ECONOMIC OUTLOOK FOR 2018 11 D 11 December 2017 2017 1
PRESENTATIONS Speakers • Pierre Olivier Beffy (Exane BNP Paribas) • Peter Vanden Houte (ING) • Bart Van Craeynest (Econopolis) PANEL DISCUSSION Moderator: Pr.Dr. Bruno Colmant (Degroof Petercam) 2
10 Questions for 2018 2017-18 economic scenario update 4 DECEMBER 2017 Disclosures & disclaimers are at the end of this publication. The Pierre-Olivier Beffy (+44) 207 039 9526 pierre_olivier.beffy@exanebnpparibas.com date & time that recommendations were finalised can be found in Francoise Huang (+44) 203 430 8514 francoise.huang@exanebnpparibas.com Research publications on https://cube.exane.com Jean-Baptiste Pethe (+33) 1 42 99 23 24 jean-baptiste.pethe@exanebnpparibas.com David Tinsley (+44) 203 430 8699 david.tinsley@exanebnpparibas.com
2018 outlook: let’s start by the best ● Global growth outlook: strong start followed by sequential slowdown 2018 global growth: upgraded to 3.9% US cycle extended until mid-2018 at least: easing financial conditions so far Eurozone: Euro appreciation/fiscal drag will cap growth next year China: mild slowdown given the moderate policy mix tightening ● Monetary policy: tightening may become a worry when the global economy slows down Inflation: rising in H1 and risk of oil price overshooting Fed: hike in December and 3 hikes in 2018 ECB: further reduction in QE beyond September 2018 10-year US yields: limited upside (2.5% at the end-2018) ● Politics: improving… but for how long? (+) Eurozone: rising pro-European sentiment (positive Italy) but slow institutional progress (-/+) US: tax cuts still our base case but beware of execution risks (-) Brexit: risk of NO DEAL outcome surging if no progress by end of Q1 next year 4 Exane BNP Paribas | 10 Questions for 2018
Is global growth normalising to a sustained high level? Strong global growth but limited upside going forward Our global trade indicator (ELIT) is Surprise indices are back consistent with 4% global growth over the at early-2017 high levels coming six months Citigroup Economic Surprise Indices: US and Eurozone 6.0 100 1.2 Exane leading indicator for trade (ELIT) and global IP, % 80 5.0 60 0.7 40 4.0 20 0.2 3.0 0 -20 (0.3) 2.0 -40 -60 (0.8) 1.0 -80 0.0 (1.3) -100 11 12 13 14 15 16 17 18 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Global IP (6m/6m, %, -lhs) ELIT (-rhs) US Eurozone Source: Exane BNP Paribas estimates Source: Citigroup, Exane BNP Paribas estimates 5 Exane BNP Paribas | 10 Questions for 2018
How long will the reflation trade last? Markets have been quick to reprice rising inflation expectations US core inflation to significantly rise next spring US oil rigs have not reacted to higher oil prices yet US crude oil rig count and Brent prices 1800 3.0 115 1600 105 2.5 1400 95 1999-2000 rebound Fed's target 85 1200 2.0 75 1000 65 1.5 800 55 600 45 1.0 400 35 200 25 0.5 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 98 00 02 04 06 08 10 12 14 16 18 20 Trimmed mean PCE inflation (%) Baker Hughes US crude oil rotary rig count Brent prices in USD/barrel, rhs Model (based on unemployment, import prices, dollar) Source: Bloomberg, Exane BNP Paribas estimates Source: Fed, Exane BNP Paribas 6 Exane BNP Paribas | 10 Questions for 2018
When will the US economy enter into a recession? Corporate credit markets should be a leading indicator Financial conditions remain accommodative High US corporate debt, but stable US corporate high yield spreads and Financial Conditions Indicator interest cost for now 5.0 0.0 100 6.0 4.0 5.5 90 3.0 5.0 5.0 2.0 4.5 80 1.0 10.0 4.0 0.0 70 3.5 (1.0) 15.0 3.0 stable for now 60 2.5 (2.0) 2.0 (3.0) 20.0 50 1.5 (4.0) 40 1.0 (5.0) 25.0 70 73 76 79 82 85 88 91 94 97 00 03 06 09 12 15 18 US recession Debt/value added (potential) Financial conditions index Corporate HY spreads (rhs, inverted scale) Net interest payment/value added (rhs) Source: Bloomberg, Exane BNP Paribas estimates Source: BEA, Fed, Exane BNP Paribas 7 Exane BNP Paribas | 10 Questions for 2018
Will Trump be good for markets in 2018? Profits should thrive but risks of trade disruptions with Mexico and Canada Risks of trade related disruption A large impact on US profits Trade in USDbn After-tax profits of US corporate, USDbn 80 2,000 70 +6.5% under House plan 60 1,500 50 40 1,000 30 20 500 10 0 0 01 03 05 07 09 11 13 15 17 19 21 23 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 US vehicles exports to Mexico US vehicles imports from Mexico Source: BEA, Tax Policy Center, Exane BNP Paribas Source: Commerce Department, Exane BNP Paribas 8 Exane BNP Paribas | 10 Questions for 2018
