w

Global Economic Outlook and Scenarios

sigma research, 5 September 2017

Kurt Karl Economic growth in the US remains on track this year to be close to 2%, an
Kurt_Karl@swissre.com improvement over last year's dismal performance of 1.5%. The short-term
Irina Fan indicators have been mixed recently, with the manufacturing PMI up to a robust
Irina_Fan@swissre.com
58.8 in August, but industrial production barely climbing. Job growth slowed last
Astrid Frey
month to 156,000 jobs from a downwardly revised 189,000 in July, but
Astrid_Frey@swissre.com
consumer confidence rose. On the policy front, the Administration is now pushing
for tax reform before year-end, but it remains to be seen if it can be successful.
US economic growth is close to Needed more urgently is an increase in the debt ceiling and a budget by end-
2%, an improvement over last September to avoid a government shutdown. Real GDP growth is still forecast to be
year's 1.5% gain. 2.1% in 2017 and 2.2% in 2018, but the yield on the 10-year Treasury is now
expected to be only 2.6% by end-2017 and 3.2% by end-2018.
Economic activity in the Euro area The manufacturing PMI for the Euro area rose from 56.6 in July to 57.4 in August,
continues to be robust and the UK a robust reading. The services PMI dipped to 54.7 from 55.4 in July, but this is also
is doing okay also. strong. Real GDP growth is now expected to be one notch stronger at 2%,
compared to 1.9% last month. In the UK, the PMI for manufacturing improved to
56.9 from 55.3 in July, while the services PMI slipped to 53.2 from 53.8. In both
the Euro area and the UK, the interest rate outlook has been lowered in response to
the lower yields in the US.
China's economy will grow by Despite the risk from rising debt levels, China continues to be resilient and will grow
about 6.5% this year and next, 6.6% this year and 6.4% next year. Growth is unlikely to be allowed to slow before
while Japan will perform well also the 19th National Congress of the Communist Party of China, which will be held in
with 1.4% growth this year and
October. Nevertheless, corporate debt continues to rise generally at a faster pace
nearly 1.0% next year.
than nominal GDP, so the risk of a hard landing remains at 20%. Real GDP growth
in Japan has been revised up to 1.4% from 1.0% last month after a strong first half
performance, mostly from business investment and consumer spending. Inflation
and interest rates are unchanged from last month.
The Fed policy for this year is fairly The Federal Reserve is likely to announce the program to begin reducing the size of
clear announcement on its its balance sheet in September, and is expected to raise rates one more time in
balance sheet in September and December by 25 basis points. There is greater uncertainty about the pace and
rate hike in December, but next
quantity of rate hikes next year, however. The forecast currently has three rate
year is much less certain.
hikes, but the outcome will be data-dependent if wages begin to rise more
aggressively, more than three hikes are possible, but if wages are weak, it could be
less. The ECB and the BoJ will continue their highly accommodative monetary
policies, and the BoE is likely to be on hold until Brexit uncertainty clears.
Political risks are plentiful, but The key political risk comes from the US Administration and its aggressive stance
prospects for growth continue to on trade relations. A trade war would lower global growth significantly. Also, a
improve. conflict with North Korea cannot be ruled out. Euro area risks have abated, but the
risk of a China hard-landing is still 20%. Emerging markets are vulnerable to sharp
hikes from the Fed, but this seems unlikely for now. Political risks are plentiful, but
global growth prospects continue to improve.
History Forecast Annual Data
US Forecast Summary: The 17Q1 17Q2 17Q3 17Q4 18Q1 18Q2 18Q3 2015 2016 2017 2018
forecast for GDP growth is Real GDP, % Change, SAAR 1.2 3.0 2.5 2.3 1.9 2.0 2.0 2.9 1.5 2.1 2.2
unchanged, but interest rates are % Change, Year Ago 2.0 2.2 2.1 2.3 2.4 2.2 2.0
lower with only three Fed fund
CPI, % Change, SAAR 3.1 -0.3 1.7 3.8 3.3 1.3 1.7 0.1 1.3 2.1 2.4
hikes next year and the yield on
% Change, Year Ago 2.6 1.9 1.9 2.1 2.1 2.5 2.5
the 10-year T-note also down a bit.
Core CPI, % Change, SAAR 2.5 0.6 2.4 2.7 2.7 2.0 2.1 1.8 2.2 2.0 2.3
% Change, Year Ago 2.2 1.8 1.9 2.0 2.1 2.5 2.4
End of period
Fed Funds Rate (Target mid-range) 0.875 1.125 1.125 1.375 1.375 1.625 1.875 0.375 0.625 1.375 2.125
3-Month Treasury Bill 0.8 1.0 1.0 1.3 1.4 1.6 1.9 0.2 0.5 1.3 2.1
5-Year Treasury Note 1.9 1.9 1.9 2.2 2.3 2.5 2.7 1.8 1.9 2.2 2.9
10-Year Treasury Note 2.4 2.3 2.3 2.6 2.7 2.9 3.0 2.3 2.5 2.6 3.2

sigma research | Swiss Re Institute 5 September 2017 1

 Global Economic Outlook and Scenarios

Euro area Forecast Summary:

