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1 GLOBAL MACRO OUTLOOK

GLOBAL MACRO OUTLOOK JULY 2019

KEY FORECAST TRENDS

Global markets have been encouraged by a truce in the trade war

between the US and China and by signs that central banks have

abandoned monetary policy normalization and are ready to provide

additional policy stimulus.

But the trade truce remains uneasy and the focus has switched to policy

effectiveness. We are optimistic that policymakers will deliver sufficient

stimulus to stabilize growth in China and that 100 basis points of Fed rate

cuts will do the same in the US.

We are more concerned about Europe, which is vulnerable to a further

downswing in the global trade cycle and has limited policy flexibility. We

expect the ECB to ease policy in the coming months, but doubt that this

will do much to lift growth or inflation in the region.

Bond yields have fallen further and remain well below fair-value estimates.

Yet it’s difficult to see a near-term catalyst for higher yields, especially in

the euro area, which is beginning to take on a distinctly Japanese feel.

Who’s Most at Risk from a Trade War?

Trade Openness and Monetary/Fiscal Policy Flexibility

Through December 31, 2018

Source: Haver Analytics and AB estimates for monetary/fiscal policy flexibility

CONTENTS

Global Forecasts ............................ 2

Global Market Outlook

Yield Curves ................................. 3

Currencies .................................... 4

US.................................................. 5

Euro Area ...................................... 6

Japan ............................................. 7

China ............................................. 8

Canada .......................................... 9

Australia/New Zealand................... 9

UK................................................ 10

Norway/Sweden .......................... 10

Asia ex Japan .............................. 11

Latin America ............................... 12

Eastern Europe, Middle East and Africa (EEMEA) ........................... 13

Frontier Markets ...........................14

Forecast Tables ............................ 15

Contributors .................................. 16

0

1

2

3

4

5

20 30 40 50 60 70 80 90

Polic

y F

lexib

ility

Exports & Imports, % of GDP

High

Low

China

AustraliaUK

S. Korea

Avg.

Germany

US

Avg..

France

Euro Area

Japan

Italy

Trade tension continues to weigh

heavily on the global manufacturing

sector—the global PMI is now at its

lowest since late 2012.

Some countries are better placed

than others to weather this storm.

Relatively closed economies with a

high degree of policy flexibility—

e.g., the US and China—fall into

this category.

The collateral damage is likely to be

felt most in open economies with

limited policy flexibility. That brings

us to Europe, which is unlikely to

trigger a global recession but could

be worst hit if downside risks start

to crystallize.


GLOBAL FORECASTS

OUTLOOK

We expect the global economy to grow by 2.6% this year and next. This soft performance reflects a weak secular backdrop

and rising cyclical headwinds.

Risks to this outlook are heavily skewed to the downside. We’re most concerned about open economies with limited policy

flexibility. That puts the spotlight firmly on the euro area, which we expect to grow by just 1.0% next year.

The secular backdrop continues to point to higher inflation. But cyclical developments point in the opposite direction, and we

expect global inflation to fall to 2.6% in 2019, from 2.8% this year. That’s despite an acceleration to 2.5% in the US.

Central banks are abandoning their plans for policy normalization. We expect the Fed to cut rates by 100 basis points and

the ECB to couple more modest rate cuts with additional asset purchases. Policy effectiveness will be key.

Global Cyclical Outlook: Close to Postcrisis Lows

Economic Growth

Inflation

Monetary Policy

Global Manufacturing PMI

Through June 30, 2019 Source: Haver Analytics and IHS Markit

(3)

(2)

(1)

0

1

2

3

4

10 11 12 13 14 15 16 17 18 19

Sta

nd

ard

Devia

tio

ns

Manufacturing PMIs


Global Trade and IP Growth

Through April 30, 2019 Source: Haver Analytics

(2.0)

(1.5)

(1.0)

(0.5)

0.0

0.5

1.0

1.5

2.0

14 15 16 17 18 19

Sta

nd

ard

De

via

tio

ns

EM

DM

(1)

0

1

2

3

4

5

6

12 13 14 15 16 17 18 19

Yo

Y %

Chg

.; 3

-Mo

. M

ovin

g A

vg

.

IndustrialProduction

World Trade

Sluggish growth likely to

continue over the forecast

horizon; downside risks

dominate

Vulnerability to event risk

remains high

Key Risks

Further trade-war escalation

Ineffective policy stimulus

European politics (UK, Italy)

The secular backdrop still

points to higher inflation over

time

But softer growth presents a

formidable hurdle to higher

inflation this year and next

Key Risks

Tariff impact

Inflation expectations become

unanchored

We expect the Fed to cut

interest rates by 100 basis

points over the next year.

ECB likely to cut interest rates

and relaunch asset

purchases, but how effective

will this be?

Key Risks

Central bank reaction

functions

Policy impotence


GLOBAL MARKET OUTLOOK: YIELD CURVES

GLOBAL YIELDS

Global—Valuations point to higher developed-market (DM) yields, but it’s not clear what the catalyst will be.

