global macro outlook - alliancebernstein€¦ · 3 global macro outlook global market outlook:...

1 GLOBAL MACRO OUTLOOK

GLOBAL MACRO OUTLOOK MAY 2017

KEY FORECAST TRENDS

With President Trump’s first 100 days and the French presidential election in the rearview mirror, attention is turning back to fundamentals. In recent months, the global economy has moved onto firmer ground and, with policy still highly accommodative, we expect this to continue. We’re forecasting 2.8% global growth both this year and next.

With inflation expected to decline (to 2.5% in 2018 from 2.7% this year), this should provide a benign backdrop for global financial markets. That’s because developed-market central banks are likely to withdraw extraordinary monetary-policy stimulus very gradually.

But this process is unlikely to uniform. The Fed is likely to continue raising rates slowly and adopt a passive approach to normalizing its balance sheet. At the ECB, tapering will probably move onto the agenda in the second half of the year, However, we expect the BoJ to remain broadly committed to its current program.

These differences are reflected in our bond yield forecasts, which show Japanese yields anchored close to zero, a modest rise in the US and a more material increase in the euro area, where the disconnect with fair value is, in our view, wider.

Bunds Set to Underperform

US Less Germany 10-Year Government Bond Yield

Through May 2, 2017

Source: Bloomberg

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CONTENTS Global Forecasts ............................ 2

Global Market Outlook Yield Curves ............................... 3 Currencies .................................. 4 Central Bank Watch .................... 5 US ................................................. 6 Euro Area ...................................... 7 Japan ............................................. 8 China ............................................. 9 Canada ........................................ 10 Australia/New Zealand ................ 10 UK ............................................... 11 Norway/Sweden .......................... 11 Asia ex Japan .............................. 12 Latin America ............................... 13 Eastern Europe, Middle East and Africa (EEMEA) ........................... 14

Forecast Table .............................. 15 Contributors .................................. 16

The spread between US and German 10-year bond yields has risen above the top of its long-term trading range

To be sustained, this will require either US growth to surprise on the upside and/or the ECB to extend its bond purchase program

Neither is likely, in our view, which is why we expect the spread to narrow


GLOBAL FORECASTS

OUTLOOK

We expect global growth of 2.8% in 2018, the same as in 2017. Slightly softer growth in developed economies (1.8% vs. 2.0%) will be offset by a modest improvement in emerging economies (4.5% vs. 4.2%).

We are more optimistic than the consensus on euro-area and Japanese growth in 2018 (2.0% vs.1.5% consensus for the euro area and 1.3% vs. 1.0% for Japan), but are more cautious regarding our growth forecasts for the US (1.8% vs. 2.4%) and China (5.9% vs. 6.5%).

Among the factors we’re watching are the interaction between strong survey data and softer official data, the implementation of fiscal policy and the extent to which China continues to prioritize short-term growth over much-needed economic reforms.

Global inflation is expected to be marginally lower next year, at 2.5% vs. 2.7% this year, with developed-market inflation settling into a 1.5%–2.0% range. Against this backdrop, central banks are likely to withdraw monetary stimulus very gradually.

Global Manufacturing Outlook: Positive Trends, Particularly in Survey Data

Economic Growth

Solid, if unspectacular, growth to continue in 2018, similar to 2017

Risks tilted in more positive direction, supported by recent data and shift toward fiscal stimulus

Key Risks

Politics and protectionism

Fiscal over/underdelivery

China default crunch/hard landing

Inflation

Energy-related rise in headline inflation has run its course

Inflation expectations move center stage: labor market/wage outcomes now key benchmarks

Key Risks

Uncertain labor-market slack

Does the Phillips curve still work?

Monetary Policy

Gradual Fed tightening (Fed funds 1.88% by end of 2018)

Near term, BoJ and ECB still committed to bond purchases

But this could change in 2H:2017

Key Risks

Fed responds to fiscal stimulus

More aggressive tapering

European politics

Weaker Stronger Easier Tighter Lower Higher

Global Manufacturing PMI

Through May 2, 2017

Source: Haver Analytics and IHS Markit

48

50

52

54

56

58

10 11 12 13 14 15 16 17

G3* Manufacturing Output

Through May 2, 2017 *US, euro area and Japan Source: Haver Analytics and IHS Markit

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Manufacturing Output

Through May 2, 2017

Source: Haver Analytics and IHS Markit

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Japan

Euro Area

US


GLOBAL MARKET OUTLOOK: YIELD CURVES

GLOBAL YIELDS

Global—Core rates likely to trend higher; central bank balance-sheet policy likely to be a key factor

