Archives par catégories : FORECASTS

Clouds gathering on risky assets

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Our contrarian outlook for a global growth slowdown starting in the second half calls for caution in terms of asset allocation

Global growth slowing next year to 2.8% versus 3.2% this year

  • U.S. growth is failing to take off: real estate prices have increased too fast, thus squelching the recovering in the construction industry, growth inertia in services continues to hurt the job market, weak productivity growth has failed to provide the necessary boost to investment that would extend the cycle. Growth disappoints and will not exceed 2% this year or next year.
  • Deflation is settling into the euro area and is propagating to the countries in the northern part of the currency union. Following the favorable boost from the economic recovery, keeping the momentum going proves difficult due to the deteriorating export outlook. Germany is not playing its role as an economic engine, other countries are not recovering. Next year, growth will fall to 0.9%, after 1% this year.
  • The situation for emerging markets suffers from the negative influence of the Chinese economy: export markets are drying up, soft demand for commodities and devaluation of the Renminbi. Imbalances and chronic shakiness increase the temporary instability. The Russian economy is tipping into a recession, Brazilian growth falls after the uptick from the World Cup, the effects of Indian reforms are diluted by a difficult economic situation.

New bond rally

  • The Fed will not see « tapering » through to the end; key rates will stay at zero. The 10Y will decrease to 2-2.25% before the start of 2015.
  • The ECB will embark on a long journey of non-conventional monetary policy. Long rates will fall, following the bund, whose 10Y yield will fall to 1-1.25% before early 2015. Interest rate gaps between countries in southern Europe and the German bund will stabilize before widening again in 2015.
  • The risk of deflation increases the world over, commodity prices fall back as instability increases. Brent drops to under $90/b.

Growing instability on the forex markets

  • The Fed’s strategy shift contradicts the ECB easing, the euro does not fall.
  • The BoJ roars back to life after the failure of Abenomics, the yen tumbles in 2015.
  • Forex risk increases in EMs, particularly in Asia where the currency war pits the Japanese against the Chinese.

Downturn in the equity markets

The change in outlook weighs on earnings forecasts and cyclical stocks.

The S&P recedes to 1,600, the EuroStoxx returns to 300 points. Industrial equities take a hit, with the DAX squarely in the crosshairs.

MSCI W EN

Scenario 2014–2015 : The Roller Coaster Economy

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2014 is off to a positive start: U.S. growth is trending upward, the euro area is pulling out of recession, Japan is reaping the benefits of its competitive strategy, and world trade is picking up. All these bright spots should be enough to end two years of global deceleration and bring about a return to growth of over 3 percent this year. But while this is certainly good news, it doesn’t tell us much about the key challenges ahead. To understand them, we need to address the much more complex question of whether 2014 will usher in a second leg of the global recovery—one that is sufficiently sturdy to ensure a lasting upswing and leave five years of convalescence well behind us. As things now stand, we feel we still have two good reasons for assuming it won’t:

  1. The deleveraging process is still producing dysfunctional effects around the world.
  2. Five years of crisis have seriously eroded the global economy’s growth potential and its ability to handle the higher interest rates the current upturn will inevitably entail.

This suggests that we are in for a period of economic instability. We are therefore forecasting that after 3.5 percent growth in 2014, global GDP will increase by only 3 percent in 2015.

The upturn, then, is likely to be short-lived, yet it’s still a reality—meaning it will necessarily affect market expectations.

We are sharply raising our long-term interest-rate forecast for the first half of 2014, but we predict backsliding before the year is out. Needless to say, there will be timid attempts at returning to normal monetary policy in the first few months of the year, but because they are unlikely to get very far, our outlook up to mid-2015 does not involve increases in key rates by the leading central banks—the Federal Reserve, the ECB, the BoJ.

Although initially encouraged by the improved economic climate to press ahead with tapering, the Fed may soon find itself overwhelmed by largely uncontrollable jumps in long-term Treasury yields.

All in all, this should be a highly volatile year.

