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Economic Adviser – Outlook 2019
Fixed Income & Macro Research
At the Crossroads – global downturn in 2019?
Outlook 2019 ♦ Date of issue: 17 December 20181 / Economic Adviser ♦ Outlook 2019
Contents
Special: At the Crossroads – global downturn in 2019? 2
USA: When will the US currency get weaker again? 4
Euroland: ECB in a dilemma – monetary policy normalization a successful undertaking? 7
Germany: Lane change for the German economy 12
Switzerland: Trial of strength with the EU 15
Japan: Gathering headwind 16
China: Trade war – finale furioso? 17
Britain: Orderly or no-deal Brexit – the decisive question 18
Canada: Oil price decline braking growth – for the time being 21
Mexico: USMCA makes for risk reduction – but what does AMLO have in store? 22
Australia: Growth momentum slower but still quite sound 23
Stock markets: Positive aspects not to be lost sight of in turbulent times 24
Crude oil: 2019 with sideways movement at a slightly higher level 26
Portfolio strategies: Yield curve, Euroland 27
Portfolio strategies: International yield curve 28
Portfolio strategies: Stock market strategy 29
Overview of forecasts 30
Contacts 31
Important information 33
Research portal:
www.nordlb.de/research
Bloomberg:
NRDR2 / Economic Adviser ♦ Outlook 2019
Special
At the Crossroads – global downturn in 2019?
Analyst: Christian Lips, Chief Economist
Political uncertainties weigh on the global economy
2018 saw the global economy come back down to earth. In the preceding year, business
enterprises, consumers and market participants had proven remarkably unimpressed by
the many and varied global risks; this helped the global economy to a dynamic upswing
and triggered exuberance on the capital markets. The calm was deceptive, however. In
2018 the major crisis issues returned with full force to investors' radar screens. Trade war,
Brexit chaos, the new populist government in Italy, turbulence in several emerging mar-
kets – the growing uncertainties made for a clouding of sentiment in 2018 and the pace of
growth slowed appreciably in most regions. Only in the USA did growth buck the general
trend and pick up – bolstered by the fiscal stimulus from Trump's tax reform.
Chart: GDP growth in selected economic and currency areas
8 in %, yoy in %, yoy 16
6 12
4 8
2 4
0 0
-2 -4
-4 -8
-6 -12
-8 -16
-10 -20
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
GDP USA GDP Japan GDP Eurozone GDP Germany
GDP UK GDP Switzerland GDP China (rhs)
Source: Bloomberg, NORD/LB Fixed Income & Macro Research
Outlook for 2019 – Year of truth with risk factors Brexit, trade war and populism
In 2019 the world will be at the crossroads in the face of important (preliminary) decisions
where the main trouble spots are concerned. The current economic cycle is undoubtedly
well advanced, so it is hardly surprising that we are forecasting a slight slowdown in the
pace of growth for the global economy. However, there is also the risk of a stronger syn-
chronous downturn of the global economy. Possible triggering factors in this context
would be a hard or no-deal Brexit, a massive intensification and extension of the US ad-
ministration's trade conflicts and an escalation of the budget dispute between Italy and
the EU Commission. All these developments are in themselves not unrealistic, but in our
(quite optimistic) baseline scenario we are presuming a victory for common sense – which
means averting a hard Brexit, a permanent ceasefire in the trade war and a compromise
between the EU Commission and Italy, which would also contribute to a certain calming of
the capital markets. All this is difficult to forecast, but the fog of uncertainty will clear
somewhat in the first half of the year. The next few weeks will be decisive as regards the
topic of Brexit, in connection with which everything seems possible. After the 90-day peri-3 / Economic Adviser ♦ Outlook 2019
od has expired, it will also become clear whether Donald Trump will continue to go for
escalation in trade issues or whether he will after all tend towards a deal with his trading
partners. And Italy is already coming up with proposals towards scaling back the deficit
plans for 2019 – the learning curve of the government in Rome at last appears to be get-
ting a bit steeper. Nevertheless, there is the threat of the European elections in May 2019
seeing a further strengthening of the (right-wing) populist forces in Europe who are acting
on a more networked basis than in the past. This would put the fragile political situation
and the shortcomings of EU governance back more prominently on the agenda. This
doesn’t necessarily have to be the case either, however, seeing as the Brexit chaos is a
reminder to the rest of Europe of the risks that leaving the common home Europe poses to
a single member state.
Chart: Real key interest rates – still a long way to normalization of monetary policy
in %
6
4
2
0
-2
-4
-6
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Fed ECB BoJ BoE SNB
Source: Bloomberg, NORD/LB Fixed Income & Macro Research
Implications for the financial markets
In our baseline scenario, however, the global economy will likely be able to make a soft
landing, especially as monetary policy is still very expansionary in the majority of regions.
Only the Fed is in a rate hike cycle, as a result of which the real US key rates (deflated by
consumer price developments) are now no longer clearly negative. We are confident that
in 2019 the Fed will proceed less briskly and that the other leading central banks will act
very cautiously to begin with. It remains to be seen whether the ECB will resolve to under-
take an initial rate at all in 2019. If not, Mario Draghi would be the first ECB president nev-
er to raise the key rate during his term of office. The developments on the financial mar-
kets will also be highly dependent on the risk factors described above. In our baseline sce-
nario we expect moderately rising capital market rates and certainly see potential for the
stock markets. However, investors will be well advised to act with caution until the most
important risks have been clarified.
We wish you enjoyable reading, a happy and peaceful Christmas and a good start into a
successful and happy New Year 2019!4 / Economic Adviser ♦ Outlook 2019
USA
When will the US currency get weaker again?
Analysts: Tobias Basse // Bernd Krampen
A look back at a turbulent year
After having initially displayed the now known relative tendencies to weakness in
Q1/2018, the US economy registered significant growth in the following quarter. Indeed,
the already quite optimistic expectations among many observers – also due to rebound
effects after the weaker start to the year – were without any doubt clearly exceeded. Put
in figures, the annualized rate of change in real economic growth was an impressive 4.2
percent. It goes without saying that the well-known (and extensively discussed) special
effects also played a role in this development, though it should be emphasized that the US
growth figures as at the end of the first half-year are under any circumstances to be seen
as positive. Then, as was to be expected, Q3 saw certain signs of deceleration. However,
the development of real economic activity in the land of unlimited opportunity must un-
doubtedly still be described as positive; preliminary data (2nd publication) indicated that
the US economy started into the second half-year with an annualized expansion rate of 3.5
percent. US growth is therefore weaker – but by no means weak. Q4 now looks set to reg-
ister somewhat less strong growth figures. While the sentiment indicators in the United
States are currently showing no significant indications of a slowdown in the wake of the
intermittently pronounced geopolitical turbulences, the rising interest rates can be ex-
pected to have a successive dampening effect on America's economic activity. Indications
in this direction can already be seen on the US real estate market. Overall, we expect the
US economy to close 2018 with a growth figure for the year as a whole only just short of
the psychologically important mark of 3.0 percent, so in retrospect the development in
terms of economic activity in the USA can certainly be rated as quite positive. The conse-
quences of the upswing are of course also reflected in the labour market data with, as
anticipated, the unemployment rate falling below the – above all psychologically im-
portant – mark of 4.0-percent in the course of 2018. The upshot is that the US economy is
now more or less in a state of full employment.
