Our activity indicator was stable at 0.1 in January, held back by a slight weakening in consumer spending. Investment remained buoyant and exports were still positive despite varying trends between regions. Our inflation indicator moved further into positive territory, to +1 from +0.5 in December.
Summary – Current economic trends seem particularly favorable, but after taking a step back, we are inclined to be more circumspect than the consensus of economists on the outlook for 2018. Our worldwide scenario has changed little since September. Our global GDP growth forecast for 2017 remains the same, at 3.6%, and we have lifted our 2018 scenario slightly to 3.3% from 3.2%. Upward revisions to our 2017 estimates for the developed world offset the declines we project in emerging markets. Meanwhile, we continue to foresee a modest global slowdown in economic activity next year as a result of reduced US and Chinese growth.
In this context, and amid the structural changes underway, worldwide inflation does not look ready to accelerate. It should fall from 2 % on average this year to 1.8% next year, in the wake of declining raw material prices. With no inflation on the horizon, central banks will maintain their very accommodative bias. Restricted by a persistent flat yield curve, the Fed will have trouble carrying out the three key interest rate increases it has planned. The ECB will remain particularly conservative and is unlikely to have an opportunity to take a position on a future increase in key rates.
The dollar is set to disappoint and maintain pressure on other countries. Japan, now benefiting from a more promising environment, is probably the country best placed to absorb the market’s wariness with regard to the US currency. Our exchange-rate scenario remains unchanged from our September projections and includes a substantial appreciation in the yen.
In the short run, we think exposure to risk is still a viable strategy, so long as it is focused on developed markets. But the current environment requires investors to be ready to change direction at a moment’s notice. For this reason, we have developed a fundamental allocation to complement our short-term, tactical recommendations.
Just noise or a real signal? The hypothesis that the sudden drop in the Chinese currency in recent days is unlikely to have major repercussions and has been orchestrated by the authorities in the sole aim of curbing speculative currency flows on the currency, is not completely unfounded given the wide-scale efforts to eradicate the growing sources of shadow banking. Assuming the hypothesis is true, the move would be a sea change, and a worrisome development for a number of domestic sectors that are heavily-dependent on foreign financing, although one with no major direct consequences on other countries.
However, the reasons liable to underpin a strategic shift with a view to provoking the yuan’s depreciation are more than sufficient to support the theory that a forex policy shift is afoot in Beijing – with much more potential damage occurring abroad. After two years of near-continuous increases, the appreciation of the Chinese currency is a major handicap for the country and cannot, by all accounts, continue indefinitely. Consequently, the time of the much-feared policy shift, which we have been fearing for several quarters now, may have finally come (for more on this subject “2013-2014 Scenario: The Financial Crisis, Act III… and Epilogue?”).
Those who believe we can offset the devastating effect of an overvalued euro by copying German recipes from the preceding decade are kidding themselves.
In fact, a brief look at how the German economy achieved competitive adjustment will highlight the unique conditions that supported such a turnaround. The international environment in the first decade of this century not only proved extremely beneficial to Germany’s industrial recovery; it also made the turnaround fairly painless for the country’s consumers.
Today, no other eurozone Member State has anywhere near the kind of industrial strength enjoyed by Germany, or for that matter the means to ease the social pain of the reforms needed to put the common currency area back on a competitive footing. If Europe’s leaders persist in copying past German recipes without considering how or why they worked, the monetary union will unquestionably be facing its greatest danger ever.
To fend off that danger, there is just one viable response: an orchestrated depreciation of the euro along the lines of the 1985 Plaza Accord, which was designed to counteract the damaging effects of an overvalued dollar on the world economy. Let’s hope the prospects of a protracted eurozone slump will win enough converts to such an approach, because it probably holds out the last chance to save the common currency.