US—The market is now pricing in rate cuts. We agree, and we think that this will push rates lower across the curve but less

so at longer maturities.

Euro Area—The case for higher Bund yields has disappeared. Yields remain well below historical fair-value estimates, but

with the ECB set to ease policy again, it’s not clear what will push them higher in coming months.

Japan—Quantitative and qualitative easing with yield-curve control (QQE-YCC) to anchor 10-year yields close to zero over

the forecast horizon.

10-Year Yields: AB vs. Consensus Year-End Forecasts (%)

AB

Consensus

2019 2020 2019 2020

US 2.35 2.50 2.35 2.49

Euro Area (0.25) (0.25) 0.03 0.27

Japan (0.10) 0.00 (0.04) 0.10

China 3.10 3.00 3.08 2.92

As of June 28, 2019

Source: Bloomberg and AB

Real 10-Year Bond Yields*

Through June 28, 2019 *Current 10-year bond yield less five-year/five-year forward inflation swap Source: Bloomberg and AB

(1.5)

(1.0)

(0.5)

0.0

0.5

1.0

1.5

2.0

2.5

10 11 12 13 14 15 16 17 18 19

Perc

ent

US

Japan

Euro Area

Yield Curves: 10-Year Bond Yield Less Two-Year Bond Yield

Through June 28, 2019 Source: Bloomberg and AB

0

50

100

150

200

250

300

10 11 12 13 14 15 16 17 18 19

Basis

Poin

ts

US

Japan

Euro Area


GLOBAL MARKET OUTLOOK: CURRENCIES

FX FORECASTS

USD—Fed rate cuts point to a weaker dollar, but this is likely to be accompanied by monetary easing in other countries, and

we doubt that the US currency will break out of the narrow range that has been in place over the past year.

JPY—The yen would benefit if risk-asset headwinds intensify.

EUR—We see few catalysts for a stronger euro; politics is still an important downside risk (e.g., Italy, Brexit).

CNY—The CNY outlook is still heavily dependent on the US/China trade war.

Global FX: AB vs. Consensus Year-End Forecasts (%)

AB

Consensus

2019 2020 2019 2020

EUR/USD 1.13 1.13 1.15 1.20

USD/JPY 105 105 108 108

USD/CNY 6.90 6.90 6.90 6.70

EUR/GBP 0.90 0.90 0.89 0.88

As of June 28, 2019


Nominal USD Exchange Rate: DXY

Through June 28, 2019


70

80

90

100

110

120

130

140

00 02 04 06 08 10 12 14 16 18

Post-

Louvre

Avg.

= 1

00

Real USD Exchange Rate



80

90

100

110

120

130

00 02 04 06 08 10 12 14 16 18

Post-

Louvre

Avg.

= 1

00


US

Real GDP (%) Inflation (%) Policy Rate (%) 10-Yr. Bond Yield (%)

2019F 2020F 2019F 2020F 2019F 2020F 2019F 2020F

US 2.0 1.8 2.3 2.5 1.88 1.38 2.35 2.50

OUTLOOK

While not yet conclusive, the evidence available suggests that the economy has slowed. The gap that has opened

between the manufacturing and the nonmanufacturing sector makes clear that trade policy uncertainty is the primary

driver of the slowdown.

Given the deterioration in the global economy and policy uncertainty at home, we believe that Fed rate cuts are

necessary to reassure economic actors that the ongoing expansion will continue. We expect the Fed to deliver on those

rate cuts—the question is whether they will be willing to act preemptively (as we expect) or will instead wait for weaker

data before acting.

Inflation remains subdued, and inflation expectations have fallen such that they are no longer consistent with the Fed’s

2.0% target. Even absent growth risks, the inflation picture alone might be enough to prompt monetary easing.

RISK FACTORS

Trade policy remains a persistent risk and is unlikely to vanish even if the US and China strike a trade deal. The

administration is willing to weaponize trade policy in the service of other objectives, as its threat to apply tariffs to Mexico

to force changes in immigration policy make clear. The takeaway: trade tension is here to stay.

While we are confident that the Fed will ease policy to support growth, we are less confident that monetary easing will

be as effective as it may need to be, should global risks continue to rise.

OVERVIEW

The US economy seems to be in a more precarious spot than the incoming data suggest. The data show that growth has

been solid for the first half of the year, supported by a strong labor market and strong financial markets. But the global

picture has markedly deteriorated, and business sentiment has fallen, suggesting that the outlook has darkened significantly.