Chart: Interest rate trend in the USA
3.50
in %
3.00
2.50
2.00
1.50
1.00
0.50
0.00
20.12.2013 20.12.2014 20.12.2015 20.12.2016 20.12.2017
UST 2Y UST 5Y UST 10Y Fed Funds Target
Source: Bloomberg, NORD/LB Fixed Income & Macro Research5 / Economic Adviser ♦ Outlook 2019
Outlook for 2019
The current data on the sentiment among US business enterprises are not pointing to any
sustained slowdown in economic activity in the land of unlimited opportunity. Indeed, the
two important ISM PMIs actually gained some ground in November as month under re-
view, arriving at levels indicating strong growth in the industrial and services sectors. How-
ever, both time series are likely overstating the upswing in the USA, and we are in fact
reckoning with a slight slowdown in economic growth in 2019 and expect real economic
activity to pick up by 2.50 percent. Private household consumption should remain a relia-
ble mainstay of the upswing in North America, however. In this context an eye needs to be
kept on the ongoingly buoyant employment situation which is likely to remain helpful to
US domestic demand in the longer term as well. Indeed, more and more companies in the
US are confirming at least certain tendencies towards staffing bottlenecks. This of course
predominantly applies where skilled personnel are concerned. The positive situation on
the US labour market also appears to have gradually had certain consequences for the
wage demands on the part of employees, in view of which the FOMC is likely to remain
under pressure to take action. Following the further increase to the Fed funds target rate
expected in December of this year, which should take the upper bound of this key US in-
terest rate for the markets to a level of 2.50 percent, the Federal Reserve's monetary poli-
cy will likely be less briskly realigned in the course of 2019. We are therefore maintaining
our expectation that the Fed officials will be aiming to implement two further rate hikes in
2019. Perhaps the central bank meeting scheduled for December 2018 will already be used
to signal to the financial markets a somewhat greater degree of caution in the reorganiza-
tion of monetary policy in Washington. The US capital market rates are in any case no
longer pricing in three interest rate adjustments in the coming year. This market assess-
ment is in our view highly realistic. As regards 10 year US Treasuries yields, we expect the
psychologically important mark of 3 percent to remain in focus for the time being. Over
the course of the year, this rate would then have to gradually move in the direction of 3.50
percent, though, all told, not at any great hectic pace.
When will the US currency get weaker again?
It goes without saying that the global interest rate environment as a whole remains a fa-
vourable one for the US currency for the time being. The pending hike of the Fed funds
target rate by the central bankers in Washington towards year-end 2018 has likely already
been priced in by the FX segment, so this monetary measure in the USA is hardly likely to
be of help to the dollar anymore. Besides this, the somewhat decelerating growth momen-
tum in the USA ought to provide reason to expect somewhat less support for the US cur-
rency in the longer term. Furthermore, we are still reckoning with the ECB aiming to very
cautiously start raising the key rates in Euroland in the second half of 2019. Against this
backdrop we are forecasting a certain strengthening of the euro over the next 12 months
(and, conversely, thus a weakening of the US dollar). The psychologically important mark
of USD 1.20 per EUR is likely to gradually move into focus within the framework of this
movement. The FX market will have to keep a close eye on the further developments in
terms of Italy's budgetary policy. The extensive public spending planned by the govern-
ment headed by Giuseppe Conte has undoubtedly weighed on the euro of late. The single
currency would certainly benefit in the event that the decision-makers in Brussels and
Rome should now find the way towards some kind of common ground. Geopolitical factors
will at any rate continue to be of significance for the FX segment in 2019 as well.6 / Economic Adviser ♦ Outlook 2019
Fundamental forecasts, USA
2017 2018 2019
GDP 2.2 2.9 2.5
Private consumption 2.5 2.5 2.3
Govt. consumption -0.1 1.5 1.5
Fixed investment 4.0 6.0 3.0
Exports 3.0 1.5 1.5
Imports 4.6 2.0 0.5
Inflation 2.1 2.5 2.3
1
Unemployment rate 4.4 3.8 3.6
2
Budget balance -4.3 -5.5 -6.9
2
Current acc. balance -2.3 -2.5 -2.6
Change vs previous year as percentage; 1 as percentage of the labour force; 2 as percentage of GDP
Source: Feri, NORD/LB Fixed Income & Macro Research
Quarterly forecasts, USA
I/18 II/18 III/18 IV/18 I/19
GDP qoq ann. 2.2 4.2 3.5 2.5 2.3
GDP yoy 2.6 2.9 3.0 3.1 3.1
Inflation yoy 2.2 2.7 2.6 2.3 2.1
Change as percentage
Source: Bloomberg, NORD/LB Fixed Income & Macro Research
Interest and exchange rates, USA
13.12. 3M 6M 12M
Fed funds target rate 2.25 2.50 2.50 2.75
3M rate 2.79 2.65 2.80 3.00
10Y Treasuries 2.91 3.15 3.25 3.45
Spread 10Y Bund 263 275 275 265
EUR in USD 1.14 1.15 1.17 1.20
Source: Bloomberg, NORD/LB Fixed Income & Macro Research7 / Economic Adviser ♦ Outlook 2019
Euroland
ECB in a dilemma – monetary policy normalization a successful
undertaking?
Analyst: Christian Lips, Chief Economist
Review 2018: Markedly weakening economic momentum
2018 saw the eurozone fail to continue its previously highly dynamic development. Already
in the first half of the year, real GDP grew at quarter-on-quarter rates of just 0.4 percent
after five consecutive quarters with qoq expansion of 0.7 percent in each case. The down-
ward tendency continued in the summer, with growth in the third quarter at just short of
0.2 percent qoq – the weakest rate in a good five years. As regards the closing three
months of 2018, there are signs of a slightly higher expansion rate for the eurozone, but
there are basically no changes in the offing to the picture of moderation in growth. The
annual rate of change for 2018 in terms of real GDP is likely to stand at 1.9 percent; the
growth forecast we made twelve months ago (2.5 percent) was therefore overly optimis-
tic. Among the five largest economies, Spain and the Netherlands show the highest expan-
sion rates in 2018 at around 2.5 percent, while Germany, France and above all Italy regis-
tered weaker economic momentum than the rest of the currency area (see chart). On the
expenditure side, the domestic economy remained a reliable mainstay of growth. By con-
trast, net exports made merely a slightly positive contribution to growth, besides which
there was a slowdown in consumption and investment as well in the course of the year.