US—Softer 2018 growth and cautious Fed tightening likely to limit the rise in the US 10-year Treasury yield to 2.75%

Euro Area—ECB tapering to push Bund yields higher, though political backdrop remains a risk

Japan—QQE-YCC policy to anchor 10-year yields close to zero, but commitment to quantity target to become fuzzier

UK—Bank of England (BOE) to resist early tightening of monetary policy

Global Rates: AB and Consensus Year-End Forecasts (%)

AB Consensus

2017 2018 2017 2018

US 2.75 2.75 2.84 N/A

Euro Area 0.75 1.25 0.75 N/A

UK 1.50 1.75 1.53 N/A

Japan 0.05 0.25 0.09 N/A

As of May 2, 2017 Source: Bloomberg and AB

G4 Medium-Term Inflation Expectations*,†

Through May 2, 2017

*G4 is the US, euro area, Japan and the UK. †Five-year/five-year forward inflation-linked swaps Source: Bloomberg and AB

1.4

1.6

1.8

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2.2

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Medium-Term Inflation Expectations*

Through May 2, 2017 *Five-year/five-year forward inflation-linked swaps Source: Bloomberg and AB

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GLOBAL MARKET OUTLOOK: CURRENCIES

FX FORECASTS

USD—Little fundamental support for stronger USD, especially given stretched valuations

JPY—Modest yen weakness expected as BoJ lags in policy normalization process

EUR—A (temporary) reduction in political risk and ECB tapering should support the euro

GBP—Brexit referendum impact appears to be largely discounted

Dollar Bloc—AUD vulnerable to a housing correction, which we expect to intensify in the second half and into 2018

Global FX: AB and Consensus Year-End Forecasts

AB Consensus

2017 2018 2017 2018

EUR/USD 1.15 1.15 1.07 1.12

USD 115 125 115 115

EUR/GBP 0.90 0.90 0.87 0.87

AUD/USD 0.70 0.68 0.74 0.75

As of May 2, 2017 Source: Bloomberg and AB

USD Effective Exchange-Rate Index: Nominal

Through May 2, 2017 Source: Bloomberg and AB

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USD Effective Exchange-Rate Index: Real

Through May 2, 2017 Source: Bloomberg and AB

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GLOBAL MARKET OUTLOOK: CENTRAL BANK WATCH

Developed Markets

Policy

Direction Latest

(%) +6M (%)

+12M (%) Comments/Unconventional Policy

US 0.88 1.38 1.38 We expect the Fed to start shrinking its balance sheet within a year

Euro Area 0.00 0.00 0.00 Our base case: The ECB will begin tapering before year-end

Japan (0.10) (0.10) (0.10) QQE-YCC policy in play for foreseeable future. BOJ to lag ECB and Fed in normalization process

UK 0.25 0.25 0.25 BOE to resist near-term pressure for higher rates

Canada 0.50 0.50 0.75 Tightening contingent on favorable US trade policy

Australia 1.50 1.25 1.00 Further easing contingent upon disorderly adjustment in housing

NZ 1.75 1.75 1.75 RBNZ on hold and increasingly reliant on macroprudential policies

Sweden (0.50) (0.50) (0.50) Next move likely to be up, though not until 2018

Norway 0.50 0.50 0.50

KEY DEVELOPED-MARKET THEMES

Although the Fed has already started raising rates, the transition away from ultra-loose monetary policy is likely to be a gradual one in the major developed economies.

As we move into the second half of the year, central bank balance-sheet policy will come into sharper focus, and is likely to be a major driver of global asset prices.

Emerging Markets

Policy

Direction Latest

(%) +6M (%)

+12M (%) Comments/Unconventional Policy

China 3.48 3.60 3.80 Clear desire to contain leverage risk, but supporting growth a priority for now

India 6.25 6.25 6.25 “Neutral” monetary stance means end of easing cycle

Indonesia 4.75 4.75 4.75 More balanced growth and inflation dynamics mean there’s no need for more rate cuts

S. Korea 1.25 1.25 1.00 On hold, but may start to ease eventually

Brazil 11.25 9.50 8.50 Aggressive easing priced in since 4Q:2016

Mexico 6.50 6.75 6.75 Banxico likely to tighten when Fed does

Chile 2.75 2.75 2.75 Soft growth and falling inflation give central bank room to ease

Colombia 7.00 6.25 6.00 Inflation to decline; more rate cuts likely

Russia 10.00 9.00 8.50

Turkey 8.00 8.00 8.00 CRBT will only use the upper end of the interest corridor to manage short-term lira liquidity

S. Africa 7.00 6.75 6.50

Hungary 0.90 0.90 0.90

Poland 1.50 1.50 1.50

KEY EMERGING-MARKET THEMES

The EM outlook is mixed. We expect modest tightening in Mexico and China and big rate cuts in Brazil and Russia.