Forecast > Annual data
Growth is likely to be a bit higher, 17Q1 17Q2 17Q3 17Q4 18Q1 18Q2 18Q3 2015 2016 2017 2018
inflation a bit lower this year,
Real GDP, % Change, SAAR 2.0 2.5 1.4 1.6 1.6 1.6 1.6 1.9 1.7 2.0 1.6
while long-term yields are lower % Change, Year Ago 1.9 2.2 2.1 1.9 1.8 1.6 1.6
this year and next, pulled down by
CPI, % Change, NSAAR 0.0 4.0 -0.8 2.0 -0.4 4.5 0.0 0.0 0.2 1.5 1.3
lower US yields. % Change, Year Ago 1.8 1.5 1.5 1.3 1.2 1.3 1.5

Refi Rate 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.05 0.00 0.00 0.00
3-Month Euribor -0.3 -0.2 -0.1 0.0 0.1 0.1 0.1 -0.1 -0.3 0.0 0.2
5-year Government note -0.4 -0.2 0.0 0.2 0.3 0.4 0.4 0.0 -0.5 0.2 0.5
10-Year Gov. Bond Yield (Germany) 0.3 0.5 0.4 0.6 0.7 0.8 1.0 0.6 0.1 0.6 1.0
10-Year Gov. Bond Yield (France) 1.0 0.8 0.8 1.0 1.0 1.1 1.3 1.0 0.7 1.0 1.3

UK Forecast Summary: Growth and

History Forecast > Annual data
inflation are the same as last 17Q1 17Q2 17Q3 17Q4 18Q1 18Q2 18Q3 2015 2016 2017 2018
month, but the yields on 5 and 10-
year gilts have been lowered along Real GDP, % Change, SAAR 0.9 1.2 1.2 1.2 1.6 1.6 2.0 2.2 1.8 1.6 1.5
% Change, Year Ago 2.0 1.7 1.5 1.1 1.3 1.4 1.6
with the US yields.
CPI, % Change, NSAAR 1.8 4.8 2.4 2.4 2.0 3.6 2.0 0.0 0.7 2.7 2.6
% Change, Year Ago 2.1 2.7 2.9 2.9 2.9 2.6 2.5

Bank rate 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.50 0.25 0.25 0.25
3-Month LIBOR 0.3 0.3 0.3 0.4 0.4 0.4 0.4 0.6 0.4 0.4 0.4
5-year Government note 0.6 0.7 0.6 0.7 0.9 1.0 1.1 1.3 0.5 0.7 1.1
10-Year Government Bond Yield 1.1 1.2 1.2 1.3 1.4 1.5 1.5 2.0 1.2 1.3 1.6

Japan Forecast Summary: Growth History Forecast Annual Data

in 2017 has been revised up by 17Q1 17Q2 17Q3 17Q4 18Q1 18Q2 18Q3 2015 2016 2017 2018

0.4 ppt, due to strong domestic Real GDP, % Change, SAAR 1.5 4.0 -2.6 1.2 1.4 3.4 -2.4 1.1 1.0 1.4 0.9
% Change, Year Ago 1.4 2.1 1.1 1.0 1.0 0.8 0.9
demand.
CPI, % Change, SAAR -0.3 -0.1 0.4 3.7 0.0 -0.9 0.3 0.8 -0.1 0.6 0.8
% Change, Year Ago 0.3 0.4 0.6 0.9 1.0 0.8 0.8
End of Period
Overnight Call Rate -0.07 -0.06 0.0 0.0 0.0 0.0 0.0 0.0 -0.1 0.0 0.0
3-Month Tibor 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.2 0.1 0.1 0.1
10-Year JGB Avg Yield 0.0 0.1 0.1 0.1 0.1 0.1 0.1 0.3 0.1 0.1 0.1

China Forecast Summary: The History Forecast Annual Data

forecast is unchanged from last 17Q1 17Q2 17Q3 17Q4 18Q1 18Q2 18Q3 2015 2016 2017 2018
month. Real GDP, ytd, % change, year ago 6.9 6.9 6.8 6.6 6.2 6.2 6.3 6.9 6.7 6.6 6.4
Real GDP, yoy, % change, year ago 6.9 6.9 6.5 6.2 6.2 6.2 6.4
CPI, % change, year ago 1.4 1.4 2.2 2.8 2.4 2.4 2.4 1.4 2.0 2.0 2.4
17Q1 17Q2
PBoC's benchmark lending rate: 1 year 4.35 4.35 - - - - - 4.35 4.35 - -
3-Month Shibor 4.08 4.47 - - - - - 3.09 3.27 - -
10-Year government bonds Avg Yield 3.31 3.55 - - - - - 3.40 2.88 - -

This document, prepared by Swiss Res sigma research, Swiss Re Institute, is for information purposes only. It is not intended as an offer or solicitation for the
purchase or sale of any financial instrument. The information contained in this document has been obtained from sources believed to be reliable; however, its
accuracy and completeness cannot be guaranteed. The views reflected herein are subject to change without notice.

sigma research | Swiss Re Institute 5 September 2017 2