The continued decline in unemployment and the concomitant increase in employment had
a buttressing effect. The annual average unemployment rate fell significantly to 8.2 per-
cent. However, consumer price inflation of over 2.0 percent at times in year-on-year com-
parison has slowed the expansion in real disposable income.
GDP growth rates in 2018 (swda, yoy in %, own estimates)
7.0 in %
6.0
5.0
4.0
3.0
2.0
1.0
0.0
IT BE DE FR EC PT GR FI NL ES AT LU LT EE CY SK SI LV IE MT
Source: Bloomberg, NORD/LB Fixed Income & Macro Research
Brexit, Italy, European elections – political risks weigh on the outlook for 2019
The economic upswing has been ongoing for 22 quarters now, and the leeway for further8 / Economic Adviser ♦ Outlook 2019
strong expansion has become correspondingly scant, at least in some countries. That said,
the output gap after two recessionary phases was also very large, which is why no conclu-
sions for the outlook can be drawn from the length of the cyclical upswing alone. The eco-
nomic outlook for the eurozone has increasingly clouded in recent months, however. The
economic sentiment indicator has been in downward mode since the turn of the year
2017/2018 but, with 109.5 points in November, was still well above the long-term average
(100.0). With the exception of the construction sector, where sentiment remains in the
region of its all-time high, the euphoria has given way to a more sober assessment in all
sectors of the economy. In particular the various political trouble spots are currently
weighing on the economic outlook. The foreign trade environment gradually deteriorated
over the course of the year, not least on account of the aggressive trade policy pursued by
US president Donald Trump. While the EU succeeded in securing a provisional ceasefire in
the conflict between the two major economic areas, the USA and the EU, in the middle of
the year, a lasting solution to the conflict has still to be achieved. Besides this, the EU is
being at least indirectly impacted by the US trade dispute with China and the economic
deceleration in the Middle Kingdom, with the first signs of a slowdown in trade becoming
visible. Add to this the in part chaotic developments on the way to Brexit. With just three
months to go before Britain's official withdrawal from the EU, the political situation is ex-
tremely confusing and Theresa May has a veritable fight on her hands to secure the British
Parliament's approval of the negotiated compromise with the EU. A hard Brexit would
cause serious economic damage to Great Britain, but the Eurozone would also be hit hard.
And as if the perennial issues trade conflict and Brexit were not enough, doubts about the
political stability of the monetary union have gathered momentum again. Mr. Macron
appears to be taking a political battering on the home front as a consequence of the seri-
ous and violent protests of the "Gilets jaunes"; his ability to reform is being called into
question as result of the latest concessions. Italy's populist government has in the past six
months taken it upon itself to break the previous agreements on budgetary policy with
Brussels and implement (consumptive) electoral promises. However, the pressure of signif-
icantly higher risk premiums for Italian government bonds appears to be gradually raising
the willingness in Rome to talk and negotiate. We expect a compromise to be reached
between Italy's populists and the EU Commission in the first half of 2019. The merely slight
progress made so far in terms of European governance is disappointing, and there is the
threat of a further strengthening of populist forces in the European elections in May. The
risks to the economic development of the euro zone are primarily of a political nature,
against which backdrop we expect GDP growth to slow from 1.9 percent in 2018 to just 1.4
percent in 2019.
Subdued inflation outlook for 2019
The average year-on-year inflation rate in 2018 stood at 1.8 percent which, for the first
time after many years of falling short of the target, met the ECB's definition of price stabil-
ity again. However, the rise in the inflation rate was primarily the result of what were at
times significantly higher energy prices. These were reflected above all in the price com-
ponent energy (see chart). Underlying domestic inflationary pressures, on the other hand,
remained low as in previous years and developed along a flatter curve than originally ex-
pected in the course of the year as well. Despite the improvement in the labour market –
with unemployment down to just 8.1 percent by October – and a wage trend a bit more
dynamic of late, the core rate ex-energy remained close to 1.0 percent yoy. The wage
stimulus is evidently taking a lot more time to have an impact in this cycle. The HICP infla-
tion rate can be expected to drop back below the 2.0 percent yoy mark in the near future
on account of the recent decline in oil prices, and a year-on-year figure of 1.5 percent –
and thus far lower than in 2018 – is to be reckoned with for 2019 as a whole.9 / Economic Adviser ♦ Outlook 2019
Chart: Oil price, headline inflation and core rate ex energy
yoy, in pp. yoy in %
5 100
Forecast
4 75
3 50
2 25
1 0
0 -25
-1 -50
-2 -75
2001 2003 2005 2007 2009 2011 2013 2015 2017 2019
Core rate ex energy Energy HICP EMU Oil price yoy (rhs)
Source: Bloomberg, NORD/LB Fixed Income & Macro Research
ECB: Is monetary policy normalization coming too late?
As expected, the European Central Bank (ECB) resolved at its last meeting in 2018 to end
its net purchases under the EAPP. The exit from the quantitative easing (QE) programme
was foreseeable and had been well prepared by the central bankers for some time, even
though the Governing Council had formally kept a back door open until the end. By con-
trast, the key interest rates remained at their historic rock-bottom levels until year-end. In
stopping its asset purchases at the turn of the year the ECB is ending the biggest monetary
policy experiment since the central bank’s inception. The Eurosystem will however keep
the volume of around EUR 2.6 trillion constant as long as necessary. The corresponding
forward guidance on reinvestments was reaffirmed and expanded, to the effect that the
Governing Council intends to fully reinvest maturing EAPP bonds for an extended period as
from the time of the first interest rate adjustment. The forward guidance remains un-
changed as regards the development of the key rates, so no rate hike is to be expected
until beyond summer 2019. Since the first hike – presumably initially only of the deposit
rate – is therefore not to be expected until late 2019 at the earliest, the ECB will in our
view be fully reinvesting maturities from the EAPP until at least 2021. The central bank in
Frankfurt thus remains a key customer on the bond markets and the upward pressure on
capital market interest rates is also limited from this side.
Two interesting basic principles apply to the future reinvestment policy with regard to the
PSPP programme: first, reinvestment of maturities in the same jurisdiction, and second, a
gradual alignment to the new ECB capital key. This would mean that Italian government
bonds in particular would have to be underweighted. At the beginning of 2019 the portfo-
lio of Italian government bonds deviates by almost 1.5 percentage points from the calcu-
lated portion as per the capital key – which equates to a volume of around EUR 28 billion.