Elsewhere, the story is one of either stable or slightly lower interest rates.


US

Real GDP (%) Inflation (%) Policy Rate (%) 10Y Bond Yield (%) DXY (Index)

2017F 2018F 2017F 2018F 2017F 2018F 2017F 2018F 2017F 2018F

US 2.3 1.8 2.0 2.1 1.38 1.88 2.75 2.75 104.36 N/A

OUTLOOK

The US economy appears structurally sound, and we are confident that the soft patch in 1Q was just a bump in the road. GDP should improve in 2Q and activity remain stable in the coming quarters.

Consumer sentiment is at a cycle high, reflecting a strong and still tightening labor market. Spending has yet to match sentiment, but we expect increased consumption in the months ahead.

With inflation still subdued, the Fed’s rate-setting committee can take its time removing accommodation. That should allow the expansion to continue.

RISK FACTORS

The primary risks for the US economy appear to be political in nature. Policy changes in Washington could lead to unexpected economic consequences and complicate the Fed’s job of maintaining stable growth and inflation. We note the potential damage that protectionism could inflict on the economy as a downside risk.

The labor market is robust and is approaching full employment. That suggests that fiscal stimulus is unwarranted at this point in the cycle and would be more likely to generate inflation than to boost growth in a sustainable fashion.

The Fed is in the process of normalizing interest rates and intends to begin reducing the size of its balance sheet around year-end. While recent rate hikes have not disrupted financial markets or the economy, the risk remains that the normalization process could be bumpier than expected, particularly as the Fed moves closer to shrinking the balance sheet.

OVERVIEW

The US economy is structurally sound, with growth, unemployment and inflation within range of equilibrium. The good news is that economies in equilibrium tend to be resilient to shocks, which suggests that the outlook for the next few quarters is stable. Monetary policy is now geared toward extending the expansion rather than boosting the rate of growth. Low inflation has at this point allowed the Fed to proceed gradually, which has contributed to stability. Near-term economic risks appear manageable, leaving us to focus on politics as the primary source of risk. Protectionism could push the economy into a phase of slower growth, fiscal stimulus could push inflation uncomfortably high, and policy unpredictability could eventually lead to financial market instability. For now those remain risks rather than expectations, however, so the economy is likely to proceed at roughly the same pace it has, with growth of close to 2%, unemployment between 4% and 5%, and inflation gradually approaching 2%. It may not be exciting, but this is the new normal.

Unemployment Rates

Through May 2, 2017 Source: Thomson Reuters Datastream

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Underemployment

Unemployment

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GDP and Long-Term Average


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15-Year Average


Euro Area

Real GDP (%) Inflation (%) Policy Rate (%) 10Y Bond Yield (%) FX Rates vs. USD

2017F 2018F 2017F 2018F 2017F 2018F 2017F 2018F 2017F 2018F

Euro Area 1.9 2.0 1.6 1.4 0.0 0.0 0.75 1.25 1.15 1.15

OUTLOOK

We expect euro-area growth to be little changed at 2.0% next year, from 1.9% in 2017.This would be the fourth consecutive year of above-trend growth.

With underlying inflation likely to rise only slowly and the impact from energy-price base effects starting to fade, we expect headline inflation to ease back to 1.4% next year from 1.6% in 2017.

Against this backdrop, the ECB is expected to announce, and possibly implement, a tapering of its asset purchases in the second half of 2017. This would put upward pressure on Bund yields and the euro.

RISK FACTORS

For the first time in several years, risks to the outlook are evenly balanced.

Politics represents a key downside risk, with the Italian election (due in the first half of 2018) the next major flash point.

OVERVIEW

Recent data suggest that the euro-area recovery continues to strengthen and broaden. Official data for the first quarter show that real GDP expanded by 0.5% for the second consecutive quarter. Given a highly supportive monetary and fiscal policy mix, a firmer global backdrop and the fact that the economy is nowhere near capacity constraints, there is no reason why growth shouldn’t continue at around the same pace in coming quarters. Indeed, April survey data—including the composite PMI, which rose to a six-year high of 56.8—point to near-term upside risks to this view.

Having fallen sharply in March, to 1.5%, headline inflation bounced back to 1.8% in April. This was driven by a rebound in core inflation, which rose from 0.7% to 1.2%. If the latter is indicative of a change in trend, it would be a very hawkish one. In our view, though, the April data should be treated with caution. That’s because both the March and April data are highly likely to have been distorted by the timing of Easter. In this respect, it’s worth noting that the three-month average for core inflation is still running at 0.9%, in line with the average over the past year. Despite strong activity data and April’s upside inflation surprise, we continue to expect underlying inflation to pick up only gradually in the euro area.

