[Jeremy Fasquelle] - Hello and welcome to our weekly podcast from BNP Paribas Wealth Management. Today we are looking at the global economy outlook following the recent publication of the IMF’s latest world economy outlook. And to discuss this, I am joined today by Guy Ertz, Deputy Global Chief Investment Officer at BNP Paribas Wealth Management. Hello Guy.
[Guy Ertz] - Hello, hi.
[Jeremy Fasquelle] - Guy, let's start with global growth. My first question is: What are the primary drivers of current global economic resilience, and how does the IMF outlook compare with our own view?
[Guy Ertz] - Yes, we are indeed in a period where economic growth is actually still resilient despite high oil prices. What we see is that we have a consumer that remains with good fundamentals. We have still low unemployment rates, but more than the consumer, it's really the business investment side that is supporting growth. It is in the US mainly about AI-driven investments related, obviously, also to data centers, but not only. We have in Europe also a dimension related to infrastructure, traditional infrastructure, electrification, and of course defense. So these are really important drivers that should continue to support growth. So we are still looking for growth to remain resilient into 2027, and indeed this idea of resilience is also a key concept for the IMF in their global outlook. And obviously, despite the fact that they keep also this resilience assumption, we are even somewhat more optimistic in terms of economic growth compared to the IMF.
[Jeremy Fasquelle] - And why is the outlook still complex, and what role does AI play in this environment?
[Guy Ertz] - Yes, inflation is indeed a complex story because we are having here some structural drivers. We have in particular AI innovation. Related to that, the assumption that over the next few years we should have rather less pressure on inflation due to AI, because there is a kind of positive supply shock. However, in the short term, AI is creating some pressure on prices, and that’s what we really see when we look at energy prices, when we look at semi-conductors. So in the short term, we could see inflation remaining somewhat sticky. In particular, in the US, it could remain somewhat above. the 2% target level of the central bank. But globally speaking, we are expecting inflation to start cooling next year, so inflation should be lower next year. This is also the assumption of the IMF. They see global inflation, so world inflation, peaking at around 4.7% in 2026, and then gradually easing into 2027 with full inflation at 4.1%.
[Jeremy Fasquelle]: That contrast is interesting because AI could ease inflation over time, while adding to price pressure today no?
[Guy Ertz]: Yes, that's correct, absolutely. But again, the timing of the evolution of AI and when it will start to impact in terms of the positive supply shock is still somewhat unknown.
[Jeremy Fasquelle]: Let's move on to the main risk beyond geopolitics. What are the key risks we should be watching?
[Guy Ertz]: Well, we should again separate the time frame, the time horizon. In the short term, so over the next 3 months, we probably have a higher risk from the geopolitical side, clearly the Middle East, the consequences on oil and also in particular gas prices, which are very important for the for the eurozone. That could be the main risk for the coming months. Looking a little bit further out into next year and probably even the year thereafter, we could see at some point, of course, the AI boom turning into excess, and then obviously the risk of an AI bust type of scenario.
But we think this is really a scenario beyond the 6 to 12-month scenario that we consider, and eventually could even be somewhat further out in time. Also, another risk that is more medium term is, of course, the evolution of debt and the sustainability of debt. We see some countries having relatively high deficits, adding to existing relatively high debt, and that is something we need to monitor. But again, this should not be an issue for markets over the 6 to 12-month horizon.
[Jeremy Fasquelle]: So AI investment, debt sustainability, and energy markets are all areas to watch. And finally, let's look at central banks and bond markets. What does this mean for central banks and government bond yields?
[Guy Ertz]: Well, what we've seen recently is that markets are now pricing somewhat less the rate hikes by central banks over the coming year. They had a quite aggressive scenario, so the market had a quite aggressive scenario. It's getting closer to our scenario. We have now a view that we should see the ECB making one more rate hike in December and then stop. The Fed would be making two more rate hikes, one in December and one in January, and then also here more wait-and-see approach thereafter. On the key bond yields, well, we've seen some peak recently. The bond yield in Germany has been peaking around 3.60%, and now it's back around 3.40%. And we are looking actually for more downside over the coming months, especially once the tensions in the Middle East and the tensions around oil and gas prices start to fade. So probably into next year, we should be then seeing yields in Germany moving closer to 3%.
In the US, we are probably not peaking at this stage. We could go temporarily again towards one towards the 5.50% on the ten year government bond yield. So what does that mean in practice for our positioning? Well, we do prefer at this stage to concentrate on eurozone and UK bonds. We include government bonds, also longer maturities, and also the corporate bonds, but focusing on quality, focusing on investment grade bonds.
[Jeremy Fasquelle] - Focus on quality, that's the keyword. Thank you! And thank everyone for listening. If you enjoyed this episode, please like, share, and subscribe on Apple Podcasts, Podcast Edit, or Spotify. For more research and insights, visit the BNP Paribas Wealth Management website. Thank you, and see you next time.