Even if the alignment takes place slowly, this is certainly not good news for Italy's populist
government. The fact is, however, that it is not one of the ECB's tasks to iron out unsus-
tainable fiscal policies in individual member states. At least in December, the question of
possible further long-term refinancing operations by the ECB was not at the centre of at-
tention. Nevertheless, we consider a decision on a TLTRO III programme to be quite likely,
since the old TLTRO II operations with a time to maturity of less than one year will lose
considerably in attractiveness from a regulatory point of view. That said, the ECB cannot
use a cliff effect on excess liquidity in parallel with a planned normalization of key interest
rates, which in spirit would run counter to the principle of sequencing. The ECB's long-term10 / Economic Adviser ♦ Outlook 2019
path to normalization is based on a still cautiously optimistic outlook for overall economic
developments. Nevertheless, the central bankers in Frankfurt have adjusted their projec-
tions for 2019 slightly downwards, in addition to which Mario Draghi stressed the down-
side risks. Due to the high global risks, sentiment became increasingly clouded over the
course of the year. In particular Brexit and Donald Trump's trade policy are weighing on
business confidence. Provided the risks do not actually materialize, late 2019 could well
see the way clear for the next step on the path to normalization – namely a raising of the
deposit rate. An end to negative interest rates would be welcome, but this will depend
very much on the economic data reports in 2019. The ECB would be well advised at this
time to proceed cautiously and not let itself be too quickly diverted from its normalization
path, especially since for the foreseeable future it is not a question of an appreciable tight-
ening of the monetary reins but rather of a gradual scaling back of unconventional stimu-
lus measures.
Chart: Deviations in the PSPP based on the ECB's old and new capital key
Deviation in %-pts.
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
-2.5
-3.0
3/15 9/15 3/16 9/16 3/17 9/17 3/18 9/18
DE FR IT ES Rest
Source: Bloomberg, EZB, NORD/LB Fixed Income & Macro Research
Capital market rates (Bunds): upward trend to remain subdued in 2019 as well
Capital market yields initially developed as expected in 2018. Speculation about the im-
pacts of the new US president Trump's aggressive trade policy and the uncertainty factors
Brexit and Italy then increasingly drove investors to safe havens again and caused the yield
on ten-year Bunds to plummet back below the 0.30 percent mark in December 2018. In
particular the massive widening of the spread between Italian government bonds and
Bunds (10Y) to well over 300 basis points at times revived concerns about contagion ef-
fects or even a sovereign debt crisis 2.0. The yield on 10-year Bunds currently stands at just
0.30 percent and, given the manifold risk factors, is at best likely to increase merely mar-
ginally in the first half of 2019. In addition, the ECB's interest rate adjustment path will
likely be even more cautious. We expect the ECB to undertake an initial raising of the de-
posit rate in Q4/2019 at the earliest; the main refinancing rate is unlikely to be upwardly
adjusted before spring 2020. Moreover, the ECB is using unconventional measures to in-
fluence longer-term market expectations regarding the key interest rates, with in particu-
lar the forward guidance aimed at moderating the risk premium for future key-rate chang-
es. Against this background the upside potential among the capital market rates will thus
remain limited for the time being. Should some of the macroeconomic risks (hard Brexit,
US import tariffs on vehicles, Italy) actually materialize, the demand for safe-haven assets,
and thus also for Bunds, would grow again. In that event the yields would likely nosedive11 / Economic Adviser ♦ Outlook 2019
to the lows last seen in 2016. If this can be avoided, however, there are justified grounds
for expecting a gradual upward movement of the capital market rates in the eurozone in
the medium term. Above all a – even if cautious – commencement of the ECB's key-rate
normalization process would provide reason for elevated interest rate expectations among
the market participants. As regards the yields on 10-year Bunds, however, we expect a rise
to no more than 0.80 percent over the year.
Fundamental forecasts, Euroland
2017 2018 2019
GDP 2.5 1.9 1.4
Private consumption 1.7 1.3 1.2
Govt. consumption 1.2 1.0 1.3
Fixed investment 2.9 2.9 1.6
1
Net exports 0.8 0.3 0.0
Inflation 1.5 1.8 1.5
2
Unemployment rate 9.1 8.2 7.8
3
Budget balance -1.0 -0.7 -1.0
3
Current acc. balance 3.2 3.0 2.7
Change vs previous year as percentage; 1 as contribution to GDP growth; 2 as percentage of the labour force; 3 as percentage
of GDP
Source: Feri, NORD/LB Fixed Income & Macro Research
Quarterly forecasts, Euroland
I/18 II/18 III/18 IV/18 I/19
GDP sa qoq 0.4 0.4 0.2 0.3 0.3
GDP sa yoy 2.4 2.2 1.6 1.3 1.3
Inflation yoy 1.3 1.7 2.1 2.0 1.8
Change as percentage
Source: Bloomberg, NORD/LB Fixed Income & Macro Research
Interest rates, Euroland
13.12. 3M 6M 12M
Repo rate ECB 0.00 0.00 0.00 0.00
3M rate -0.31 -0.31 -0.28 -0.15
10Y Bund 0.29 0.40 0.50 0.80
Source: Bloomberg, NORD/LB Fixed Income & Macro Research12 / Economic Adviser ♦ Outlook 2019
Germany
Lane change for the German economy
Analyst: Christian Lips, Chief Economist
Review: Growing burdens end the boom
The economic upswing has lost momentum in the course of 2018. Real GDP registered
growth of 2.0 percent in the first half-year as against the same period in 2017. However,
the German economy then went on to record its first drop in GDP since early 2015, with a
seasonally and calendar-adjusted figure of -0.2 percent qoq in Q3. Even assuming sound
quarter-on-quarter growth in Q4 – we are currently reckoning with expansion in the order
of 0.4 percent qoq – the closing quarter of 2018 is only likely to see a year-on-year plus of
around 1.0 percent. 2018 saw the German economy adversely affected in particular by the
growing deterioration of the global economic climate resulting from the diverse global risk
factors. The export-oriented German economy was hit particularly hard by the negative
impacts of the trade conflicts. The dynamics of foreign orders for industry declined signifi-
cantly in the course of the year, and the key leading indicators too registered a downtrend.
For 2018 as a whole, real GDP will likely have expanded by around 1.5 percent and thus
roughly in the same order as potential growth. This clearly disappointed the in some cases
very high expectations among the majority of economic analysts at year-end 2017. Despite
the weak Q3, the economy's capacities remain slightly overstretched. The key mainstay of
growth in 2018 was domestic demand. This applies to private consumption, but gross fixed
capital formation too has expanded in recent months. The latter trend is primarily at-
tributable to ongoingly brisk investment activity on the construction front. Net exports, on
the other hand, have made a significantly negative contribution to growth of late (see
chart).
Chart: Growth contributions to real GDP
qoq, in pp.