The ECB didn’t announce any changes to its policy instruments or forward guidance after its April Governing Council meeting. The spotlight now turns to the June meeting, at which we expect the ECB to change its risk assessment for economic growth (to “balanced” from slightly to the downside) and possibly remove the downside interest-rate bias in its forward guidance. That should set the stage for the Governing Council to announce a tapering of its bond purchases and/or an increase in the deposit rate in the second half of the current year. In our view, the probability that the ECB will implement these policies before year-end is higher than markets expect.

Real GDP and Composite PMI-Based Proxy

Through May 2, 2017 Source: Haver Analytics and IHS Markit

Consumer Price Inflation

Through May 2, 2017 Source: Haver Analytics and IHS Markit

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Japan


2017F 2018F 2017F 2018F 2017F 2018F 2017F 2018F 2017F 2018F

Japan 1.6 1.3 0.6 1.1 (0.10) 0.00 0.05 0.25 115 125

OUTLOOK

We continue to expect roughly trend growth in Japan over the next couple of years, helped by both fiscal and monetary stimulus. Strong manufacturing activity and exports are adding to the growth momentum. Not surprisingly, the labor market continues to tighten.

Wage outcomes will remain key in assessing the shift in core inflation. While there’s been some progress in shifting inflation expectations higher, inflation is still well below the central bank’s 2% target. In fact, the latest reading on the BoJ’s preferred core measure (CPI ex fresh food and energy) dipped back into negative territory.

Against that backdrop, it’s likely that the QQE-YCC program designed to cap 10-year yields at zero will stay in place through 2017 and into 2018, even as the volume of purchases may (passively) decline.

RISK FACTORS

An important risk would be any disruption of global trade caused by the Trump administration’s trade policies. Japan’s current account surplus (4% of GDP) leaves the country vulnerable to US criticism on trade issues.

Another risk would be a policy error, such as the BoJ prematurely pulling back from its QQE-YCC program.

OVERVIEW

One of the risk scenarios we’ve been talking about for a while is whether the BoJ could end up tapering before year-end. We had been assessing the probability at around 25%–30% for a couple of reasons. First, there may be technical reasons for tapering, with the BoJ finding it difficult to implement its program. Second, fundamental developments may dictate tapering. For example, inflation and wage growth may be strong enough for the BoJ to declare “mission accomplished.”

As 2017 has unfolded, however, the odds of either of these things happening have fallen. Sure, the pace of JGB purchases has eased a little, but the BoJ has managed to keep 10-year yields in a narrow range (10 b.p. either side of zero) (left display, below). Also, the slope of the yield curve out to the super-long sector has been stable. And while economic growth has been solid, the inflation numbers have disappointed (right display, below). The exit seems no closer.

In short, this makes it more likely that the BoJ will continue with its current QQE-YCC program. In the shift toward balance-sheet normalization, the Fed and the ECB will likely be way out in front of the BoJ.

Japan 10-Year Government Bond Yields


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2014 2015 2016

Per

cent

QQE-YCCRegime

BOJ: Monetary Base Change over 12 Months

Through March 31, 2017 Source: CEIC Data and Thomson Reuters Datastream

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China


2017F 2018F 2017F 2018F 2017F 2018F 2017F 2018F 2017F 2018F

China 6.4 5.9 2.5 2.7 3.60 3.80 3.70 3.60 6.90 7.00

OUTLOOK

Despite increased deleveraging efforts, the risk of excessive tightening remains low. The key policy objective is stable growth.

The trade war threat has faded, and better US-China cooperation will enhance the external and currency outlook, especially now that the USD seems to have peaked.

The outlook for 2018 depends on the balance Beijing strikes between growth and reform. At this point, we think the authorities will gradually resume their reform initiatives, but this time with less emphasis on growth promotion.

RISK FACTORS

Deleveraging intensifies, with rising counterparty risk during the process.

Protracted trade negotiations with the Trump administration fail to bear fruit, resulting in another round of external uncertainty.

OVERVIEW

China’s credit impulse, which leads domestic demand growth by about six months, has peaked as Beijing stresses measures to contain financial leverage. We expect measured credit tightening in the next quarter or two. The risk of over-tightening should stay low because steady economic growth is a key policy objective. We expect growth to ease marginally in the second half of 2017, but a sharp deceleration looks unlikely. The absence of an imminent trade war with the US has already removed a key external near-term uncertainty. Housing, however, is a wild card. Rapid swings in market sentiment and the attendant policy response may cause more domestic uncertainty down the road.

