accelerate, at 2.1% in 2017 and 2.5% in 2018, versus 1.6% in 2016. Growth in the euro area is expected to remain at 1.7% in 2017 before reaching 1.8% in 2018. Emergent markets should see their growth strengthen, at 4.6% in 2017 versus 4.1% in 2016 according to our forecasts, this despite decelerating commodity prices. That being said, global growth remains constrained by the weight of the debt burden that continues to increase.