Will Jerome Powell spoil the party? Policy normalisation still good news as long as core inflation rises and growth remains strong Rate hikes have barely tightened financial conditions so far 7.0 (5.0) 6.0 (4.0) 5.0 (3.0) 4.0 (2.0) 3.0 (1.0) 2.0 0.0 1/1 impact of Fed hikes on FCI 1.0 1.0 0.0 2.0 (1.0) 3.0 (2.0) 4.0 little impact of Fed hikes on FCI (3.0) 5.0 92 94 96 98 00 02 04 06 08 10 12 14 16 18 Real 3mth Tbill FCI (inv.scale, rhs) Source: OECD, Exane BNP Paribas 9 Exane BNP Paribas | 10 Questions for 2018
Will the USD rise? The current rebound in USD is mainly tactical (2018 year-end target at 1.20) EURUSD fair value at 1.25 means EURUSD Monetary decoupling to support the USD likely to go back to 1.40 over the coming years EURUSD and 2-year real yield spreads between Germany and US 1.8 4.0 1.6 1.6 3.0 1.5 2.0 1.4 1.4 1.0 1.2 1.3 0.0 1.0 1.2 (1.0) 0.8 1.1 (2.0) 0.6 1.0 (3.0) 07 08 09 10 11 12 13 14 15 16 17 18 19 EURUSD fair value EURUSD EURUSD 2yr real yield (Germany-US) Source: Exane BNP Paribas estimates Source: Bloomberg, Exane BNP Paribas estimates 10 Exane BNP Paribas | 10 Questions for 2018
Will European political risk continue to ease? Limited risks around Italian elections / slow European integration ECB QE extension aims at “full” sovereign Rising support for the EU and the Eurozone bond normalisation Support for the Euro and for the EU, % 10-year sovereign spreads 16.0 85 14.0 75 12.0 65 10.0 55 8.0 Brexit 6.0 45 4.0 35 2.0 25 04 05 06 07 08 09 10 11 12 13 14 15 16 17 0.0 Support for the Euro in Eurozone countries, % Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Portugal Italy Spain Ireland Support for the EU in EU countries, % Source: Bloomberg, Exane BNP Paribas estimates Source: Eurobarometer, Exane BNP Paribas estimates 11 Exane BNP Paribas | 10 Questions for 2018
Brexit : No news, good news? No agreement before March would significantly raise the likelihood of a NO DEAL outcome June 2017 Dec 2017- March 2018 Oct 2018 29 March 2019 EU Council: 14 th /15 th Dec 2023? 22 nd /23 rd March Negotiating a Transition A 50 Ratifying the ‘framework for period and negotiations withdrawal deal future relations’ technical talks Citizens’ rights, exit bill, Vote in UK and European on FTA Future trade and non- Northern Ireland Council and Parliament trade relations European Commission makes a Exit deal agreed and concluded Deadline for ending talks on the recommendation to the European between the UK and EU, and UK’s withdrawal terms from the EU Council on ‘sufficient progress’ to ratification process begins start next stage 12 Exane BNP Paribas | 10 Questions for 2018
Will China tighten policy? Some slight tightening possible around the turn of the year China can kick the can down the road The Chinese inflation paradox: rising PPI for a few years (2021=100 th anniversary of the with stable CPI Communist Party) CPI, PPI and RRR, % 22.0 11.0 Financial vulnerability indicators, China and EM countries in crisis 195 9.0 20.0 Thailand (1997) 7.0 18.0 175 5.0 Brazil (1998) 16.0 Mexico (1994) 3.0 South Korea 155 (1997) % , o i t 14.0 1.0 a Russia (1998) r t i s o p 135 (1.0) e 12.0 d / d Argentina e r (2001) (3.0) C China 2020 10.0 Turkey (2001) 115 (5.0) Indonesia (1998) Bulgaria (1996) 8.0 China 2015 (7.0) 95 6.0 (9.0) 06 07 08 09 10 11 12 13 14 15 16 17 18 China 2009 RRR % PPI %y/y (rhs) CPI %y/y (rhs) 75 Source: National Bureau of Statistics of China, PBOC, Exane BNP Paribas estimates 35.0 25.0 15.0 5.0 (5.0) Net foreign debt, % of bank assets Source: Gavekal, Exane BNP Paribas estimates 13 Exane BNP Paribas | 10 Questions for 2018
Will capital flows continue to pour into EM? Excess real return is a medium-term support for EM The real sovereign spread between US and EM is elevated Real 10-year government bond yields: US (rhs), BRIICS simple average (rhs), and Net total portfolio flows to EM (USD bn) 125 4 105 3 85 2 65 1 45 0 25 (1) 5 (2) (15) (3) (35) (4) Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Net total portfolio flows to EM (USD bn) US real 10-year sovereign rate (rhs) BRIICS real 10-year sovereign rate simple average (rhs) Source: Thomson Reuters, National sources, Exane BNP Paribas estimates 14 Exane BNP Paribas | 10 Questions for 2018
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