The push and pull between global risks and FOMC support will define the second half of this year. If the former prevails, the

economy will fall into recession. If not, the expansion, which just passed its 10th birthday, will go on. We expect that the Fed

will prevail and keep the economy moving forward, but it is an uncomfortably close call—and one that relies on the central

bank acting more proactively than it has in the past. Our call for rate cuts in July and again later this year represents our faith

that the Fed will follow through on its intent to do what is required to extend the expansion. It can do this, of course, because

inflation remains subdued. Inflation expectations have fallen and now look to us to be too low for comfort. We expect the Fed

to heighten its attention to inflation expectations in the coming month as a significant underpinning of the rate-cut cycle that

we expect.

ISM Business Surveys


Source: Thomson Reuters Datastream

35

40

45

50

55

60

65

35

40

45

50

55

60

65

19

99

20

01

20

03

20

05

20

07

20

09

20

11

20

13

20

15

20

176

-M

on

th M

ovi

ng

Ave

rage

Manufacturing Falling Sharply

Nonmanufacturing Still Solid

Market-Based Inflation Expectations


Source: Thomson Reuters Datastream

0

0.5

1

1.5

2

2.5

3

0

0.5

1

1.5

2

2.5

3

19

99

20

01

20

03

20

05

20

07

20

09

20

11

20

13

20

15

20

17

20

19

Per

cen

t

Per

cen

t

US TIPS - CONST MAT 10Y BREAK INFL.


Euro Area

Real GDP (%) Inflation (%) Policy Rate (%) 10-Yr. Bond Yield (%) FX Rates vs. USD

2019F 2020F 2019F 2020F 2019F 2020F 2019F 2020F 2019F 2020F

Euro Area 1.2 1.0 1.2 1.2 0.00 0.00 (0.25) (0.25) 1.13 1.13

OUTLOOK

The euro-area outlook remains challenging, but we think that continued weak growth is more likely than a recession. We

expect the economy to grow by 1.0% next year, significantly lower than the ECB’s latest forecast of 1.4%.

The ECB has abandoned its plans to normalize monetary policy and looks set to ease policy again in coming months.

We expect a lower deposit rate and additional asset purchases, but we doubt that this will have the desired effect on

economic growth and inflation.

RISK FACTORS

Risks are heavily skewed to the downside. While the domestic economy continues to look resilient, it’s not clear how

long this would last in the face of sustained external weakness.

The euro-area countries are open economies with limited policy flexibility. As such, they are particularly vulnerable to a

sustained slowdown in global trade growth due to a prolonged period of trade tension.

While the possibility of a no-deal Brexit has been pushed back, it remains an important downside risk for the euro area.

OVERVIEW

Recent survey data provide some comfort on euro-area growth. The composite PMI rose to 52.2 in June, from 51.8 in May,

and is now over a point higher than the lows registered around the turn of the year. This suggests that growth is stabilizing at

a low level.

The manufacturing and services PMIs continue to tell very different stories. While the externally exposed manufacturing PMI

fell to 47.6 and is still rooted in contractionary territory, the services PMI rose to an eight-month high of 53.6 and continues to

point to considerable domestic resilience. That’s consistent with official data showing final domestic demand growth running

at close to 2.0% in the first quarter.

While the June survey data are encouraging, there are two important caveats:

First, the gap between the services and manufacturing PMIs is unusually wide (it’s been wider only during the global financial

crisis) and is likely not sustainable. If the manufacturing sector doesn’t start to improve soon, there’s a risk that it will drag the

larger services sector down with it.

Second, the euro area is heavily exposed to a further slowdown in global growth. That’s not just because the euro area is a

more open economy than countries like China and the US but also because it has much less policy flexibility. There is now

little doubt that the ECB will ease policy again, but we remain highly skeptical that this will be effective in driving growth and

inflation higher. And that’s a big concern if the global backdrop continues to deteriorate.

Real GDP and Composite PMI-Based Proxy


(0.6)

(0.4)

(0.2)

0.0

0.2

0.4

0.6

0.8

1.0

10 11 12 13 14 15 16 17 18 19

Qo

Q %

Ch

an

ge

Real GDP

PMI

CPI Inflation

Through June 30, 2019 Source: Haver Analytics

(0.5)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

10 11 12 13 14 15 16 17 18 19

Yo

Y%

Cha

ng

e

Headline

Core


Japan

Real GDP (%)

Inflation (%)

Policy Rate (%)

10-Yr. Bond Yield (%)

FX Rates vs. USD

2019F 2020F 2019F 2020F 2019F 2020F 2019F 2020F 2019F 2020F

Japan

0.6 0.5 0.8 1.2 (0.10) (0.10) (0.10) 0.00 105 105

OUTLOOK

The slowdown in global trade has hit Japan’s export sector, but the domestic economy is holding up.

Employment growth has slowed, but the labor market remains tight. Even so, progress toward the 2% inflation target

remains slow.

The Bank of Japan (BOJ) has signaled that target interest rates (on overnight and 10-year JGBs) will remain unchanged

until at least the spring of 2020. Despite increased speculation, options to ease policy further are limited.

RISK FACTORS

Apart from October’s VAT hike, most of the key risks are external and could materialize through trade or via a sharp

appreciation in the yen in a risk-off environment.

