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Global Economic Outlook and Scenarios

sigma research, 6 November 2017

Kurt Karl US employment rebounded, up 261,000, in October after a weak hurricane-

Kurt_Karl@swissre.com
Irina Fan
Irina_Fan@swissre.com
Astrid Frey
Astrid_Frey@swissre.com
Reconstruction efforts will help
boost growth to 2.2% this year
and next.
Economic activity in the Euro area
continues to strengthen and the
UK appears to be stabilizing.
China's 19th CPC Congress implies
strong growth and gradual
reforms, while Japan's election
indicates policy continuity.
The Fed is still likely to raise rates
in December and three more hikes
are assumed for next year also.
Political risks abound, but
prospects for growth remain on
track.
US Forecast Summary: The
forecast is unchanged this month.
induced September report. Despite the hurricanes, real Gross Domestic Product
(GDP) rose 3% in 3Q17, led by a rise in inventories, vehicle sales and net exports.
As a result, the Fed is still expected to hike rates in December. The President has
chosen Jerome Powell as the Fed chair, a current governor on the Fed Board and
as such a source of continuity in the Fed's policymaking. The Administration's tax
proposals are now being modified by Congress. We assume in our baseline
forecast that the impact of the final tax cuts will be small. For the NAFTA
renegotiations, the Administration is proposing terms that are unacceptable to
Mexico and Canada. As with the tax proposals, it remains to be seen what the final
outcome will be, but we assume that NAFTA will be maintained with some small
changes, though it could be cancelled, weakening US output by up to 0.5%. Real
GDP is forecast to grow by 2.2% in 2017, 2018 and 2019. The 10-year Treasury
yield is still expected to be 2.6% by end-2017 and 3.2% by end-2018.
The manufacturing PMI for the Euro area rose from 58.1 in September to an 80-
month high of 58.5 in October, implying strong growth in the Euro area. The
services PMI fell to 54.9 (Flash) from 55.8 in September. Real GDP growth this
year was revised up, based on the robust Q3 GDP data, to 2.3%. Growth is
expected to be a bit stronger next year also. In the UK, the PMI for manufacturing
rose to 56.3 from 56.0 in September, while the services PMI jumped to 55.6 from
53.6. The UK economy appears to have stabilized after weakening earlier this year.
From China's 19th CPC Congress, we have concluded that 1) China will continue
to focus on maintaining strong GDP growth at least until 2020; 2) reforms will be
implemented only very gradually; 3) the State and the Party will retain a leading
role in economic growth and development despite rhetoric of giving the "market" a
"decisive" role; 4) the quality, vs. speed, of growth emphasis should be taken as a
medium- to longer-term target. In Japan, PM Abe handily won re-election with a
two-thirds majority in the Lower House, enough for constitutional reform.
The Federal Reserve is very likely to raise rates in December by 25 basis points.
Next year's number of hikes is less certain. Much will depend on incoming data and
the new appointees to the Board, but we are assuming three rate hikes of 25 bp
each. As expected, the ECB is reducing its asset purchases, but this should have a
minimal impact on European yields. The BoJ remains highly accommodative, while
the BoE is expected to raise rates once in each of the next two years.
The key political risk comes from the US Administration and its stance on trade
relations NAFTA is now at risk. If US trade aggression causes a trade war, global
growth would be significantly lower. A conflict with North Korea cannot be ruled
out. The Catalan debacle, the weakened German coalition government and the
non-performing loans in Italy have all raised concerns about Euro area growth. The
risk of a China hard-landing is still 20%. Emerging markets are vulnerable to sharp
hikes from the Fed. Political risks abound, but global growth keeps improving.
History Forecast Annual Data
17Q2 17Q3 17Q4 18Q1 18Q2 18Q3 18Q3 2016 2017 2018 2019
Real GDP, % Change, SAAR 3.1 3.0 2.7 1.7 2.0 1.9 2.0 1.5 2.2 2.2 2.2
% Change, Year Ago 2.2 2.3 2.5 2.6 2.3 2.1 1.9

CPI, % Change, SAAR -0.3 2.0 4.9 3.4 0.7 2.5 2.9 1.3 2.2 2.6 2.5
% Change, Year Ago 1.9 2.0 2.4 2.5 2.7 2.9 2.4

