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The UniCredit Economics Chartbook - March 2017

Company: Amcham

Global growth improves, major central banks to remain very accommodative

Welcome back to the latest UniCredit Economics Chartbook. The global economy is improving faster than expected, and we are upgrading some of our forecasts accordingly.

■  Global: We revise our global growth forecast for 2017 to 3.7% from 3.5%, following a mediocre 3% or so last year. The key drivers of the revision are emerging markets and the now-visible recovery in global trade. This, in turn, is fuelling growth in several countries around the world, predominantly in Europe. The improved global outlook has already contributed to convincing the Fed to bring forward its interest rate hikes, as witnessed this month. The world's major central banks have all – most likely – passed the peak in their monetary accommodation, but policy normalization will be very slow. As a result, 2017 is likely to turn into a very strong year for risky assets.

■  EMU: We raise our GDP forecast for 2017 to 1.8% from 1.5%, mainly to reflect a stronger and more frontloaded recovery in global trade that boosts eurozone exports and capex in export-oriented sectors. The growth projection for 2018 rises to 1.5% from 1.4%. Our forecasts imply another two years of above-potential GDP expansion, four in total in this recovery phase. Compared to the US, the eurozone recovery still remains at a relatively early stage. The ECB is on track to announce a further tapering of asset purchases in September, to be implemented in early 2018. We still expect QE to be wound down by the end of 2018, and the first increase of the deposit rate to come only late in 2018 or in 2019. Politics remains the key downside risk, but after the positive outcome of the Dutch election, we remain confident that France will also reject populism. 

■  CEE: On the back of stronger foreign demand and improving confidence, we have upgraded the growth outlook for most countries, except for Turkey and Ukraine, where activity will be affected by heightened political uncertainty. The region’s EU members will also benefit from the recovery in EU transfers and continued policy accommodation, and growth in Russia will be supported by the recovery in oil prices. Reflation in the region will likely continue at a moderate pace, keeping inflation below central bank targets through 2017 and pushing any rate hikes back to 2018. Except for Turkey, macroeconomic imbalances are set to remain well contained, with financial markets supported by the favorable global environment. External risks have abated with key elections in Europe likely to return pro-European parties to power, but domestic political risk remains elevated in some countries.

■  US: GDP growth in 1Q17 is likely to be hurt by temporary weakness, even though consumer and business sentiment indicators have climbed to multi-year highs. We think 2Q17 will show a rebound, and some degree of fiscal stimulus stemming from tax reforms will likely boost growth towards the very end of the year. As a result, we have made only marginal changes to our forecasts, now expecting 2.3% GDP growth his year, followed by 2.8% next year in the wake of looser fiscal policy. The Fed is likely to deliver two additional rate hikes this year, followed by another three in 2018.

■  UK: The economy is set to slow as materially higher inflation and weaker wage growth squeeze real household income and, in turn, consumption growth. The BoE’s MPC is likely to maintain its current monetary policy stance throughout the next two years of what are likely to be arduous Brexit negotiations.

■  China: The structural rebalancing proceeds in an orderly manner for now, although financial-stability risks related to excessive leverage remain a key challenge in the medium term. We expect the growth slowdown to continue and GDP to expand 6.5% in 2017 and 6.2% in 2018. Deflationary pressure has subsided, with the PPI sharply rebounding at the beginning of the year. As domestic demand stabilizes, monetary policy will focus on containing financial risks, particularly growing NPLs, an overpriced real estate market, and high corporate debt. We expect the lending rate to remain unchanged at 4.35% and the RRR stable at 17% and we forecast USD-CNY at 7.15 and 7.30 for the end of 2017 and 2018, respectively.

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