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World: 3 shocks could alter the current growth cycle
The growth of the world economy should accelerate in 2018 to + 3.3%, against + 3.2% in 2017. The dynamic remains positive , but the drivers of the global economy could be out of sync this year. Indeed, while US growth should accelerate in 2018, a slowdown is expected in Europe and China.
A situation that could put an end to the current cycle prematurely, resulting from three international shocks: an inflationary shock, with a rise in world prices following the rise in oil prices ( expected at USD 72 on average in 2018); an interest rate shock, due to a likely tightening of the Fed's monetary policy to stem the risk of overheating of the US economy; a shock of uncertainty about the stability of economic policies resulting from the rise of American protectionism.
Euler Hermes believes that the world economy is able to absorb these shocks in order to limit their impact. The world's leading credit insurer is forecasting an economic slowdown in 2019, suggesting that the peak of global growth is well behind us. However, this deceleration should be moderate, and global growth to + 3.1%.
United States: fiscal stimulus works but can not last
The US economy is responding very well to the fiscal stimulus (tax cut) put in place by the Trump administration. These measures benefit both businesses and households, and should enable growth to accelerate in 2018 to + 2.9% (+ 2.3% in 2017).
But to avoid overheating the economy, the Fed will certainly have to tighten its monetary policy faster than expected. Euler Hermes expects two rate hikes in the remainder of 2018 and two more in 2019, which would slow down residential investment and household consumption. The budgetary generosity of the American authorities also weighs heavily on the public deficit: while it amounted to 3.7% of GDP in 2017, it is expected at 4% in 2018 and 4.5% in 2019. In the months future, the priority could therefore be given to fiscal rebalancing. For all of these reasons, Euler Hermes estimates that US growth should slow in 2019 to + 2.4%.
Europe: lower growth, but still above potential
After strong growth in 2017 (+ 2.6%, the highest in 10 years), the European economy is expected to slow down in 2018 and 2019 at + 2.1% and +1.9% respectively. Intra-zone trade and more generally domestic demand will offset the external slowdown. But the resurgence of protectionism, even if it is currently under control, weighs on business confidence. Internally, the political uncertainties (Italy, Brexit) announce a high volatility regime. Finally, the ECB will end the QE program in December and is expected to announce a first increase in the deposit rate in September 2019. Euler Hermes estimates that a rise of + 50bp in the key interest rate will increase the interest charge by 60 billion euros for companies in the euro zone, and 14 billion euros for French companies. In this context, an acceleration of European institutional reforms will be key to reassuring Europe's capacity to integrate further.
Nevertheless, the region still benefits from important safety mattresses, which protect growth: (1) fiscal policy that will become expansionary in 2019, particularly in Germany, Italy and to a lesser extent in Spain; (2) consumption, supported by the acceleration of wages coupled with contained inflation, means greater purchasing power in the second half of 2018; (3) margins of companies that remain high; (4) revenue growth above pre-crisis levels; and (5) more than 890 billion euros of available cash.
Excesses are more noticeable in Eastern Europe, where balanced growth has given way to overheating. This is particularly the case in Turkey, where growth is expected to halve in 2018 to reach 3.7%.
Asia: China's transformation benefits the entire region
In Asia, China will play the role of stabilizer, thanks to the controlled transformation of its growth model. This change will benefit the entire region, the gradual decline of the Chinese current account surplus (expected at 1% of GDP in 2018 against 10% in 2007) being favored by exports from neighboring countries. The restructuring of the Chinese economy is accompanied by an intelligent policy-mix that allows for progressive deleveraging and a reduction of overcapacity without severely penalizing domestic demand. This soft landing of the Chinese economy, coupled with the proliferation of commercial cooperation initiatives, will benefit all of Asia, which should grow at a rate close to + 5% in 2018 and 2019 (vs. 2017) .
Vigilance, however, is on the financial side. The tightening of monetary policy in the United States is putting pressure on the currencies of countries with twin deficits (India, Indonesia, for example), and encourages their central banks to adopt a proactive policy of rate hikes. These tensions on the exchange and this tightening of interest rates (external and domestic) could endanger the indebted enterprises of the region but also their suppliers.
b [Amérique Latine : Les BAM[1] under financial and political pressure] b
For Latin America, the takeoff expected at the end of last year is delayed. Growth should accelerate to + 2% in 2018 and + 2.4% in 2019 (+ 1.2% in 2017), but less than initially expected. This is mainly due to downward revisions in growth in Argentina and Brazil. Indeed, the rise in US interest rates has highlighted the region's vulnerabilities, starting with Argentina: inflation over 25% and twin deficits have led to market sanctions (the Argentine peso is depreciated by 45% since the beginning of the year). The situation should remain under control, with growth expected at + 1.4% in 2018 and + 1.7% in 2019 (+ 2.9% in 2017), thanks to IMF support until 2020.
In Brazil, the recovery will be slower than expected, but the country should resist volatility thanks to a favorable external position, with growth expected at + 1.9% in 2018 (+ 1% in 2017). The medium-term outlook remains degraded due to the drifting public finances, while no candidate in the presidential election foresees pension reform at the height of the stakes. Finally, Mexico, despite a resilient economy (+ 2.5% growth in 2018 after + 2% in 2017), a proactive monetary policy and a responsible fiscal policy, will continue to be under pressure from the markets. The uncertain renegotiation of the NAFTA treaty in 2019 and the future of the energy sector, potential target of the new Mexican president will be a source of prolonged volatility.
Middle East and Africa: Growth Driven by Commodities
Middle East countries remain convalescent, as the period of low oil prices has forced massive fiscal consolidation. However, with the rebound in oil, growth prospects are improving, as in Saudi Arabia (+ 1.7% in 2018).
In Africa, the recent rise in commodity prices is expected to have a stabilizing influence for the region as a whole, with notably the expected strengthening in Nigeria (+ 2.5% in 2018). Overall, Euler Hermes expects African growth to accelerate to + 3.9% and + 4.3% in 2018 and 2019 (+ 3.4% in 2017). The problem is not growth in itself. Infrastructure projects (hydroelectric dams, ports, roads, rails) remain legions, particularly in East Africa (Ethiopia, Kenya) or West Africa (Côte d'Ivoire, Senegal). But the way these projects are funded can be problematic and lead to over-indebtedness.
Euler Hermes Group
eulerhermes.com
Euler Hermes is the world leader in credit insurance solutions and a recognized specialist in the fields of collection and bonding. With more than 100 years of experience, Euler Hermes offers a complete range of services for the management of receivables. Its international monitoring network analyzes the financial stability of SMEs and large groups active in markets representing 92% of total GNP. Based in Paris, the company is present in 52 countries with over 6,050 employees. A member of the Allianz Group, Euler Hermes is rated AA by Standard & Poor's. The company recorded consolidated sales of 2.6 billion euros in 2017 and guaranteed 894 billion euros in worldwide commercial transactions at the end of 2017.
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