Scenario 2013-2014: The Financial Crisis, Act III…and Epilogue?

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New round of central bank liquidity injections worldwide

  • The U.S. economy can’t do without Fed support
  • The euro area is out of recession, but bank sector and sovereign issues remain
  • The Fed, BoJ, BoE and ECB continue to nurse ailing economies

Continued low interest rates are not enough to dispel emerging risks

  • The momentum driving global trade has been undermined for the foreseeable future
  • China can no longer act as the global engine of growth
  • Foreign exchange rate adjustments appear inevitable

Is inflation, end-point of the financial crisis, around the corner? 

  • New round of liquidity injections, currency crises, geopolitical tension, labor unrest…
  • … Inflation remains the most likely scenario, but the path ahead is unclear

Outlook 2013-2014 : No Spectacular Upswing in Sight

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The Eurozone outlook looks brighter and this is good news. Unfortunately the world economic outlook remains constrained by structural weaknesses. Our forecasts, at respectively 3.1% and 3.3% for 2013 and 2014, remain in the low range established for 2012, thus removing any doubts about the risks of inflationary pressures or of a bond crash.

On the positive side: the concerns we had in the beginning of this year are no longer looming over us

–  In the Eurozone, consumer confidence is picking up as austerity policies get phased out.  Intra-regional trade should progress and the Eurozone should recover from recession by the end of the year.
– The U.S. pulls back from the fiscal cliff and real estate market recovery is no longer in doubt. Household wealth and corporate profits are at a historic high, while unemployment is declining.

On the negative side: structural restraints to growth are multiplying

– Europe is out of the woods, but not on the path to growth. The economic policy shift came too late and is too fainthearted. The crucial questions on the euro area’s future have yet to be answered.
– The U.S. outlook is penalized by insufficient productivity gains and low savings rate. High profit levels won’t be able to considerably accelerate job growth and the wealth effect is constrained by the historic-low level of personal savings. We revised downward our forecasts from 2,7% to 2.2% for 2014.
– The lack of coordination has limited the impact of monetary policy moves and there was no real considerable global economic stimulus.
– The structural inadequacies of emerging economies have become an increasing handicap. The Chinese transition will take time as it can’t be as rapid as the rate at which exports decrease. Endemic inflation in other major emerging markets is coming back.

Outlook for 2014: too little improvement to take risk off the agenda

– Not much change in our scenario for 2013, but a sharp downward revision for 2014.
– Global growth revised down to 2.9% in 2013 and 3.3% in 2014, from an earlier estimate of respectively 3.1% and 4.1%.
– Our forecasts regarding China and Brazil growth have also been downwardly revised. They are respectively at 7% and 3%, instead of, as predicted in January, at 7.5% and 4%
– Bond market crash? Not in the short run.
– Flagging U.S. growth in the second half of the year will keep the Fed from pulling back too soon.
– Long-term yields in the U.S. will stop rising, settling in below the 2.50% mark until year-end. Instability of the bond market will be on the increase next year despite low growth, as U.S. unemployment falling to around 6.5%.
– The euro will remain firm, at 1,35 USD by the end of the year. Our forecasts have been upwardly revised for 2014.
– Stock markets should become more vulnerable to weak structural growth.

