Societe Generale’s latest global outlook and update to its famous “black swans” chart is out:
“Black swans” are events that are unlikely to occur but which, should they materialise, would unleash chaos on financial markets. The phrase “black swan” for this type of event was popularised by statistician, scholar, and former trader Nassim Nicholas Taleb.
In its quarterly outlook, the Soc Gen global economics team says US president Donald Trump’s next policy moves amid a China tightening is both an upside and downside risk, for fiscal expansion, trade policies, wage outcomes, euro area reform or monetary policy. They also reduced the near term risk of a China hard landing.
Here’s Soc Gen:
As China tightens policy, what happens next in the US has become critical, we look for modest US tax cuts but believe that, Trumpflation insufficient to offset fading Xiflation. Without tax cuts, the US economy could well slow more substantially as early as 2H18.
The economists have built the report around six anchor themes:
The economists summarise the outlook:
Is this as good as it gets? The current US expansion began in June 2009 and is already now the third longest on record. Come February 2018, it will become the second longest. To make it to first place, however, it would have to survive until May 2019. If the Trump administration delivers on tax cuts that could well be the case, although we would not expect it to run much beyond that point. Our analysis shows China, South Korea, Australia, US, Germany, UK and Japan to be in the more mature phase of the cycle, but the rest of Europe is catching up quickly as output gaps continue to narrow. Latin America and Russia continue to lag.
Soc Gen listed the political uncertainty for each region.
For Europe, there is still a busy electoral agenda ahead. Nonetheless, with the French Presidential election over, the bank has lowered the risk of a drag from European policy uncertainty shock from 30% to 25% risk to its black swan relating to this risk factor. Its main concerns at this stage are about Italy and an ugly Brexit.
For the US, the risk has shifted increasingly to finally seeing no US tax cuts delivered in FY18. Soc Gen sees a 30% risk that Trump will fail to deliver tax cuts, which would see the US economy slowing sharply as early as 2018. There is also the risk of upside surprise on fiscal accommodation.
In China, the risk of a policy error is an ongoing issue. With the approach of this autumn’s Congress, Soc Gen believe the near-term risk of a China hard landing is reduced. The economists have lowered the risk hereof to 15% from 20% previously, but expect to raise it again after October.
The economists also said low interest rates were the lynchpin of global markets.
Should confidence in the ability of central banks to respond to either upside or down side risks decline significantly, the risk is to see a sharp market repricing. This links in closely to confidence that the current expansion can continue for the foreseeable future.
Here ‘s the table detailing their global outlook
And the following points encapsulates their key assumptions
One other key takeaway is that they expect China growth to slow to just 4.5% by 2020 before recovering slightly to 4.8% the next year.
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