20140304-NATIXIS-Advanced_economies__What_are_the_main_upside_and_downside_risks_to_our_growth_forecasts__19页_622kb

Summary of FLASH ECONOMICS No. 171

Core Content

This report from FLASH ECONOMICS No. 171, dated April 4th, 2014, analyzes the main upside and downside risks to growth forecasts for major developed economies. It discusses the euro zone, the United States, the United Kingdom, and Japan, and explores the consensus on global growth acceleration and the factors influencing it.

Main Views

Global Growth Consensus

• There is a broad agreement on the acceleration and rebalancing of global growth in favor of developed economies.
• The financial turmoil in some emerging countries and the upturn in international trade have supported this consensus.
• The level of dispersion in growth and inflation forecasts is unusually low, suggesting either reduced uncertainty or a tendency to converge towards "average" or "potential" growth levels.
• The low volatility in macroeconomic and financial indicators (e.g., bond and stock markets) is interpreted as a sign of improved confidence and reduced uncertainty.

Euro Zone

Key Points of the Scenario

• The core scenario assumes a moderate and gradual recovery, driven mainly by external demand, with foreign trade contributing around 40% to annual growth.
• Corporate investment is expected to rise slightly, supported by self-financing capacity.
• The rebuilding of operating margins is underway, and the decline in wage share explains the fall in consumption's weight in GDP.
• The ECB is likely to adopt a defensive monetary policy, focusing on liquidity management rather than aggressive stimulus.
• The euro zone remains a multi-speed monetary union, with varying levels of adjustment across countries.

Main Downside Risks

• The risk of deflation remains high, especially in peripheral countries with mass unemployment and ongoing deleveraging.
• The current macroeconomic equilibrium is deflationary, and the process of deleveraging among private agents (especially households) has not yet concluded.
• The legal basis for the OMT program and the potential confirmation by the European Court of Justice could trigger a new sell-off in European fixed-income markets.
• Political risks, such as the ability of the new Italian Prime Minister to implement reforms, pose a challenge to stability.
• The assessment of European banks' balance sheets could reveal significant capital requirements, increasing financial stress.

Main Upside Risks

• A sharper rise in corporate investment than expected could signal a real cyclical recovery.
• Reduced uncertainties and renewed confidence among business leaders may lead to a marked increase in capital expenditure.
• A less stringent capital requirement assessment by the ECB and EBA could restore confidence in the banking system, facilitating investment.
• The low production capacity utilization and the obsolescence of productive capital may encourage companies to invest more rapidly.

United States

Key Points of the Scenario

• The core scenario expects a growth acceleration of around 2.6% in 2014, slightly above the 2013 level of 1.9%.
• The improvement in the labor market and the gradual removal of fiscal constraints (e.g., payroll tax cuts and sequester) support this growth.
• Growth will be driven by domestic demand, particularly household consumption and corporate investment.
• However, the trajectory of long-term interest rates and the Fed's tapering of asset purchases remain a concern.

Main Downside Risks

• A more pronounced rise in interest rates than expected could negatively impact sectors sensitive to credit costs, such as real estate and durable goods.
• The end of the household deleveraging cycle is a prerequisite for stronger consumption, but the current upswing in credit may not be sustained.
• A sharp decline in asset prices could further curb consumption, especially if wage growth does not offset the impact.
• A slowdown in global growth could reduce future demand expectations and delay corporate investment projects.

Main Upside Risks

• A more vigorous recovery in employment and investment could lead to higher wage growth and sustained household spending.
• A rebound in residential investment, supported by rising real estate prices and high builder confidence, may continue despite higher interest rates.
• A faster upturn in credit could provide an additional boost to the real estate market.

United Kingdom

• The recovery has been driven by ultra-accommodating monetary policy and is still characterized by significant imbalances, including investment shortfalls and current-account deficits.
• The contribution of local authorities to GDP growth is likely to be slightly positive in 2014, despite fiscal tightening by the federal government.
• A rebound in real estate prices has not yet translated into increased tax revenues, but could do so in the future.
• The financial situation of local authorities is pro-cyclical, meaning they will benefit more from a stronger economic recovery.

Japan

• A more drastic change in domestic demand than expected after the VAT hike is a significant downside risk.
• The main upside risk is a new fiscal stimulus programme combined with further monetary easing.
• The recovery is relatively weak, and the country is an exception to the global growth trend, mainly due to domestic factors.

Key Information

• The consensus on growth and inflation forecasts for 2014 and 2015 is unusually tight, indicating a convergence of views.
• The euro zone's recovery is seen as fragile and dependent on external factors and market sentiment.
• The United States faces downside risks due to interest rate hikes and uncertainty around the Fed's policy.
• The UK's recovery is also uneven, with local authorities playing a crucial role.
• Japan's recovery is weaker, and the country's fiscal and monetary policies remain key to its future performance.

Conclusion

Despite the broad consensus on growth acceleration, the report emphasizes that uncertainties still exist, particularly in the euro zone, where deflationary pressures and structural issues remain significant risks. In the US, the main risks stem from monetary policy and financial stability, while the UK faces challenges related to fiscal policy and imbalances. Japan's situation is more fragile, with the potential for a sharp drop in domestic demand. The report concludes that while the current growth momentum is positive, the forecasts should be interpreted cautiously due to the presence of both upside and downside risks.