OVERVIEW

The 2Q Tankan survey confirmed the dichotomy evident in the monthly data: the slowdown in global trade growth is still

dragging on the Japanese manufacturing sector, but the nonmanufacturing (non-traded) sector remains relatively firm.

With fiscal stimulus kicking in ahead of October’s VAT hike—assuming that it still goes ahead—we expect GDP growth to be

somewhere around trend in 2019. Our baseline forecast is for a similar pace of growth to be maintained through 2020.

Although the downward trend in the unemployment rate has stalled at 2.4%, labor remains tight. Whether this leads to higher

Consumer Price Index (CPI) inflation is unclear. Core inflation remains broadly stable at around 0.5% year over year.

The shift in global policy bias toward easing has affected the debate around likely BOJ action, too, despite the recent

extension of forward guidance. This was prompted in part when JGB yields fell further into negative territory. Still, it’s not

clear that the BOJ has any effective tools left in its tool kit.

Labor Market: Stable but Still Tight

Through July 1, 2019 Source: Bloomberg and Thomson Reuters Datastream

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

08 09 10 11 12 13 14 15 16 17 18 19

%

Ratio Unemployment

Rate (RH)

Job Offers to Applicants Ratio (LH)

Abenomics

Inflation Still Falling Short

Through July 1, 2019 Source: Thomson Reuters Datastream

(3.0)(2.5)(2.0)(1.5)(1.0)(0.5)0.00.51.01.52.02.53.0

04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

Perc

ent

Core CPI Inflation (ex Fresh

Food and Energy)

Headline CPI (ex VAT Impact)

Abenomics

BOJ TARGET


China


2019F 2020F 2019F 2020F 2019F 2020F 2019F 2020F 2019F 2020F

China 6.2 6.0 2.5 2.4 4.35 4.10 3.10 3.00 6.90 6.90

OUTLOOKS

The official Chinese real GDP growth rate will likely be around 6.2% in 2019, down from 6.6% in 2018, as weakness in

capex spending persists.

We expect continued monetary and fiscal policy easing to counter downward pressure on the economy. The focus will

likely be on infrastructure projects and property easing—the measures most likely to help stabilize the economy.

Rising pork prices may push up inflation, but we think that the increase will not constrain the central bank’s monetary

policy easing.

RISK FACTORS

Policy easing may be less effective than expected if economic data surprise big to the downside. This would put

sustained economic stabilization this year and next at risk.

An underwhelming US-China trade deal—if one comes at all—would be another risk for China’s economy.

OVERVIEW

Trade-related uncertainty has made Chinese capex expansion less likely. We still think that China has enough ammunition

when it comes to easing policy. On the monetary side, that includes the ability to cut the reserve requirement ratio (RRR), or

the benchmark interest rate. On the fiscal side, the government can issue more special local government bonds. The official

target is CNY 2.1 trillion for 2019, but we think that the government can do more, as infrastructure projects are most effective

in stabilizing growth.

If the Chinese economy stabilizes this year—and we think that it will—China’s currency should become a global currency

stabilizer. Even so, we cannot ignore the ongoing trade tensions between China and the US. If there is no trade deal by the

end of June and an escalation of 25% tariff on the remaining US$325bn in Chinese goods, we think that the USD/CNY

exchange rate could break above 7.0, en route to 7.2. RMB depreciation will help Chinese exporters weather the blow of a

25% tariff on exports to the US, to some extent.

China Manufacturing PMI

Through May 31, 2019 Source: Bloomberg and AB

48

50

52

54

48

50

52

54

16 17 18 19

Caixin PMI

Official PMI

Where to Re-Leverage Up

Through April 30, 2019 Source: Bloomberg and AB

0

5

10

15

20

25

30

0

5

10

15

20

25

30

14 15 16 17 18 19

YoY

% C

han

ge

Real

Infrastructure

Real Estate


Canada


2019F 2020F 2019F 2020F 2019F 2020F 2019F 2020F 2019F 2020F

Canada 1.8 1.8 2.1 2.2 1.50 1.25 2.00 2.00 1.30 1.28

OUTLOOK

Canada’s domestic economy remains stable, with both growth and inflation near equilibrium.

With no domestic imbalances to confront, the Bank of Canada is likely to go with the global flow, cutting rates after the

Fed does, though probably by not as much.

RISK FACTORS

For the time being, Canada is a spectator to the global trade war. But if the US pivots back to a confrontational stance

toward its northern neighbor, it could become a trade-war casualty, as domestic strength won’t be enough to buck the

global trend.

OVERVIEW

Were Canada an island insulated from global developments, there would be no reason for concern about the economy.

