Global Economic & Markets Factbook H2:2017 Outlook

Global Economic & Markets Factbook, H2:2017 Outlook: Key Takeaways

Global growth momentum remains strong, according to leading business and consumer confidence indicators. In contrast, inflation is weaker than expected, due to lower energy prices, declining inflation expectations and modest wage pressures.

European political uncertainty abated following the outcome of the French elections, but could re-surface (due to Brexit and the possibility of new UK elections, and Italy). The ongoing investigation regarding Trump-Russia-FBI could cause delays to the regulatory and fiscal agenda of the US Administration

Regarding the short-term outlook (H2:2017), US GDP is expected to accelerate towards potential
output of 2%. Accommodative fiscal policy, if it occurs, will not be before 2018. In the euro area,
robust growth momentum will expand across countries. In Japan, above-trend growth will likely be sustained due to fiscal support and a favorable external environment. The UK remains a “wildcard” in the global economy, as deteriorating economic data, increasing inflation and post-election uncertainty complicate the outlook. In China, GDP is expected to remain at c. 6.5%. Moreover, stabilizing capital outflows and a strong RMB provide focus to the authorities to tackle
“shadow banking” activities and promote financial stability.

Monetary policy appears to turn more hawkish despite moderate inflation. The Fed will adhere to
its gradual policy tightening, raising interest rates and reducing its balance sheet. The ECB dropped its “easing” bias on rates and is ready to reduce, and eventually terminate, its net asset purchases during 2018. The Bank of England may be tempted to remove part of the post-referendum accommodation, while the Bank of Japan will remain on “auto-pilot” with its yield-curve targeting regime. Finally, the PBOC will continue with its “regulatory tightening” unless economic data deteriorate significantly.

Equities continue to offer superior total return potential relative to fixed income, albeit remaining
vulnerable, as their valuations are high and upward revisions to earnings are plateauing. We remain cautious regarding Government bonds, as nominal yields are expected to increase due to
tightening by central banks. We assign a low likelihood to corporate bond spreads tightening
further from current levels. O/W Cash.

Global Economic & Markets Factbook H2:2017 Outlook