28 March 2017

Economic scenario: “one swallow can at least make a spring”

By Christophe Morel, Chief Economist at Groupama Asset Management.

[Christophe Morel]
The structural environment is still confronted by challenges: low growth including in the long term (in particular due to the end of the “demographic dividend” and to the drag on productivity caused by lack of investment), very high public and private debt, imbalance between savings and investment, with the resulting demand for very low interest rates for a very long time, and the remaining threat, in the long term, of deflation (and not inflation).

Nevertheless, for several consecutive quarters, our discourse concerning the economic situation has become increasingly optimistic. The reason is that a positive economic elasticityhas continued to stretch as consumer spending (powered by the fall in the price of oil and interest rates) has continued to extend its “lead” over businesses that remain paralyzed by uncertainties. As a result, stocks have continued to lag so far behind demand that the accumulating gap was no longer tenable. Consequently, despite persistently high levels of political uncertainty, the business climate has continuously improved since last summer.

And this cyclical recovery is robust, not only because it is happening simultaneously in all the developed countries and most of the emerging economies (in particular the CEE countries and the exporting countries of Asia), but also because it is happening in every sector (industry, construction and services). Above all, it is accompanied by good investment prospects. Clearly, the horizon of business leaders extends beyond the simple effect of restocking. The “hysteresis” effect of the crisis is attenuating, encouraged by economic policies that remain highly accommodating.

So, business demand (for stocks and investment) will now be taking up the baton of growth. And, if investment kicks back into life, world trade, which had particularly suffered from the decline in orders for durable goods and capital goods, should also make a strong comeback. Global trade, which had already been consigned to the grave, is by no means dead, despite the risks of protectionism.


Overall, our significantly positive discourse on the economy is given tangible form by our statistical forecasts. Firstly, we are revising our growth forecasts upwards: in 2017, global growth is revised from 3.1% to 3.3%, solely due to the developed countries and China; in 2018, the upward revision of global growth from 3.3% to 3.4% only relates to the emerging countries. In terms of individual countries, growth in 2017 is predicted to reach 2.6% in the United States, 1.8% in the Eurozone (1.5% for France), 1.8% for the United Kingdom and 6.5% for China.

The downside risk factors are essentially: i) the geopolitical and political risks (United States, France, Netherlands, Brexit negotiations etc.), ii) financial instability (interest rate risk and equity adjustment risk) and iii) in the longer term, the risk of protectionism (trade barriers, immigration control etc.). The upside risks are in particular i) the multiplier effect of global trade, and ii) a “real” relaunch of the European project after the French and German elections in a framework of reflection on the future of Europe. In the final analysis, this “balance of risksseems to us to be stable at present, in the knowledge that if the political risks do not materialize it could become positive.

In terms of our money market scenario, this implies that:

  • the central banks will not be taking any risks with the recovery, will be more tolerant of inflation and will continue implicitly or explicitly to control the curve of interest rates.
  • In practical terms, the Fed will raise its Fed Funds 3 times in 2017 and 3 more times in 2018; the question of shrinking its balance sheet will be debated this year and should lead to a prudent balance sheet management strategy, by undertaking a process of “reverse tapering” from mid-2018, in other words a gradual reduction in principal reinvestment on maturity.
  • For the ECB, our prediction is as follows: abandonment of the downside risk to growth in June; announcement in autumn (after the German elections) of a progressive reduction in asset purchases, to be implemented in early 2018, simultaneously with a progressive increase in the bank deposit rate only; end of the asset buying programme in summer 2018.