Growth is solid, the labor market is strong, and there is no sign of imbalances. Alas, Canada is not an island, and global

economic developments matter profoundly for its economy. With the global outlook having darkened in recent months, it is

fair to say that downside risks prevail in Canada at this point, even if the domestic economy looks fine. We view the Bank of

Canada as more likely to cut rates later this year than not, but we expect those cuts to be more circumscribed and to arrive

after the Fed cuts. The difference in timing and magnitude may give the Canadian dollar a slight upward bias relative to its

southern neighbor but likely not a large enough one to pose economic danger.

Australia/New Zealand


2019F 2020F 2019F 2020F 2019F 2020F 2019F 2020F 2019F 2020F

Australia 1.5 1.8 1.3 1.6 0.75 0.75 1.40 1.75 0.65 0.67

New Zealand 2.8 2.8 1.7 2.0 1.25 1.25 1.70 2.00 0.67 0.70

AUSTRALIA

The Reserve Bank of Australia (RBA) delivered a follow-up interest-rate cut in July, taking the cash rate down to 1.0%.

Though the RBA then signaled a pause as likely, it still has an easing bias. What happens to unemployment and wage

growth will be critical.

Falling home prices and construction were key factors that influenced the RBA’s decision, but the global policy

reassessment and continued undershoot in wages and inflation play a role, too. That’s driven a rethink of where neutral

policy rates lie.

We think that there’s still further currency weakness to come, and we wouldn’t be shocked to see AUD/USD revisiting

the 0.65 area over the next three to six months.

NEW ZEALAND

We continue to think that there is a clear divergence in fundamentals between the Australian and New Zealand

economies, with the latter on much firmer footing (in part, a reflection of the housing-sector outlook).

Still, persistently lower-than-expected inflation has driven a policy rethink by the central bank.


UK


2019F 2020F 2019F 2020F 2019F 2020F 2019F 2020F 2019F 2020F

UK 1.2 1.2 1.8 1.7 0.75

0.75 0.90 0.75 1.25 1.25

OUTLOOK

After a strong first quarter that was helped by Brexit-related stockpiling, the economy fell back to earth in the second

quarter. The new monthly GDP indicator fell by 0.1% in March and 0.5% in April. Barring a sharp rebound in May and

June, the economy is set to contract in the second quarter (after a 0.5% gain in the first quarter). Survey data tell a

similar story, with the manufacturing PMI dropping to 48.0 in June, a six-year low.

The impact of Brexit makes it even more difficult than usual to separate noise from signal in the monthly data flow.

However, just as strong data in the first quarter overstated the strength of the British economy, so the soft second

quarter is likely to overstate its weakness. Looking past the volatility, the economy appears to be stuck in a low growth

rut since the 2016 Brexit referendum and will probably remain so until there is greater clarity on the terms of the UK’s

EU exit.

The Bank of England continues to signal that a modest tightening of monetary policy will probably be needed in coming

years to hit its inflation target. However, that assumes a smooth Brexit. Until there is greater clarity on this issue, we

expect rates to remain on hold. If rates do move in the next few months, it is probably more likely to be down than up.

RISK FACTORS

The main risks to the UK outlook remain political. The probability of a no-deal Brexit has risen in recent months, and

domestic political risk is now very high.

Norway/Sweden


2019F 2020F 2019F 2020F 2019F 2020F 2019F 2020F 2019F 2020F

Norway 2.2 1.7 2.2 1.8 1.50 1.50 1.50 1.50 8.44 8.22

Sweden 1.8 1.6 1.9 1.8 (0.25) (0.25) 0.00 0.00 9.33 9.33

NORWAY OUTLOOK

Growth in the mainland economy eased to 2.4% in the first quarter, from 2.7% in the final quarter of last year, but is

close to the average of recent quarters and remains above trend. Core inflation fell to 2.3% in May but is still above

target.

The Norges Bank raised rates by 25 basis points, to 1.25%, at its last meeting and indicated a rising probability of an

additional rate increase before year-end. The rationale is simple: Inflation is above target, growth is above trend, the

output gap is now positive, the krone is weak, and interest rates are still in expansionary territory. The Norges Bank is

aware of global risks, but until some part of this narrative changes, it is likely to continue gradually raising interest rates.

RISK FACTORS

Very high household debt (currently 220% of income) and fluctuations are key risk factors.

SWEDEN OUTLOOK

Economic growth slowed to 2.0% in the first quarter, from 2.4% in the final quarter of last year. We expect the economy

to slow a little further over the forecast horizon, to 1.8% in 2019 and 1.6% in 2020.

Core inflation (CPIF, excluding energy) rose slightly, to 1.7% in April, but continues to move in a narrow range just below

the Riksbank’s target.

The Riksbank recently scaled back its projections for the key policy rate, indicating a move back to zero around the turn

of the year. Even this might be difficult to achieve at a time when major developed-market central banks are likely to be

easing monetary policy.

RISK FACTORS

High household debt and elevated house prices continue to represent a major risk to financial stability.