The outlook for 2018 depends on how Beijing balances growth and reform. If there’s no disorderly correction in the housing market, the economy won’t lose an important growth engine. That means Beijing is more likely to gradually resume reform initiatives next year.

Growth Should Ease Somewhat as Credit Impulse Slows

Through May 2, 2017 Source: CEIC Data and AB

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Credit Impulse(Right scale, forward 6 months)

Domestic Demand Proxy

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Housing Market Remains Buoyant Residential Housing

Through May 2, 2017 Source: CEIC Data and AB

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Canada


2017F 2018F 2017F 2018F 2017F 2018F 2017F 2018F 2017F 2018F

Canada 2.1 1.9 1.9 2.0 0.75 1.25 1.85 2.00 1.38 1.38

OUTLOOK

The domestic economy is on track to grow by more than 3.5% in the first quarter, the labor market is improving, and a rebound in oil prices has boosted exports. Even so, the risks to this rosy outlook may be skewed to the downside.

The housing market is pushing household leverage higher, wage growth remains soft and there’s continued uncertainty regarding US trade policy. These factors are keeping the Bank of Canada more dovish than the data alone suggest it should be.

RISK FACTORS

A disorderly renegotiation of NAFTA would have negative repercussions throughout the Canadian economy, since many industries are deeply dependent on US trade flows.

Household leverage metrics are at an all-time high. A continuation of home price appreciation and a reliance on debt risks debt levels becoming unmanageable, especially in the context of rising interest rates.

OVERVIEW

Housing markets in Toronto and Vancouver are still heating up. Rapid price appreciation is nothing new for these markets; they’ve been seeing large increases almost every month for the past few years. But now the government is taking note. The Ontario government introduced a menu of macroprudential measures aimed at cooling the housing market and reducing speculative activities. However, history shows that foreign buyer taxes and other strategies to reduce demand are short-term solutions. Rising prices lead to increased household leverage, which creates a risk to the economy and the stability of the financial sector. We think the banking sector is well capitalized and can withstand a market correction. Still, we’re monitoring developments closely.

Australia/New Zealand


2017F 2018F 2017F 2018F 2017F 2018F 2017F 2018F 2017F 2018F

Australia 2.0 1.9 1.9 1.5 1.00 1.00 2.55 2.65 0.70 0.68

New Zealand 3.0 2.6 1.7 1.8 1.75 1.75 3.00 3.00 0.71 0.70

AUSTRALIA

Stronger economic data and higher commodity prices have improved the consensus outlook. We see things differently.

We are becoming more worried about the housing sector, particularly as oversupply begins to emerge (especially in the apartment market) and as tighter macroprudential policies loom.

With high debt levels, stagnant wages and a declining savings rate added to the mix, the likely outcome is a weaker economy, a softer Australian dollar and renewed rate cuts as the year progresses.

NEW ZEALAND

Growth in New Zealand remains strong, but inflation is still subdued. This partly reflects labor market dynamics, such as high levels of migration and higher participation, which have acted as major shock absorbers and limited wage growth to just 1.6%.

If nothing changes, it’s difficult to believe that the central bank will hike rates any time soon, particularly as recent macroprudential policy tightening is helping to cool the housing sector.


UK


2017F 2018F 2017F 2018F 2017F 2018F 2017F 2018F 2017F 2018F

UK 1.7 1.5 2.6 2.2 0.25 0.25 1.50 1.75 1.28 1.28

OUTLOOK

A sharp slowdown in real income growth and Brexit-related uncertainty suggest slower economic growth in 2017. We expect the slowdown to continue next year too, with the economy forecast to grow by just 1.5%.

Inflation is likely to reach 3.0% in coming months, but we still expect the BOE to hold interest rates steady.

RISK FACTORS

If the economy holds up better than expected in the short term, a small rise in interest rates is possible.

If Brexit negotiations are handled badly, the fallout could lead to a much sharper slowdown than we anticipate, and easier monetary policy—primarily in the form of quantitative easing.

OVERVIEW

Recent data have been mixed. While real GDP rose by a disappointing 0.3% in the first quarter, down from 0.7% in the final quarter of last year, survey data for March and April suggest that the economy may have regained some momentum. The BOE is likely to take both sets of data into account, but the resultant uncertainty as well as lingering concerns about the Brexit impact provide strong arguments for keeping interest rates on hold. Things may change if wage pressures start to build, but at present, pay growth is moving in the opposite direction (adding to the squeeze on real income).