1.6
1.0 1.1
1.2 0.9 1.0 0.9
0.8 0.6 0.6 0.5 0.5 0.5
0.4 0.3 0.3
0.4 0.4 0.4 0.5
0.4 0.2
0.6
0.0
-0.4 -0.1 -0.1
-0.3 -0.2
-0.8
-1.2
I/13 I/14 I/15 I/16 I/17 I/18
Priv. consumption Govt. consumption Gr. fixed cap. form.
Inventories Net exports GDP growth
Source: Bloomberg, NORD/LB Fixed Income & Macro Research
Healthy labour market trend continues
Despite the economic slowdown, the healthy labour market trend of recent years has con-
tinued with similar momentum. The number of people in employment in 2018 rose by 1.3
percent, roughly as much as in the previous year (see chart). On average, the unemploy-
ment rate fell from 5.7 to 5.2%. The sustained upward trend in employment and growing
shortages of skilled labour in individual sectors have contributed to significant nominal
wage increases. At a good 1.0 percent yoy however, the expansion in private consumption13 / Economic Adviser ♦ Outlook 2019
was as low as it last was in 2014. Real disposable income was dampened by higher infla-
tion prevailing above all in the summer. Investments trended quite dynamically despite the
high degree of global uncertainty. On the buildings front, the rising demand in residential
construction as well as, in general, the low interest rate environment and the lack of high-
yield investment alternatives are continuing to bolster demand.
Chart: Long-term labour market development (incl. forecast)
in millions in millions
38 5.5
Forecast
39 5.0
40 4.5
41 4.0
42 3.5
43 3.0
44 2.5
45 2.0
46 1.5
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Unemployment (sa, rhs) Employed persons (sa, inv.)
Source: Bloomberg, NORD/LB Fixed Income & Macro Research
Outlook: Gradually receding WLTP problem – global risks weigh on sentiment
The poor GDP figures in Q3 were also due to special factors. In particular the problems
encountered by some manufacturers in obtaining timely certification of vehicle models to
the new WLTP exhaust emissions test standard led to a temporary slump in production
and sales in the automotive sector. The production figures available up to November from
the automotive industry association VDA indicate a gradually emerging catch-up effect, for
which reason slight catch-up effects in vehicle production are also to be expected for the
first half of 2019. Besides the problems in the automotive sector, however, capacity bot-
tlenecks and an uncertain global environment are having an increasingly dampening effect
on the economy. Above all, the Brexit issue and – to put it mildly – the unorthodox policies
of Donald Trump and the populist government in Italy are weighing heavily on sentiment.
The PMIs fell further in November, approaching the 50-points mark and thus the expan-
sion threshold. Although the expectations among the financial market experts in the most
recent ZEW survey have risen slightly, this must be gauged in the context of the significant-
ly worsened assessment of the situation, however; the more pessimistic evaluation of the
current situation does after all form the reference point for looking ahead into the future.
The ifo business climate too has in the meantime moved significantly away from its highs
(see chart), meaning that all key leading indicators provide good reason to expect a slow-
down in the pace of economic development. Having been in the fast lane in 2017, the
German economy has shown growing signs of a deceleration of late. It has as a result
changed lanes and will for the time being be running at a slower pace – probably in line
with potential. That said, there is still no reason for alarm as long as the risk factors (Brexit,
Italy, trade war) do not become of decisive significance. The coming half-year will provide
more clarity in this context. In the absence of major shock events, the German economy
will likely register real expansion of 1.3 percent in 2019. We expect a bolstering effect from
private and public consumption, each of which can be expected to grow more strongly14 / Economic Adviser ♦ Outlook 2019
than in the past year. Private consumption will continue to benefit from a buoyant labour
market trend and lower inflation, in addition to which high wage settlements are to be
expected in the upcoming collective negotiations. Where equipment is concerned, on the
other hand, we expect a phase of investment restraint due to the elevated global risks and
the clouded sentiment in key export markets. The ongoing expansive monetary policy and
added stimuli from fiscal policy will buttress the German economy's development in 2019.
Chart: Leading indicators signal significantly decelerated pace of growth
3 standardized in % 6.0
2 4.0
1 2.0
0 0.0
-1 -2.0
-2 -4.0
-3 -6.0
-4 -8.0
1995 1998 2001 2004 2007 2010 2013 2016
GDP (yoy in %, rhs) ifo business climate
Industrial confidence (EU Comm.) ZEW "business climate"
Source: Bloomberg, NORD/LB Fixed Income & Macro Research
Fundamental forecasts, Germany
2017 2018 2019
GDP 2.2 1.5 1.3
Private consumption 1.8 1.1 1.4
Govt. consumption 1.6 0.9 1.7
Fixed investment 2.9 3.2 2.6
Exports 4.6 2.1 2.2
Imports 4.8 3.4 3.5
1
Net exports 0.3 -0.4 -0.5
2
Inflation 1.7 1.9 1.6
3
Unemployment rate 5.7 5.2 4.9
4
Budget balance 1.0 1.6 1.1
4
Current acc. balance 8.0 7.6 7.2
Change vs previous year as percentage; 1 as contribution to GDP growth; 2
HICP; 3 as percentage of the civil labour force
(Federal Employment Office definition); 4 as percentage of GDP
Source: Bloomberg, NORD/LB Fixed Income & Macro Research
Quarterly forecasts, Germany
I/18 II/18 III/18 IV/18 I/19
GDP sa qoq 0.4 0.5 -0.2 0.4 0.4
GDP nsa yoy 1.4 2.3 1.1 1.0 1.1
Inflation yoy 1.4 1.9 2.1 2.2 2.2
Change as percentage
Source: Bloomberg, NORD/LB Fixed Income & Macro Research15 / Economic Adviser ♦ Outlook 2019
Switzerland
Trial of strength with the EU
Analyst: Dr. Stefan Grosse
Trial of strength with the EU – blueprint for post-Brexit UK?
Switzerland is currently engaged in a trial of strength with the EU, which in some respects
could be a blueprint for future disputes between London and Brussels. It concerns in par-
ticular the Swiss stock exchange equivalence issue in connection with a framework agree-
ment between Switzerland and the EU which replaces Switzerland's special status with
EEA-like arrangements. Certain EU rules must be respected in return for market access.
The Swiss succeeded in achieving some negotiation successes, such as limiting the scope of
the framework agreement. A topic of dispute lies in the adoption of the EU's principle of
the free movement of persons, to which the Swiss trade unions are opposed because they
fear wage dumping. The EU is using the stock exchange equivalence issue as a means of
exerting pressure. The rules are at present mutually recognized, but Brussels set a dead-
line, namely for December 2018. This has now been extended again for a further six
months. Should it expire without agreement having been reached, stock exchange transac-
tions will be made considerably more difficult and the Swiss stock exchange would suffer
substantial losses in turnover. If the Federal Council in Bern makes too many concessions
in the framework agreement it will face domestic political pressure from the SVP and the
possibility of referendums. The discussion is in any case already of a more emotional than
rational nature. It is our view, however, that a compromise can be found; in particular
Brexit could make the EU more interested in reaching an amicable settlement than in
opening a second front. Switzerland could, for example, exert considerable pressure
through the transit of goods.