Asia ex Japan


2019F 2020F 2019F 2020F 2019F 2020F 2019F 2020F 2019F 2020F

Asia ex Japan 5.6 5.4 2.5 2.5 4.04 3.84 3.59 3.54 — —

Hong Kong 2.2 2.0 2.2 2.2 2.75 2.50 1.40 1.35 7.83 7.85

India 7.2 7.0 3.6 3.8 5.50 5.25 6.90 6.80 69.00 68.00

Indonesia 5.1 5.1 3.2 3.0 5.75 5.50 7.30 7.20 14,000 13,950

South Korea 1.8 1.8 1.0 1.3 1.25 1.25 1.60 1.75 1,250 1,275

Thailand 3.0 3.0 1.2 1.2 1.25 1.25 2.10 2.25 33.50 34.50

OUTLOOK

The drag from global trade and the technology cycle should continue to weigh on growth in the more trade-exposed

parts of the region (South Korea and Taiwan).

Inflation generally continues to decline across the region, and with exchange rates relatively stable, speculation has

turned to policy easing.

RISK FACTORS

Uncertainty over the global trade cycle and US-China trade tensions remains key.

OVERVIEW

PMIs for bellwether exporters like South Korea and Taiwan remain patchy. The pace of deterioration may have eased, but

we should be circumspect about the prospects for a robust—or even a tepid—recovery. Why? Because there are a lot of

moving parts to consider, and the likely path of the trade war is but one. China’s growth outlook, the new product cycle in

tech and excess semiconductor inventory are important, too. Accordingly, we remain biased toward weak growth in the more

trade-exposed economies in the region, such as South Korea, Singapore and Taiwan.

At the same time, inflation has been lower than expected across the region. In part, this reflects the pass-through from lower

oil prices last year. But in general, food prices and core inflation have also been falling. Along with the Fed’s more dovish

outlook, this has helped drive a reassessment of the policy outlook across the region.


Latin America


2019F 2020F 2019F 2020F 2019F 2020F 2019F 2020F 2019F 2020F

Latin America 1.3 2.3 9.3 6.1 11.52 9.42 6.73 6.89 — —

Argentina (1.3) 1.5 48.0 25.0 50.00 35.00 — — 48.00 56.00

Brazil 1.0 2.5 3.9 4.0 5.75 6.50 7.25 7.75 3.80 3.60

Chile 3.0 3.3 2.3 3.0 2.50 2.50 3.30 3.50 670 660

Colombia 2.9 3.3 3.3 3.3 4.25 4.25 6.00 6.50 3,250 3,200

Mexico 1.8 1.5 3.8 3.2 7.75 7.00 7.25 6.75 19.68 21.00

OUTLOOK

Brazilian policymakers are on the brink of approving an overhaul of the social security system, a change that will likely

prompt the central bank to cut rates and consumers and businesses to regain confidence. The upshot should be a broad

recovery in growth.

Global central banks’ more dovish bent gives regional counterparts the room to cut rates to offset external headwinds.

Chile began the trend with a surprise 50-bp cut in its policy rate, and many other regional central banks have become

more dovish and are likely to cut rates later this year.

RISK FACTORS

Concerns about global growth and other external risks, specifically regarding trade, may be keeping investment on the

sidelines across the region. Growth expectations are likewise slowing in much of the region.

OVERVIEW

In Argentina, currency stability and declining (but still high) inflation allowed the central bank to reduce its monetary policy target rate by almost 800 basis points in June. Easing policy reduces the attractiveness of the carry trade in Argentina rates and could open the door to further deposit dollarization and portfolio outflows. But more accommodative monetary policy should also help growth rebound by the end of the year. The central bank has bought US dollar futures to offset any future currency instability caused by this fall’s election. The central bank can use these reserves to intervene in the FX market if volatility spikes. The improvement in the macroeconomic backdrop should help boost President Macri’s reelection prospects; however, political dynamics will continue to dominate headlines in the coming months.

In Brazil, social security reform is the single most important factor determining the trajectory of the country’s economy. If reform passes in Congress, which we expect it will, the government is likely to reap fiscal savings of more than BRL 800 billion over the next 10 years. Reform should also open the door to private investment. Brazil’s central bank has signaled that it will cut its policy rate after the pension-reform proposal passes the Lower House, possibly before the congressional recess in mid-July. Lower rates should help to fuel the economy recovery during the second half of 2019 and into 2020.

Mexico’s economy continues to weaken as the accumulated effects of highly restrictive monetary policy and geopolitical

uncertainty combine with concerns about the sustainability of PEMEX and its impact on sovereign creditworthiness. With the

central bank reluctant to cut rates in a highly uncertain environment, persistently tight monetary policy means that growth will

continue to weaken. We expect the central bank to cut rates grudgingly later this year, but we fear that when those cuts

come, it may prove to be too little, too late to provide much optimism about 2020. A clear resolution to the uncertainty around

PEMEX would be very helpful; unfortunately, that does not appear imminent.