Norway/Sweden


2017F 2018F 2017F 2018F 2017F 2018F 2017F 2018F 2017F 2018F

Norway 1.7 2.1 1.9 2.2 0.50 0.50 2.00 2.25 8.05 8.05

Sweden 2.7 2.6 1.5 1.5 (0.50) (0.25) 1.00 1.50 8.25 8.25

NORWAY

The Norwegian recovery should continue in 2018 after the period of oil price–induced weakness in 2016. We expect real GDP to grow by 2.1% next year following growth of 1.7% this year.

Since peaking at 3.7% last year, the Norges Bank’s preferred measure of inflation has fallen sharply, and now stands at 1.8%. The central bank maintains a mild easing bias, but we think rates will remain on hold for some time.

SWEDEN

The Swedish economy picked up steam in the opening months of 2017. We expect it to grow by 2.7% this year and by 2.6% in 2018, well above the regional average of 1.9%.

In spite of this strong growth, underlying inflation pressures remain muted. This means that monetary policy will likely remained focused on avoiding a rising exchange rate. We expect policy rates to remain on hold for the duration of this year and to remain below zero in 2018.


Asia ex Japan


2017F 2018F 2017F 2018F 2017F 2018F 2017F 2018F 2017F 2018F

Asia ex Japan 5.7 5.5 2.6 2.9 3.55 3.80 4.05 4.07 — —

Hong Kong 2.7 2.8 2.1 2.8 1.50 2.00 1.70 1.90 7.76 7.76

India 6.4 6.6 3.4 4.2 6.25 6.75 7.10 7.40 64.00 64.00

Indonesia 5.2 5.7 4.2 3.9 4.75 5.00 7.10 7.30 13,200 13,000

South Korea 2.3 2.4 1.7 1.6 1.00 1.00 2.30 2.30 1,130 1,150

Thailand 2.7 3.4 1.3 2.4 1.50 2.00 2.85 3.00 34.50 34.50

OUTLOOK

A marginal rise in growth and inflation will ensure there are no drastic changes in policy direction. We expect only measured tightening next year.

Local bond yields should rise gradually across the region as the Fed continues to slowly raise rates and the ECB begins to taper its asset purchases later this year. This should lead to more prudent monetary policy across the region.

A less hostile US trade policy removes uncertainty and should enhance the region’s external and currency outlook.

RISK FACTORS

China’s excessive deleveraging could disrupt financial flows in a region heavily influenced by Chinese investment.

Renewed trade tensions with the US remain a possibility.

OVERVIEW

Asia’s growth momentum has slowed, according to the latest PMI data. Only Indonesia and Malaysia showed improvement in the April surveys, while India held firm. The rest of the region, including China, Taiwan, Thailand and the Philippines, has slackened, and South Korea remains in the contractionary phase of the manufacturing cycle. Expectations for new export orders in particular were hurt by a continued commodity price correction. Also, electronic exports from Asia’s major tech exporters seem to have peaked.

We still think that Asia’s recovery is on solid ground, though. Excepting China, there’s no indication of inflation risk or the need for central banks to tighten policy—at least in 2017. Besides Hong Kong, where a currency peg arrangement requires the base rate to follow the US federal funds rate, we expect only Taiwan and the Philippines to hike rates modestly this year. The rest of the region’s central banks may stay put for longer. Regarding currencies, a weaker USD will help support most Asian currencies in the coming year, while only Vietnam and Sri Lanka will persist with their steady depreciation policies.


Latin America


2017F 2018F 2017F 2018F 2017F 2018F 2017F 2018F 2017F 2018F

Latin America 1.1 2.0 5.5 3.8 8.69 7.48 6.99 6.45 — —

Argentina 2.0 3.1 — 22.0 21.00 15.00 — — 17.00 19.50

Brazil 0.6 2.1 4.2 4.5 9.00 8.50 10.15 9.00 3.50 3.75

Chile 2.0 2.3 3.2 3.0 2.75 3.00 4.20 4.70 680 700

Colombia 1.7 2.3 4.2 4.0 6.00 5.25 6.90 7.30 3,030 3,100

Mexico 1.9 2.5 5.2 3.8 6.75 5.50 7.30 7.30 18.50 19.00

OUTLOOK

International demand for emerging-market (EM) assets is strong, and is likely to remain so.

Investment inflows have made a handful of local currencies overvalued, and that’s not likely to change soon—unless the Fed suddenly becomes more aggressive with its interest-rate hikes.

Uncertainty on US trade policy remains, but the worst-case scenarios for EM countries, such as a border tax adjustment, seem unlikely.

