#Market Strategy — 19.09.2018

Economic Outlook Update

Guy Ertz


United States

In the US, the economy is on track to reach our growth target of 2.8% this year. Leading economic indicators such as business surveys and job market indicators suggest strong activity and even overheating in some sectors. Economic growth looks set to decelerate in 2019 to 1.8% on the back of fading fiscal stimulus, a likely loss of momentum in the area of deregulation, and a  normalisation of monetary policy. We evaluate the risks of recession to be rather low for next year. There is a risk of overheating as activity is probably already beyond full employment and we foresee that unemployment will reach a trough of below 3.5%. An unexpectedly sharp rise in wages, combined with the recent bounce in oil prices, further implementations of tariffs and pressure on corporate margins could lead to an overshooting of inflation and more Fed hikes. A further rise in trade tensions for a longer period is the key risk. We do however expect a gradual easing of tensions and bilateral trade deals. We expect the Fed to make two more rate hikes this year (in September and December) and another two next year. The policy rate would therefore reach 3% and the Fed would likely stop the tightening cycle in line with the pace of economy that we anticipate to slow down. Bond yields are expected to move gradually higher and converge to 3.25% by next autumn.

The eurozone

In the eurozone, the activity has slowed but remains at a high level. The sideways move in the Eurozone business survey (PMI) suggests some divergence within the group of countries. Weaker business expectations are worrying, but probably related to trade uncertainties. As discussed, we are expecting more positive news regarding trade and we see the potential for a stronger growth rebound in the coming months. Indeed, an appropriate combination of economic policies suggests that domestic demand should remain strong and offset some of the short-term external negative forces. On the inflation front, there are first signs of labour shortages and capital goods and this could gradually lead to an acceleration in inflation. We therefore anticipate an increase in the deposit rate in September 2019, followed by a joint increase in the deposit rate and the policy rate to 0.25% in December 2019. Bond yields are expected to move gradually higher and reach 1.25% over the coming year.


In Japan, the economy resumed the growth path in the second quarter 2018 after recording negative growth previously. The global environment was less sustainable due to trade tensions. Exports are weaker and the terms of trade are less favourable. We expect GDP growth to slow further from 0.9% this year to 0.6% in 2019 as economic growth slows in the US and the eurozone. Despite full employment, low inflation  expectations have seen “core” inflation (excluding energy) hover at around zero. The key factors keeping inflation from normalising are a higher labour participation of women, seniors (over 65) and foreigners. We expect headline inflation to stabilise at around 1% this and next year.  The BoJ is the last major central bank to continue a massive monetary stimulus. We do not anticipate any change to monetary policy in the coming months. The main risks for the Japanese economy are the trade tensions with the US with both direct and indirect effects.  

Emerging economies

These economies have seen a sharp de-synchronisation in recent months. There are several reasons. First, trade tensions have fuelled further uncertainty and some countries are more at risk. Second,  rising risk aversion has shifted investor appetite away from countries with the weakest fundamentals, such as Argentina, South Africa and Turkey. One key criteria is the so-called “twin deficit” (current account and public deficit) and the massive debt issued in hard currencies (dollar and euro). This has led to a sharp fall in the respective currencies and in turn reinforced the vulnerability for those countries. A third reason is political risk as for example Brazil where elections will be held in October.  We expect the uncertainty around trade tensions and the elections in Brazil to fall. This should lead to a more favourable environment for the region. At this stage, we see the risk of contagion with regard to Turkey and Argentina as relatively low. Uncertainty should remain high for these countries.