Eastern Europe, Middle East and Africa (EEMEA)


2019F 2020F 2019F 2020F 2019F 2020F 2019F 2020F 2019F 2020F

EEMEA 1.9 2.5 6.2 5.6 9.06 8.00 9.19 9.10 — —

Hungary 3.0 2.8 3.1 3.2 1.25 1.25 2.45 2.45 276 276

Poland 3.4 3.6 1.9 2.5 1.50 1.50 2.50 2.70 4.25 4.25

Russia 1.4 1.7 4.3 4.0 7.00 7.00 7.35 7.20 65.00 65.00

South Africa 0.5 1.2 4.7 4.9 6.50 6.25 9.00 9.20 14.75 15.10

Turkey (3.0) 0.5 16.5 14.3 20.00 17.00 18.00 19.00 6.20 6.40

OUTLOOK

Real GDP growth is expected to pick up in 2020, particularly in Turkey and South Africa, although downside surprises

are possible in the latter.

While headline CPI is rebounding in most Central and Eastern European (CEE) economies, price pressures are

expected to ease in Russia and Turkey, following fading tax and exchange-rate pass-throughs. Inflation in South Africa

is expected to remain close to the midpoint of the target band.

CEE central banks are mostly expected to remain on hold, while Russia, South Africa and Turkey have room to cut

interest rates in 2019 and potentially into 2020.

RISK FACTORS

The potential for higher core yields is a risk for current account deficit countries such as Turkey and, to a lesser extent,

South Africa.

OVERVIEW

A recent research trip to Turkey has convinced us that key event risks, including potential early elections and potential US

sanctions over Ankara’s plans to buy Russian missiles, are less likely than expected. Early polls suggest that nobody is

immediately going to lead an AKP breakaway party, and that could increase internal party pressures and compromise AKP’s

parliamentary majority. Also, MHP is unlikely to call an end to the AKP-MHP alliance. Crucially, MHP may have alienated its

most nationalist supporters after AKP’s outreach to Kurdish voters, which was sanctioned by MHP leadership. As for

possible US sanctions, we doubt that Turkey will escape punitive measures if the government takes delivery of the S-400

missile system from Russia. But we are increasingly convinced that any sanctions will apply only to defense companies (as

in the case of China). These would not pose a fundamental risk to the Turkish economy.

Beyond immediate geopolitical event risks, the overall macro challenges remain significant: domestic demand remains weak,

and the chance of the economy falling back into sequential contraction is high. At the same time, a private sector balance

sheet recession is under way, and the true extent of the banking sector’s nonperforming loans and (sovereign)

recapitalization needs remains unclear. As for the government, fiscal accounts are under increasing pressure. Most

worrisome is that the government still lacks a coherent macro strategy to tackle these challenges.

The main positive from the sovereign side so far is that government market interventions, such as price controls, moral

suasion on banks and FX interventions, have decreased significantly over the past month. At the same time, the central bank

seems ready to cut interest rates—possibly in July—despite strong year-over-year inflation base effects that will materialize

in 3Q. If the easing cycle is too aggressive in these circumstances, it may come back to haunt the central bank.


Frontier Markets

OUTLOOK

Ecuador’s policy agenda, which includes tax and labor reform this year, will likely lead to continued commitment to fiscal

consolidation and compliance with IMF program targets.

The IMF program and other multilateral loans should reduce market financing requirements.

RISK FACTORS

Dollar appreciation and lack of monetary flexibility will weigh on Ecuador’s competitiveness in non-oil sectors.

OVERVIEW

Ecuador’s economic strategy over the past 18 months has been to recalibrate the economy, moving away from public sector investment-led growth to private sector–led growth. The government passed some new laws last year that were intended to promote business investment, but the private sector has not picked up the slack enough to offset the fiscal adjustment that began in 2018. As the fiscal position continues to tighten, this growth problem will continue to worsen. GDP forecasts for this year are 0–0.5% growth. Slow growth is not solely a symptom of the $4.2 billion IMF program that was signed in March but is a result of frictions in the economic transition from the public to the private sector.

As a fully dollarized economy, competitiveness is a key challenge. Dollar appreciation has led to a 30% overvaluation of the real effective exchange rate. Ecuadoran companies have a noncompetitive cost structure due to labor regulations, high employer contributions to the social security system and too-high interest rates. Ecuador is also one of the only countries in Latin America lacking a free-trade agreement with the US. These competitiveness challenges have caused Ecuador to lose market share in its traditional exports—a huge headwind for a country facing a balance of payments crisis. There are some reasons to think that this isn’t a completely dire situation. Labor reform should remove some cost pressures, and Ecuador is in advanced discussions with the US on a free-trade pact. But non-oil exports will still struggle to compete in the global marketplace.

One sector that may help solve the country’s balance of payments is mining. Ecuador has huge mining potential, and international companies have already invested billions into the sector. The big question for the sector is whether there will be legal obstacles to development. The Constitutional Court has yet to decide on the future of mining, but it will likely be influential in the future of the sector, which, if developed, could provide a boost to the economy in the medium term and help Ecuador diversify away from oil.

