BSI Economics Consensus October 2017:
CONCERNS OF THE CONSENSUS
This third Consensus of 2017 is in line with the previous issue: convictions are weak and uncertainties prevail, while few events are likely to materialize. In Europe, optimism is high, particularly in France, which could lead to monetary policy normalization in the eurozone as early as 2018. This renewed optimism contrasts with the recent performance of the euro against the US dollar (USD). In the United States, the Fed’s actions will continue to play a decisive role in the US economy, while the US administration’s upcoming fiscal easing could reassure markets about corporate earnings prospects. At the same time, investor appetite for emerging markets is helping to strengthen emerging market currencies against the USD, even though the opposite scenario was expected at the beginning of the year. Growth in Chinese demand is providing a positive boost to emerging market growth. However, vigilance remains key: commodity prices, particularly oil, are expected to rise only slightly, while a slowdown in China cannot be ruled out.
1/ MEDIUM-TERM OPTIMISM
IN FRANCE The medium-term outlook is improving for France. When asked about the future effects of labor market reform, nearly 80% of respondents answered affirmatively. In the longer term, the 2024 Olympic Games in Paris could be a source of economic opportunity for more than 80% of respondents. However, for both questions, around 9 out of 10 economists (3 out of 4) expect only a very small impact on the global economy (and asset allocation). A wave of optimism seems to be sweeping France since the election of President E. Macron, but it is important that the actual data follow the confidence effect in order to sustain the current recovery.
2/ THE EURO ZONE IN A NEW ERA?
At the beginning of 2018, monetary policy in the eurozone is expected to enter uncharted territory for more than 80% of those surveyed. The European Central Bank (ECB) is set to begin tapering, which is expected to continue throughout 2018. In addition, the associated impacts on the global economy and asset allocation are expected to be observed by more than 90% of the economists surveyed. It is likely that some of the assets of euro money market funds will be impacted by the first signs of monetary normalization given by the ECB. The challenge will be for the central bank to gradually reduce its net asset purchases while containing the tightening of financial conditions, which is undesirable for the members of its Executive Board. While nearly three out of four economists believe it is likely that the euro will rise again and remain above USD 1.20, the recent depreciation of the euro remains a positive factor in allowing inflation to rise, which would facilitate the ECB’s monetary policy.
3/ LIMITED TRUMP EFFECT ON US ECONOMIC ACTIVITY BUT AN EFFECT ON THE FED
Expectations in the US for fiscal easing in response to Donald Trump’s election remain high, with downside risks to corporate earnings growth if a decision is postponed, thereby fueling uncertainty. Only 23% of economists surveyed by Consensus believe that fiscal easing is likely before the end of the year, and most of them consider it to be only moderate. These disappointments could lead to a downward revision of corporate earnings growth forecasts and thus a decline in US equity performance in the second half of 2017 compared to the first half. While such an event would have a significant impact on asset allocation (with reallocations to Europe, emerging markets, or Japan), only 56% of the specialists surveyed consider the probability of such a scenario to be moderately likely, and only 19% consider it highly likely. While the date of the Fed’s next interest rate hike remains uncertain, 50% of respondents believe that the start of the Fed’s balance sheet reduction should lead to a rise in long-term rates. Sixty-two percent also believe that this event will have a significant impact on asset prices.
4/ PERSISTENT DOUBTS ABOUT CHINESE GROWTH
In China, the IMF’s October forecasts predict GDP growth of 6.8% in 2017, due to the positive impact on activity of the policy mix (fiscal stimulus and accommodative monetary policy). This is particularly true for demand figures, which are proving to be much more dynamic than anticipated. However, 52% of the Consensus estimates that the probability of Chinese growth falling below 6.5% in 2017 is average, and 25% considers this probability to be high. Indeed, the high level of public debt raises questions about the Chinese government’s room for maneuver. Furthermore, the difficulties encountered by the monetary authorities in curbing the growth of bank credit without further increasing shadow banking cast serious doubts on the objectives set in terms of financial stability. Finally, the presence of excess production capacity and the uncertainties surrounding the real estate market are also factors that call for caution regarding Chinese growth figures. A slowdown in economic activity in China would thus have an impact on global growth for 96% of those surveyed. Such a scenario would be detrimental to emerging countries, particularly in Southeast Asia.
5/ EMERGING COUNTRIES: BETWEEN RESILIENCE AND VIGILANCE
A majority of economists surveyed (55%) believe that emerging market currencies will remain resilient throughout 2017, compared with only a very small minority (10%) who consider this to be unlikely. This result seems consistent with data from the first three quarters of 2017, when most emerging market currencies tended to appreciate against the USD. Buoyed by strong external demand (from developed countries and China) and a moderate recovery in commodity prices, the growth outlook is favorable for 2017, particularly in South America (with Brazil and Argentina emerging from recession). Moderate inflation in most countries and the resilience of their currencies have eased financing conditions, which is supportive of economic activity. However, although most emerging countries recorded positive net capital flows in the first half of 2017, these consisted mainly of portfolio investments, i.e., short-term, volatile flows that are particularly sensitive to changes in US interest rates. This enthusiasm for emerging market debt raises fears of excessive indebtedness in African countries, which could ultimately lead to a new debt crisis (average probability of 56% according to the Consensus). Furthermore, growth in several countries is still based on fragile fundamentals (Turkey, South Africa) or could be threatened by geopolitical tensions. If these tensions increase, there is no consensus here as to whether this would have an upward impact on commodity prices. But if this were to happen, 51% of experts believe it would have a significant impact on global growth.