Slower growth, expansive SNB
The slowdown in growth is felt in Switzerland too, as reflected in, among other things, the
economic data on Q3, which surprised on the downside with a negative quarter-on-
quarter growth figure of -0.2 percent. Switzerland can hardly decouple itself from the
trend, especially in Europe. The latent risks such as trade conflicts, Brexit and Italy repeat-
edly lead to an appreciation of the Swiss franc. The slowing economic momentum will con-
tinue in 2019, against which background we expect GDP growth of just 1.3 percent. Em-
ployment remains high and domestic consumption robust; the latter will remain a key
mainstay of the Swiss economy in the year ahead as well. The overly subdued price trend
is making for difficulties, especially against the background of the exchange rate problems.
Consequently, the SNB can make little change to its current monetary policy.
Fundamental forecasts*, Switzerland Interest and exchange rates, Switzerland
2017 2018 2019 13.12. 3M 6M 12M
GDP 1.6 2.6 1.3 LIBOR target rate -0.75 -0.75 -0.75 -0.75
Inflation (CPI) 0.5 1.0 0.7 3M rate -0.74 -0.74 -0.75 -0.75
Unemployment rate 1 3.2 2.6 2.4 10Y -0.17 -0.09 0.00 0.10
Budget balance 2 1.3 0.4 0.5 Spread 10Y Bund -46 -49 -50 -70
Current acc. balance 2 9.8 10.5 10.0 EUR in CHF 1.13 1.14 1.15 1.17
*Change vs previous year as percentage; 1 as percentage of the labour force; 2 as percentage of GDP
Source: Bloomberg, NORD/LB Fixed Income & Macro Research16 / Economic Adviser ♦ Outlook 2019
Japan
Gathering headwind
Analyst: Dr. Stefan Grosse
Gathering headwind
Following revision, the data on Q3 revealed a very significant contraction in growth of 0.6
percent qoq, reflecting the fact that the natural disasters had a greater impact than initial-
ly hoped for. The deep drop into the negative zone will likely soon be history, however,
since there will be catch-up effects from Q4 onwards, not to forget that disasters always
have the effect of a small economic stimulus package. Against this background the domes-
tic economy will likely be giving a more robust showing in the near future. The economic
headwind is gaining strength at the global level, however. Japan will also be particularly
impacted by the economic situation in China and the slowing economic momentum in the
United States. While the trade conflict between Japan and the US is unlikely to be an issue,
as the Japanese are more willing to make concessions than the Chinese, there is neverthe-
less a threat of setbacks in the event of an escalation between the two largest economies.
Even if the "ceasefire" appears to be holding at present, there is nonetheless a considera-
ble residual risk. That said, the degree of investment activity is indicating a stabilization,
though the investment cycle could make for a certain braking effect in the second six
months of 2019. At that time there could be a further – government-induced – problem,
arising from the fact that the government in Tokyo still plans to raise the consumption tax
in October 2019. The experiences gained from the last increase suggest that this will make
for brought-forward consumption in the preceding months but likely trigger a recession
when it comes into effect. The government still has time to abandon its intended measure,
though it will probably only do so if there are no significant negative shocks beforehand.
Overall, though, the signs are that 2019 will give a significantly weaker economic showing.
Bank of Japan's hands remain tied
The BoJ’s hands remain tied where monetary policy is concerned, and normalization is not
to be expected for the time being. Given the slowing economic momentum and the lack of
stimuli for price development, which is being further depressed by the more favourable oil
prices, it also has less alternatives. The central bankers haven't exhausted the volume of
purchases of late, but could easily change up a gear again in this context – something that
has in the meantime become more likely again. The BoJ will at any rate maintain its strate-
gy of yield curve control and the somewhat wider trading range. It will also wish to wait
and see whether the scheduled consumption tax comes and what impact it has.
Fundamental forecasts*, Japan Interest and exchange rates, Japan
2017 2018 201 13.12. 3M 6M 12M
9
GDP 1.9 0.6 0.5 Key rate -0.10 -0.10 -0.10 0.00
Inflation 0.5 1.1 1.8 3M rate -0.11 -0.09 -0.06 0.00
Unemployment rate 1 2.8 2.4 2.8 10Y 0.05 0.09 0.12 0.14
Budget balance 2 -3.7 -3.7 -3.9 Spread 10Y B -23 -31 -38 -66
Current acc. balance 2 4.0 3.8 3.7 EUR in JPY 129 130 130 134
* Change vs previous year as percentage USD in JPY 114 113 111 112
1
as percentage of the labour force; 2 as percentage of GDP
Source: Bloomberg, NORD/LB Fixed Income & Macro Research17 / Economic Adviser ♦ Outlook 2019
China
Trade war – finale furioso?
Analyst: Dr. Stefan Grosse
Fateful year in the trade war
There are growing signs of a slowdown in the Chinese economy. Especially when account is
taken of the fact that there is currently a "frontrunning" in progress, i.e. in this case in-
vestments and purchases being brought forward in anticipation of a trade war escalation.
There is at least 90-day breather in the foreign trade dispute that appears to be holding.
This means that the planned raising of US import tariffs has also been postponed until
January for the time being. Trump implied that he had been hugely successful in the nego-
tiations. China will after all be lowering the tariffs on American cars and also gave indica-
tions of improved market access. That said, all this does not necessarily mean that the
conflict has been resolved. President Trump is always good for a surprise. Particularly in
view of the fact that on the domestic front he is under increasing pressure from the
Mueller investigation, it is difficult to judge how he reacts, whether he aims for a quick
success in order to score points or whether he vents his aggression on his "favourite oppo-
nent". It is at any rate clear that 2019 will be the year in which it will be decided whether
the conflict will be settled or ultimately escalated.
Either way –further stimulus measures are certain
The Chinese government is likely to respond by way of a further economic stimulus pack-
age to the slowing economic momentum, which is attributable not only to the trade con-
flict but also to home-grown problems. We expect that the waning frontloading, the cool-
ing construction sector and the investment cycle will lead to a weak start to 2019, even
without a further escalation of the trade conflict. The PBoC and the government will react
with measures in Q2/2019 at the latest, with minimum reserve rate reductions a certainty
and reductions in consumption tax and corporate tax reductions conceivable. The impact
of the stimuli and the cyclical effects will contribute towards stronger growth in the second
half of the year. The bottom line is that we should see growth above the 6-percent mark.