Core CPI, % Change, SAAR 0.6 1.7 3.2 3.3 1.5 1.7 3.2 2.2 1.9 2.3 2.5
% Change, Year Ago 1.8 1.7 2.0 2.2 2.4 2.4 2.4
End of period
Fed Funds Rate (Target mid-range) 1.125 1.125 1.375 1.375 1.625 1.875 2.125 0.625 1.375 2.125 2.875
3-Month Treasury Bill 1.0 1.1 1.3 1.4 1.6 1.9 2.1 0.5 1.3 2.1 2.8
5-Year Treasury Note 1.9 1.9 2.2 2.3 2.5 2.7 2.9 1.9 2.2 2.9 3.5
10-Year Treasury Note 2.3 2.3 2.6 2.7 2.9 3.0 3.2 2.5 2.6 3.2 3.6

sigma research | Swiss Re Institute 6 November 2017 1

Global Economic Outlook and Scenarios

Forecast >
Euro area Forecast Summary: 17Q2 17Q3 17Q4 18Q1 18Q2 18Q3 18Q4 2016 2017 2018 2019
Growth is forecast to be a bit
Real GDP, % Change, SAAR 2.6 2.4 1.8 2.0 1.8 1.8 1.6 1.8 2.3 2.0 1.6
stronger in 2017 and 2018 % Change, Year Ago 2.3 2.5 2.3 2.2 2.0 1.9 1.8
compared to last month.
CPI, % Change, NSAAR 4.0 -0.8 2.0 -0.4 4.5 0.0 1.6 0.2 1.5 1.3 1.7
% Change, Year Ago 1.5 1.5 1.3 1.2 1.3 1.5 1.4

Refi Rate 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.25
3-Month Euribor -0.3 -0.3 -0.1 0.0 0.0 0.1 0.2 -0.3 -0.1 0.2 0.3
5-year Government note -0.2 -0.3 0.0 0.1 0.2 0.4 0.6 -0.5 0.0 0.6 1.0
10-Year Gov. Bond Yield (Germany) 0.5 0.5 0.6 0.7 0.8 0.9 1.0 0.1 0.6 1.0 1.5
10-Year Gov. Bond Yield (France) 0.8 0.7 0.9 1.0 1.1 1.2 1.3 0.7 0.9 1.3 1.8

History Forecast > Annual data

UK Forecast Summary: Two more 17Q2 17Q3 17Q4 18Q1 18Q2 18Q3 18Q4 2016 2017 2018 2019
rate hikes are now expected.
Real GDP, % Change, SAAR 1.2 1.6 1.2 1.6 1.6 1.6 1.6 1.8 1.5 1.5 1.6
% Change, Year Ago 1.5 1.5 1.3 1.4 1.5 1.5 1.6

CPI, % Change, NSAAR 4.8 2.1 2.9 2.0 3.6 2.0 1.6 0.7 2.7 2.6 2.3
% Change, Year Ago 2.7 2.8 2.9 2.9 2.6 2.6 2.3

Bank rate 0.3 0.3 0.5 0.5 0.5 0.5 0.8 0.25 0.50 0.75 1.00
3-Month LIBOR 0.3 0.3 0.6 0.6 0.6 0.6 0.9 0.4 0.6 0.9 1.1
5-year Government note 0.7 0.8 0.8 0.8 0.9 1.0 1.1 0.5 0.8 1.1 1.2
10-Year Government Bond Yield 1.2 1.4 1.3 1.4 1.5 1.5 1.6 1.2 1.3 1.6 1.8

History Forecast Annual Data

Japan Forecast Summary: Growth, 17Q1 17Q2 17Q3 17Q4 18Q1 18Q2 18Q3 2016 2017 2018 2019

inflation and interest rates are Real GDP, % Change, SAAR 1.2 2.5 -0.1 0.8 0.6 2.0 0.2 1.0 1.4 0.9 0.5
unchanged from last month. The % Change, Year Ago 1.4 1.6 1.3 1.1 1.0 0.8 0.9

inflation spike in 2019 is due to CPI, % Change, SAAR -1.6 1.6 0.0 3.8 -2.0 1.6 0.0 -0.1 0.6 0.8 2.1
% Change, Year Ago 0.3 0.4 0.6 0.9 0.8 0.8 0.8
the assumed tax hike. End of Period
Overnight Call Rate -0.1 -0.1 0.0 0.0 0.0 0.0 0.0 -0.1 0.0 0.0 0.1
3-Month Tibor 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 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 0.1 0.1 0.1 0.2

History Forecast Annual Data

17Q2 17Q3 17Q4 18Q1 18Q2 18Q3 18Q4 2015 2016 2017 2018 2019
China Forecast Summary: The Real GDP, ytd, % change, year ago 6.9 6.9 6.8 6.2 6.3 6.3 6.4 6.9 6.7 6.8 6.4 6.2
forecast is unchanged this month. Real GDP, yoy, % change, year ago 6.9 6.8 6.5 6.2 6.4 6.4 6.6
CPI, % change, year ago 1.4 1.6 1.9 1.9 1.7 1.9 2.1 1.4 2.0 1.6 1.9 2.1

17Q2 17Q3
PBoC's benchmark lending rate: 1 year 4.35 4.35 - - - - - 4.35 4.35 - - -
3-Month Shibor 4.47 4.34 - - - - - 3.09 3.27 - - -
10-Year government bonds Avg Yield 3.55 3.64 - - - - - 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 6 November 2017 2