RISK FACTORS

Increased US protectionism

Uncertainty related to US tax policy

Idiosyncratic political shocks in Argentina, Brazil and Venezuela

OVERVIEW

The first green shoots are appearing in some large Latin American countries. We expect the regional GDP growth average to turn positive this year after two years of contraction. Argentina and Brazil are expected to grow again in 2017, while activity indicators in Mexico are looking up. Venezuela will probably be the only country in the Americas that does not grow in 2017. Inflation rates (also excluding Venezuela) are contained, and the regional average is declining (thanks mainly to lower inflation in Brazil, Mexico and Argentina—the only countries in the region still taking a tight monetary policy stance).

In Brazil, President Michel Temer is unpopular, and corruption investigations are ongoing. But the government is making progress on the policy front, with preliminary approval of both labor and social security reforms. Additional efforts to secure a majority in Congress to endorse pension reform are needed, and the final bill will likely be a watered-down version of the initial proposal, but still a significant step ahead from a fiscal standpoint.

In Mexico, the peso climbed back toward 19 per USD as US officials toned down their statements on NAFTA. But volatility may perk up again ahead of the State of Mexico elections. In Argentina, the government has yet to find a solution to the conflict with unionized labor, but investors remain bullish ahead of this year’s midterm elections. Lenín Moreno’s victory in the Ecuadorian presidential election suggests policy continuity. But a weaker fiscal position in Ecuador means that he’s likely to have less wiggle room.


Eastern Europe, Middle East and Africa (EEMEA)


2017F 2018F 2017F 2018F 2017F 2018F 2017F 2018F 2017F 2018F

EEMEA 1.8 2.6 6.4 5.8 6.87 6.36 8.20 8.11 — —

Hungary 2.6 2.9 2.4 2.7 0.90 0.90 3.75 4.20 315 317

Poland 3.4 3.4 2.0 2.2 1.50 1.75 3.75 4.20 4.15 4.15

Russia 1.1 1.6 4.7 5.2 8.50 7.50 8.30 8.00 60.50 59.00

South Africa 0.7 1.2 5.7 5.5 6.50 6.00 9.20 8.90 13.70 13.60

Turkey 1.8 3.2 9.6 8.0 8.00 8.00 10.80 10.80 3.80 4.00

OUTLOOK

Regional real GDP growth should improve in 2017, driven partly by a modest recovery in Russia. In South Africa, expect weak growth and increased downside risk due to political uncertainty.

Most Central and Eastern Europe (CEE) economies are experiencing a rebound in headline CPI, while Turkish inflation has yet to peak, and will remain above 10% for most of 2017. Disinflation, on the other hand, should persist in Russia and South Africa.

Despite the CPI rebound, CEE central banks will not tighten monetary policy in the near term. Russia and South Africa have scope to cut interest rates in 2017, while Turkey will keep domestic liquidity conditions tight.

Political risks still loom large in a few EEMEA countries, especially in Turkey and South Africa. In the latter, the recent cabinet changes by President Zuma have caused a further rift in the ruling party, and are severely undermining reform efforts.

RISK FACTORS

If the price of oil continues to decline, it would benefit CEE’s and Turkey’s inflation outlook and delay CEE tightening until 2018. But weaker commodities and currencies could delay rate cuts in Russia and South Africa this year.

A more significant and prolonged decline in oil prices would also pose renewed growth and fiscal challenges for the region’s energy exporters, especially Russia, Kazakhstan, Azerbaijan and the Middle East.

OVERVIEW

Fitch and S&P downgraded South Africa to junk status following President Zuma’s dramatic cabinet changes at the end of March. Moody’s has yet to cast a verdict, but is also expected to downgrade South Africa soon, though it’s likely to stop short of stripping the country of its investment-grade status. All three rating agencies as well as investors will watch for signs of policy reversals, especially on the fiscal and state-owned enterprise reform front. They’ll also be watching for more radical measures, such as land seizure without compensation—something proposed by Zuma himself. We don’t think the government will resort to such measures any time soon. But the possibility hurts domestic confidence and therefore poses a risk to South Africa’s already fragile recovery.

The good news is that South Africa’s strong judiciary system continues to impose important checks and balances, as recently witnessed by the High Court’s ruling to stall advances in Eskom’s nuclear power program. While the latter will not be terminated, the program will see more significant delays. That should reduce the downside risks to public finances and sovereign ratings.

In Turkey, President Erdoğan’s narrow victory in the constitutional referendum has eased near-term political and fiscal risks, but allegations of electoral fraud have left the country more divided than ever. We still think that an early election is unlikely in 2017 given Erdoğan’s currently weak mandate. But it’s a risk that can’t be completely ignored. If Erdoğan and his AKP party sense that support for opposition parties HDP and MHP is waning, they may still risk an early poll in hopes that these parties’ support falls below the 10% threshold required for seats in the legislature.