Downside risks are to be expected from the trade conflict, a possibly stronger slowdown in
the US economy's growth but also from political events in Europe or friction in the capital
markets. On the currency side, the USD 7/CNY mark will likely be exceeded next year, with
a slowdown in growth, interest rate differentials and an indirect economic stimulus pack-
age likely to play a role in this context. That said, the pace of depreciation will be rather
slow towards counteracting capital flight endeavours.
Fundamental forecasts*, China Interest and exchange rates, China
2017 2018 2019 13.12. 3M 6M 12M
GDP 6.9 6.5 6.2 Deposit rate 1.50 1.50 1.50 1.50
Inflation 1.6 2.2 2.3 3M SHIBOR 3.15 2.80 2.50 3.00
Unemployment rate 1 4.2 4.1 4.1 10Y 3.35 3.50 3.61 3.89
Budget balance 2 -3.6 -3.6 -3.7 Spread 10Y Bund 307 310 311 309
Current acc. balance 2 1.3 0.7 0.5 EUR in CNY 7.82 8.21 8.54 8.76
* Change vs previous year as percentage USD in CNY 6.88 7.14 7.30 7.30
1
as percentage of the labour force; 2 as percentage of GDP
Source: Bloomberg, NORD/LB Fixed Income & Macro Research18 / Economic Adviser ♦ Outlook 2019
Britain
Orderly or no-deal Brexit – the decisive question
Analyst: Dr. Jens Kramer
Stalemate at the crossroads between an orderly and no-deal Brexit
The situation in the last few metres before the crossroads between an orderly and a no-
deal departure of the United Kingdom from the European Union on 29 March of the new
year could hardly be more dramatic and confusing. With the Brexit negotiators having
succeeded in concluding an agreement almost 600 pages long with several annexes and a
political declaration of intent, prime minister Theresa May had a great deal of difficulty to
get her own cabinet behind the compromise that had been thrashed out. The Brexit deal
was due to be voted on in the House of Commons on 11 December, but Mrs May sum-
marily called the vote off the day before as it was clear that a majority of MPs would op-
pose the agreement. There is fierce resistance to the so-called backstop clause, which is
intended to avert a hard border between the British North of Ireland and the Republic of
Ireland. To this end, it was agreed in the deal that, if necessary, Great Britain would remain
in the customs union and Northern Ireland in the single market if no agreement on future
trade relations can be reached at the end of the transitional period, which runs until the
end of 2020 and, if necessary, beyond it. Since the agreement provides for neither a uni-
lateral right of exit for Britain nor a time limit for the backstop, the Brexiteers fear that the
different treatment of Northern Ireland and the rest of the United Kingdom will on the one
hand constitute an undermining of integrity and, on the other hand, in extreme circum-
stances put Britain in a state of vassalage to the EU. The discontent ultimately channeled
itself into a party-internal vote of no confidence, which Mrs. May survived with the ap-
proval of almost two thirds of the Conservative MPs.
"No deal" almost as likely as an orderly Brexit
In bilateral talks and at the EU summit on 13 and 14 December, Mrs May in the meantime
endeavoured to attain improvements to the Brexit agreement with regard to the backstop
clause. Understandably and in a rare show of unanimity, however, the EU refused to undo
the painstakingly negotiated package once again. The British were merely conceded the
non-binding declaration of intent that the backstop would only be applied – if at all – for a
limited period and would be replaced by a follow-up regulation still to be agreed. This
means that the orderly withdrawal in the form of the negotiated agreement will be put to
the vote in Parliament no later than 21 January. It would take no less than the most opti-
mistic imagination to see a majority as conceivable. Around one third of the conservative
MPs could oppose it, as could the parliamentarians of the Northern Irish DUP, whose votes
the minority government has relied upon to date. As regards the opposition Labour Party,
it will be a matter of whether its MPs give preference to damage limitation rather than
attempting to bring down the government and forcing fresh elections. In our baseline sce-
nario we are assuming an orderly Brexit and the path thus opened into the transition
phase. A no-deal or hard Brexit and the reversion of the UK's trade relations with the EU
and the rest of the world to WTO standards is almost equally likely, however. Against this
background we outline in the following our forecasts for the year ahead, not only for the
event of an orderly withdrawal but also for the no-deal scenario of a hard Brexit.19 / Economic Adviser ♦ Outlook 2019
Chart: Growth, inflation and monetary policy in baseline and hard Brexit scenarios
Source: Bloomberg, NORD/LB Fixed Income & Macro Research
Baseline: Restrained growth momentum, Bank of England on a more neutral course
In the event of an orderly withdrawal, the most volatile risks will take a back seat in the
subsequent transition phase, but the uncertainty about the rules and regulations that still
need to be laid down for trade in goods and services, the free movement of people and
capital will dampen investment and the propensity to consume. We expect 2019 to see
real economic growth of 1.1 percent, which will thus remain below potential. The annual
average cost of living will increase by 2.1 percent in year-on-year comparison. The em-
ployment trend should no longer be quite so robust against the background of a down-
trending economy. In this environment we expect the Bank of England to continue steer-
ing its cautious and measured course towards a more neutral monetary orientation. We
expect a bank rate hike in spring and one in autumn. The pound sterling exchange rate
ought to be able to stabilize, doing so in the direction of the GBP 0.85/EUR mark by year-
end 2019. Yields on British government bonds will likely move slightly upwards over the
entire yield curve against the background of rate expectations and a no longer so strongly
pronounced risk perception.
Hard Brexit: Severe adjustment recession, pound close to parity against the euro
In contrast, the macroeconomic implications of a hard Brexit can be described as outright
dramatic. Our model calculations indicate the likelihood of a severe adjustment recession.
Alone the strict restrictions on the cross-border exchange of goods and, above all, services
and the severing of key value chains will lead to a slump in economic output as early as
Q1/2019 which will likely accelerate even further in the summer. For the year as a whole,
we forecast a decline in real GDP of -0.3 percent as against 2018 in the event of a hard
Brexit. The drastic exchange rate losses sustained by the pound sterling – against the euro
in the direction of parity – will drive the inflation rates markedly upwards amid stumbling
domestic demand. Despite its mandate to ensure price stability, the Bank of England re-
mains blocked from raising rates in this constellation. In this crisis scenario we instead
expect a rapid rate cut. In a market environment characterized by incalculable risks, British
government bonds are still the most reliable asset class for investors wishing to remain20 / Economic Adviser ♦ Outlook 2019
invested in the British pound. We expect price gains that will push 10-year yields down to
the 1.00 percent mark.
