24 November 2016

2017 scenario: a world of uncertainty… and opportunity

At its annual event dedicated to market scenarios, attended by about a hundred professional investors, the team at Groupama Asset Management presented its macroeconomic outlook and management convictions.

[Christophe Morel, Chief Economist]
Positive cyclic “elasticity” of the economy

In a world of stubbornly low growth  

The global economy continues to face major structural challenges. Levels of GDP growth will remain low for the foreseeable future, while debt remains globally high and at the same time we must allow for an increase in uncertainties, due in particular to the geopolitical risk.

The forecasts of only modest growth are derived from structural factors. “Today we anticipate that potential growth, globally, will be only a little over 3.0%, which is almost 1% lower than during the period from 1997-2006,” explains Christophe Morel, Chief Economist. This erosion is attributed in part to factors such as the ageing population, the debt burden or the increase in inequality. “However, global growth is also being held back by the hysteresis of the crisis. Investors and economic players are still marked by the impact of the Great Recession,” he adds. Groupama AM anticipates that in 2017 potential growth will reach 1.5% in the United States and between 0.5 and 1.0% in the Eurozone.

These fundamentals constitute compelling arguments for a continuing policy of low real interest rates over the long term. In the Eurozone, there is imbalance between the sustained excess of savings and insufficient levels of investment. To correct this imbalance, real interest rates have to be low.  As long as collective debt, both private and public, remains high, there will be no significant change in interest rates.


Monetary policies: when the “unconventional” becomes “conventional”

 At the same time, it is necessary to dissociate these long-term structural trends from the shorter-term environment. And the current momentum is relatively favourable – so much so that Christophe Morel speaks of a positive “cyclic elasticity” of the current economic situation. The developed economies have allowed their economies to trail behind on two fronts, not only in the field of production and stocks, where demand is far outpacing supply, but also in investment. “The catch-up potential is considerable: companies will have to accelerate their production rate and reconstitute their stocks to meet the growth in consumer demand,” estimates Christophe Morel.

At the same time, monetary policies are expected to remain very accommodative. Although the American Federal Reserve has initiated a cycle of higher key rates, its intentions with this approach are pragmatic. In other words, the Fed will prioritize a very gradual tightening of monetary policy, without actually shrinking its balance sheet. “We anticipate an increase in the Fed Funds in December, and then only a further two in 2017 and three 2018.” For its part, the ECB will very probably extend its programme of asset purchases beyond March 2017. In the Eurozone, the reduction in the cost of debt due to quantitative easing will allow for more expansive budget policies: “QE generates implicit budget “windfalls”, and a part of this extra money in the kitty is used to support growth, for example via tax cuts to boost the purchasing power of consumers,” he affirms.

Finally, the Groupama AM team expects to see the emergence of new paradigms in economic policies. In addition to a progressive freeing from budget orthodoxy in the developed countries, structural policies are expected to increasingly target obstacles to growth. Measures to increase the minimum wage, stricter regulation (as in the financial sector) or again a rebalancing of added value in favour of employees could presage a move away from neo-liberal dogma and the Washington Consensus.

> 2016 11 24-2017 scenario & outlook