Although structural challenges remain a concern, Ecuadoran asset prices have rallied significantly since the IMF program began because of the confidence boost and planned capital inflows that will cover the country’s balance of payments imbalance, at least for this year. The near-term policy agenda also remains favorable: policymakers are on track to approve tax and labor reform before the end of the year, which will likely keep Ecuador on track to meet the IMF’s targets for continued fiscal consolidation next year. A liability management exercise conducted in June reduced the 2020 external financing needs, eliminating a key risk.

2019F 2020F 2019F 2020F 2019F 2020F 2019F 2020F 2019F 2020F

Global 2.6 2.6 2.8 2.6 2.84 2.47 2.51 2.56 - -

Industrial Countries 1.6 1.4 1.7 1.8 0.98 0.77 1.17 1.26 - -

Emerging Countries 4.4 4.6 4.6 3.9 6.37 5.64 5.12 5.04 - -

United States 2.0 1.8 2.3 2.5 1.88 1.38 2.35 2.50 - -

Canada 1.8 1.8 2.1 2.2 1.50 1.25 2.00 2.00 1.30 1.28

Europe 1.3 1.1 1.3 1.3 0.15 0.15 0.01 (0.01) - -

Euro Area 1.2 1.0 1.2 1.2 0.00 0.00 (0.25) (0.25) 1.13 1.13

United Kingdom 1.2 1.2 1.8 1.7 0.75 0.75 0.90 0.75 1.25 1.25

Sweden 1.8 1.6 1.9 1.8 (0.25) (0.25) 0.00 0.00 9.33 9.33

Norway 2.2 1.7 2.2 1.8 1.50 1.50 1.50 1.50 8.44 8.22

Japan 0.6 0.5 0.8 1.2 (0.10) (0.10) (0.10) 0.00 105 105

Australia 1.5 1.8 1.3 1.6 0.75 0.75 1.40 1.75 0.65 0.67

New Zealand 2.8 2.8 1.7 2.0 1.25 1.25 1.70 2.00 0.67 0.70

Asia ex Japan 5.6 5.4 2.5 2.5 4.04 3.84 3.59 3.54 - -

China 6.2 6.0 2.5 2.4 4.35 4.10 3.10 3.00 6.90 6.90

Hong Kong 2.2 2.0 2.2 2.2 2.75 2.50 1.40 1.35 7.83 7.85

India 7.2 7.0 3.6 3.8 5.50 5.25 6.90 6.80 69.00 68.00

Indonesia 5.1 5.1 3.2 3.0 5.75 5.50 7.30 7.20 14,000 13,950

Korea 1.8 1.8 1.0 1.3 1.25 1.25 1.60 1.75 1,250 1,275

Thailand 3.0 3.0 1.2 1.2 1.25 1.25 2.10 2.25 33.50 34.50

Latin America 1.3 2.3 9.3 6.1 11.52 9.42 6.73 6.89 - -

Argentina (1.3) 1.5 48.0 25.0 50.00 35.00 - - 48.00 56.00

Brazil 1.0 2.5 3.9 4.0 5.75 6.50 7.25 7.75 3.80 3.60

Chile 3.0 3.3 2.3 3.0 2.50 2.50 3.30 3.50 670 660

Colombia 2.9 3.3 3.3 3.3 4.25 4.25 6.00 6.50 3,250 3,200

Mexico 1.8 1.5 3.8 3.2 7.75 7.00 7.25 6.75 19.68 21.00

EEMEA 1.9 2.5 6.2 5.6 9.06 8.00 9.19 9.10 - -

Hungary 3.0 2.8 3.1 3.2 1.25 1.25 2.45 2.45 276 276

Poland 3.4 3.6 1.9 2.5 1.50 1.50 2.50 2.70 4.25 4.25

Russia 1.4 1.7 4.3 4.0 7.00 7.00 7.35 7.20 65.00 65.00

South Africa 0.5 1.2 4.7 4.9 6.50 6.25 9.00 9.20 14.75 15.10

Turkey (3.0) 0.5 16.5 14.3 20.00 17.00 18.00 19.00 6.20 6.40

Blanks in Argentina are due to distorted domestic financial system so are not forecast.

AB Global Economic Forecast July-19

Real Growth (%) Inflation (%) Official Rates (%) Long Rates (%) FX Rates vs USD

Long rates are 10-year yields unless otherwise indicated.

Latin American Rates include Brazil, Chile, Colombia and Mexico

Real growth aggregates represent 48 country forecasts not all of which are shown


Contributors

Guy Bruten

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Mo Ji

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Eric Winograd

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Katrina Butt

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Markus Schneider

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Adriaan Du Toit

[email protected]

Darren Williams

[email protected]

There is no guarantee that any projection, forecast or opinion in this material will be realized. Past performance does not guarantee future results.

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