Fundamental forecasts*, Britain Interest and exchange rates, Britain
2017 2018 2019 13.12. 3M 6M 12M
GDP 1.7 1.3 1.1 Repo rate 0.75 0.75 0.75 1.00
Inflation (CPI) 2.7 2.5 2.1 3M 0.90 0.90 0.90 1.10
Unemployment rate 1 4.4 4.1 4.5 10Y 1.29 1.50 1.70 1.80
Budget balance 2 -1.8 -1.9 -2.2 Spread 10Y Bund 100 110 120 100
Current acc. balance 2 -3.7 -3.7 -3.7 EUR in GBP 0.90 0.87 0.87 0.85
* Change vs previous year as percentage GBP in USD 1.27 1.32 1.34 1.41
1
as percentage of the labour force as per ILO concept; 2 as percentage of GDP
Source: Bloomberg, NORD/LB Fixed Income & Macro Research21 / Economic Adviser ♦ Outlook 2019
Canada
Oil price decline braking growth – for the time being
Analysts: Tobias Basse // Bernd Krampen
Oil price decline weighs on the economy, restrains BoC from rate hike in the near future
The signs are that the Bank of Canada will not be undertaking its expected rate hike in
January – as can be inferred from an unexpectedly dovish statement by the central bank-
ers following the BoC's meeting in early December. The decline in oil prices to be seen
since early October is having a particularly negative impact on the economy. The BoC
points to the weaker energy sector – with implications for the western provinces but also
for the economy as a whole. Add to that a decline in investment of late and the danger
that the higher interest rates could slow growth somewhat. After a quite sound Q3 with
annualized GDP growth of 2 percent, there are now growing signs of a setback in growth in
Q4, in addition to which the rate of inflation will be dropping for the time being from its
current level of 2.4 percent for oil price-induced reasons.
Economic situation stabilizes again – BoC rate hike thus merely postponed
We are nevertheless assuming that the decline in oil prices will only slightly delay the BoC's
intended further normalization of monetary policy at the beginning of 2019. Besides our
expectation of the oil prices rising again in the course of 2019, the recently more sound
economic data from the land of the maple leaf also provide justification for our assump-
tion. The sentiment among Canada's business enterprises thus remains at a healthy level.
The diminished uncertainty in the wake of the successful negotiations on the NAFTA's suc-
cessor in the form of "USMCA" has undoubtedly stabilized the expectations for 2019.
There was also good news from the labour market, with strong employment growth, be-
sides which the sound GDP expansion to be expected in its southern neighbour, the USA, is
a stabilizing element. Against this background there is no reason to be all that pessimistic
about the economic prospects for Canada in 2019. We expect renewed GDP growth of
around 2 percent. We are maintaining our expectation of two rate hikes by the BoC in
2019 but probably not before spring.
CAD under strain for the time being but should stabilize somewhat in the long run
Slightly rising interest rates – albeit on both sides of the Great Lakes – should only boost
the Canadian currency against the US dollar to the extent that, in our opinion, the current
depreciation has been too rapid. We expect 2019 to see the Canadian dollar moving in the
opposite direction, with an appreciation in the direction of CAD 1.30/USD if the oil prices
stabilize somewhat again as well.
Fundamental forecasts*, Canada Interest and exchange rates, Canada
2017 2018 2019 13.12. 3M 6M 12M
GDP 3.0 2.1 2.1 O/N target rate 1.75 2.00 2.25 2.25
Inflation 1.6 2.3 2.1 3M 1.64 2.10 2.30 3.40
Unemployment rate 1 6.3 5.9 5.8 10Y 2.16 2.30 2.50 2.70
Budget balance 2 -1.1 -0.8 -0.7 Spread 10Y Bund 187 190 200 190
Current acc. balance 2 -2.8 -2.8 -2.5 EUR in CAD 1.52 1.52 1.53 1.57
* Change vs previous year as percentage USD in CAD 1.34 1.32 1.31 1.31
1
as percentage of the labour force; 2 as percentage of GDP
Source: Bloomberg, NORD/LB Fixed Income & Macro Research22 / Economic Adviser ♦ Outlook 2019
Mexico
USMCA makes for risk reduction – but what does AMLO have in
store?
Analysts: Tobias Basse // Bernd Krampen
One uncertainty less for 2019: USMCA is a done deal
The new North Atlantic free trade agreement under the name "USMCA" was signed at the
G20 summit in Buenos Aires on 30 November. This has put one element of uncertainty
aside for Mexico since it basically means that a continuation of the trade between the
three signatory countries can be reckoned with – with positive effects for all of them. Giv-
en the merely slightly less strong growth momentum expected in the USA for 2019, Mexi-
co too should be able to achieve growth of around 2 percent again.
One uncertainty more for 2019: AMLO is Mexico's new president
Another uncertainty has just gathered weight, however: following his election victory in
the summer, Andres Manuel Lopez Obrador (AMLO for short) was sworn in as Mexico's
new president on 1 December. The rating of the new head of state is quite mixed: on the
one hand, he has set himself the fight against corruption and against poverty as goals,
which is an honourable intention but likely difficult to achieve. On the other, concerns
have risen that the left-wing president could hamper the country's economic develop-
ment. Those sceptical of AMLO were given a foretaste of a less investment-friendly policy
when the construction of the new airport in Mexico City was summarily stopped. Moreo-
ver, the capital markets (and the rating agencies) will be keeping a close eye on the new
government's planned expenditure increases, which could admittedly help stabilize growth
in the short term but at the same time drive debt levels higher in the medium term.
Banxico will have to act twice in 2019 to stabilize the peso
Concerns about future policy have also markedly increased the pressure on the Mexican
peso of late. Mexico's national currency has been consistently above the psychologically
important level of 20 pesos per dollar since mid-November – a development on which the
Mexican central bank is keeping a close eye since it means a growing risk of higher infla-
tion. After the rate hike in November, Banxico could take a wait-and-see stance at its
meeting on 20 December – and then likely take renewed action in the first and second
quarters of 2019. Whether or not these measures will be sufficient to stabilize the peso
depends largely on the new president's actions in his first few months in office.
Fundamental forecasts*, Mexico Interest and exchange rates, Mexico
2017 2018 2019 13.12. 3M 6M 12M
GDP 2.1 2.1 2.1 O/N target rate 8.00 8.25 8.50 8.50
Inflation 6.0 4.9 4.0 3M 8.32 8.35 8.60 8.60
Unemployment rate 1 3.4 3.4 3.5 10Y 8.99 9.10 9.20 9.20
Budget balance 2 -1.6 -2.1 -2.5 Spread 10Y Bund 871 870 870 840
Current acc. balance 2 -1.1 -1.6 -1.7 EUR in MXN 23.08 23.00 22.82 23.40
* Change vs previous year as percentage USD in MXN 20.31 20.00 19.50 19.50
1
as percentage of the labour force; 2 as percentage of GDP
Source: Bloomberg, NORD/LB Fixed Income & Macro ResearchYou can also read