Our 2013–2014 Scenario: A Situation Under Control

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  • Global GDP up 3.1 percent in 2013, 4.1 percent in 2014. With difficult conditions prevailing through the first half of 2013, the world economy will not grow any faster than the 3.2 percent registered in 2012. It will take until 2014 for global growth to exceed 4 percent—a level not seen since 2010. 
  • 50–50. Over the next two years, emerging economies will add $4 trillion to their combined GDP (at constant 2010 prices and exchange rates), contributing four times as much to global output as developed countries. By 2014, global GDP should therefore be evenly distributed between the emerging and developed worlds. 
  • Inflation. All quiet on this front in 2013, but will start to edge up in 2014. Weak growth and receding commodity prices in early 2013 should keep a lid on inflation throughout the year. However, more vigorous recovery in 2014 will push commodity prices up (with oil reaching $130) and accelerate inflation in emerging markets.
  • Sovereigns. Budget deficits should ease slightly in 2013; public debt will continue to swell in 2013 and 2014. Countries that have structurally weakened and whose reform policies have yet to kick in will still be at risk. Italy tops the list, followed by Spain; France is balanced on the razor’s edge; and the future of Japan will depend on how successful the new prime minister’s stimulus program is.
  • The U.S. unemployment rate will diminish to 6.5 percent in the first half of 2014. The Fed’s quantitative easing program will be over. Expectations that interest rates will revert to normal levels will bring the period of low long-term rates in the Western world to an end.
  • 10-year U.S. Treasury Note yields will hit 3.5 percent by end-2014. The rise in U.S. long-term yields will go from gradual in the latter half of 2013 to more pronounced in 2014. Europe will follow suit, with a moderate widening of the T-Bond/Bund spread.
  • The euro will trade at $1.35 in 2013. The Fed’s vastly expanded balance sheet, combined with the elimination of extreme risk in the euro area, will keep the dollar low against the euro in 2013. But the trend will reverse in 2014 when the Fed abandons its unconventional policy tools.

 

The U.S. Economy: Still Far From the Mark

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In an environment dominated for months by mounting fears of the worst, pleasant surprises understandably create a fair amount of enthusiasm. That leaves economists with the thankless task of urging the enthusiasts not to get their hopes up too fast. The U.S. economy has shown encouraging signs in the past few months, including revival of the housing market, higher consumer sentiment, and, in the past few days, good news from the job market. But the country is not out of the woods yet.

  • The jobless rate has fallen to its lowest level since 2008. A less heartening statistic, however, is that private-sector employment has yet to recover to where it stood in 2001. In this area, the U.S. economy has not performed any better than the French economy over the past eleven years!
  • The housing market is unquestionably picking up, and all the evidence points to further improvement down the road. But the key drivers of demand have taken quite a bruising from the weaker economic environment of the past few years, and real estate has lost a good deal of its power to tow the rest of the economy in its wake.
  • Corporate profits in the U.S. are at a historic high. However, decelerating productivity growth has led to a significant slowdown in the rise of earnings over the last several quarters. The upshot is that by any standard, developments on the investment front have been extremely disappointing.
  • Lastly, while American pragmatism can be expected to bring about a postponement of the deadline for balancing the budget, thereby limiting the “fiscal cliff” risk to the economy, the fact remains that the country’s public finances are in alarming shape. The upcoming negotiations will necessarily turn the spotlight on one of the most disturbing issues facing the United States.

France’s 3-Percent Deficit Target for 2013: Harder and Harder to Believe

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Although the French government has repeatedly described its 3-percent deficit target for 2013 as “inviolable,” this claim should be taken with a large grain of salt. The fact that investors are willing to pay to hold French sovereign debt suggests that the government has done a good job communicating—no small achievement just when one neighboring country after another is forced to borrow at exorbitant rates. But let’s not be gullible: there is no way that France can meet its target. Even if the official growth forecasts were accurate—0.3 percent in 2012 and 1.2 percent in 2013—this would be an ambitious goal. If the economy goes into negative territory, it will be downright unattainable. Coming after three quarters of stagnation, the steady slide in economic activity since early summer will push France into a full-blown recession. We estimate that GDP should basically be flat this year, before decreasing by at least 0.7 percent on average next year. This differs markedly from the government’s current forecasts, the basis for its budgetary assumptions for 2012 and 2013. With a shortfall totaling 2.3 points of GDP (0.4 points in 2012, 1.9 points in 2013), meeting the 3-percent target in 2013 would require cuts equal to 3.6 points of GDP over those two years, in contrast to the 2.6 points initially forecast!

In other words, it would require unprecedented savings, two thirds of them in the coming year. If actually carried out, they would make France the eurozone’s star pupil in the field of fiscal retrenchment, but it seems unlikely they will be. In fact, it seems more like the government is playing with dynamite.