2017F 2018F 2017F 2018F 2017F 2018F 2017F 2018F 2017F 2018F

Global 2.8 2.8 2.7 2.5 2.29 2.41 3.01 3.10 - -

Industrial Countries 2.0 1.8 1.7 1.8 0.69 0.96 1.72 1.94 - -

Emerging Countries 4.2 4.5 4.3 3.8 5.37 5.16 5.48 5.30 - -

United States 2.3 1.8 2.0 2.1 1.38 1.88 2.75 2.75 - -

Canada 2.1 1.9 1.9 2.0 0.75 1.25 1.85 2.00 1.38 1.38

Europe 1.9 1.9 1.7 1.5 0.04 0.05 0.92 1.37 - -

Euro Area 1.9 2.0 1.6 1.4 0.00 0.00 0.75 1.25 1.15 1.15

United Kingdom 1.7 1.5 2.6 2.2 0.25 0.25 1.50 1.75 1.28 1.28

Sweden 2.7 2.6 1.5 1.5 (0.50) (0.25) 1.00 1.50 8.25 8.25

Norway 1.7 2.1 1.9 2.2 0.50 0.50 2.00 2.25 8.05 8.05

Japan 1.6 1.3 0.6 1.1 (0.10) 0.00 0.05 0.25 115 125

Australia 2.0 1.9 1.9 1.5 1.00 1.00 2.55 2.65 0.70 0.68

New Zealand 3.0 2.6 1.7 1.8 1.75 1.75 3.00 3.00 0.71 0.70

Asia ex Japan 5.7 5.5 2.6 2.9 3.55 3.80 4.05 4.07 - -

China 6.4 5.9 2.5 2.7 3.60 3.80 3.70 3.60 6.90 7.00

Hong Kong 2.7 2.8 2.1 2.8 1.50 2.00 1.70 1.90 7.76 7.76

India 6.4 6.6 3.4 4.2 6.25 6.75 7.10 7.40 64.00 64.00

Indonesia 5.2 5.7 4.2 3.9 4.75 5.00 7.10 7.30 13,200 13,000

Korea 2.3 2.4 1.7 1.6 1.00 1.00 2.30 2.30 1,130 1,150

Thailand 2.7 3.4 1.3 2.4 1.50 2.00 2.85 3.00 34.50 34.50

Latin America 1.1 2.0 5.5 3.8 8.69 7.48 6.99 6.45 - -

Argentina 2.0 3.1 - 22.0 21.00 15.00 - - 17.00 19.50

Brazil 0.6 2.1 4.2 4.5 9.00 8.50 10.15 9.00 3.50 3.75

Chile 2.0 2.3 3.2 3.0 2.75 3.00 4.20 4.70 680 700

Colombia 1.7 2.3 4.2 4.0 6.00 5.25 6.90 7.30 3,030 3,100

Mexico 1.9 2.5 5.2 3.8 6.75 5.50 7.30 7.30 18.50 19.00

EEMEA 1.8 2.6 6.4 5.8 6.87 6.36 8.20 8.11 - -

Hungary 2.6 2.9 2.4 2.7 0.90 0.90 3.75 4.20 315 317

Poland 3.4 3.4 2.0 2.2 1.50 1.75 3.75 4.20 4.15 4.15

Russia 1.1 1.6 4.7 5.2 8.50 7.50 8.30 8.00 60.50 59.00

South Africa 0.7 1.2 5.7 5.5 6.50 6.00 9.20 8.90 13.70 13.60

Turkey 1.8 3.2 9.6 8.0 8.00 8.00 10.80 10.80 3.80 4.00

Blanks in Argentina are due to distorted domestic financial system so are not forecast.

AB Global Economic Forecast May-17

Real Growth (%) Inflation (%) Official Rates (%) Long Rates (%) FX Rates vs USD

Real growth and inflation are calendar-year forecasts. Official and long rates are end-of-year forecasts.

Long rates are 10-year yields unless otherwise indicated.

Latin American Inflation and Rates include Brazil, Chile, Colombia and Mexico

Real growth aggregates represent 31 country forecasts not all of which are shown


Contributors

Guy Bruten [email protected]

Fernando Losada [email protected]

Darren Williams [email protected]

Katrina Butt [email protected]

Markus Schneider [email protected]

Eric Winograd [email protected]

Anthony Chan [email protected]

Vincent Tsui [email protected]

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