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GLOBAL ECONOMIC FORECASTS: Q2 2018

21st May 2018

Report closing date: 10th May 2018

Overview• Global Economy• Executive Summary• Global Forecasts: GDP, Inflation, Interest Rate• Major Forecast Revisions

The USThe EurozoneThe UKJapanChinaRussiaBrazilIndia

Risk Scenarios

Notes

© Euromonitor International 3

Global Economic Forecasts: Q2 2018May, 2018

Global Economy

OVERVIEW

• Global economic activity continues to perform strongly, both in advanced and emerging market economies. Global real GDP expanded by 4.0% in Q4 2017, which was notably above our baseline forecasts a year ago. Growth was supported by higher investment activity in advanced economies, higher consumer demand in emerging markets, and a rebound in global trade.

• In the May 2018 baseline we forecast global real GDP to grow by 3.8-3.9% per year over 2018-2019, albeit with a gradual easing on the cards as central banks tighten monetary policy, US fiscal stimulus subsides, and China’s slowdown progresses. Despite positive near-term economic prospects for the world, debt levels, financial market volatility, trade and geopolitical tensions pose a threat.

• Our newly-introduced Global Downturn scenario captures hypothetical effects of the above downside risks. The scenario assumes escalating fears about trade wars and more populist policies, as well as concerns about overvaluation in financial markets, which could lead to a self-fulfilling sell-off in advanced economies, and through global spill-overs induce a slowdown in emerging markets. If materialised, these risks have the power to reduce global GDP growth by a cumulative 5.4% over the 3-year horizon.

2016 2017 2018 2019 2020 2021

Source: Euromonitor International Macro Model

World Real GDP Growth Forecast Revision% %

0

3

3.4

3.8

4.2

0

3

3.4

3.8

4.2

Euromonitor baseline, May 2018Euromonitor baseline, May 2017

Average Annual 2018-2021 Real GDP Growth

%

AdvancedEconomies

Emerging MarketEconomies

World

Euromonitor baseline, May 2018Global Downturn, starting Q3 2018

43210 5 6


%43210 5 6



Executive Summary

OVERVIEW

GDP GROWTH HIGHLIGHTS

The US We have lifted the US real GDP growth forecast to 2.4-2.5% over 2018-2019. Growth was stronger than expected in the recent quarters, thanks to the positive impact of tax cuts on investment.

Eurozone Eurozone growth has slowed since the end of 2017, but remains solid at 2.5% in Q1 2018. Private sentiment also remains high. Real GDP is forecast to grow by 2.3% in 2018, and 1.9% in 2019.

The UK Brexit has taken a toll on the UK economy. Real GDP growth slowed down to 1.2% in Q1 2018, marking the lowest reading since 2012. Our real GDP growth forecast is 1.3-1.4% over 2018-2019.

Japan The growth momentum in Japan has receded somewhat in Q4 2017, although the economy is still on the recovery track. We see real GDP growing by 1.4% in 2018 and 1.0% in 2019.

GDP GROWTH HIGHLIGHTS

China China’s economy keeps beating the slowdown concerns thanks to strong private consumption and investment. Yet demand should ebb, bringing GDP growth to 6.5% in 2018 and 6.3% in 2019.

Brazil Brazil’s real GDP picked up pace at the end of 2017, boosted by rising consumption, low inflation and interest rates. We kept the real GDP growth forecast at 2.4-2.5 % over 2018-2019.

Russia In Q1 2018 the Russian economy benefited from the rising oil price and positive dynamics of consumer demand. We have lifted our real GDP growth forecast to 1.6-1.7% over 2018-2019.

India The recovery of the Indian economy from recent policy disruptions continues to gain traction. Our baseline forecast remains upbeat, with average real GDP growth at 7.4-7.5% over 2018-2019.

3

0‘18

2.5

3

0‘18

2.3

3

0‘18

1.4

3

0‘18

1.4

9

0

6.5

‘18

9

0

7.4

‘18

-2

4

02.4‘18

1.6

-2

4

0‘18



GDP Growth Forecasts – Revisions Over Last Quarter

OVERVIEW

Country 2017%

2018(f)%

2019(f)%

2020(f)%

2021-2025 average(f)

%

2018 forecast change

Percentage points


Percentage points

Advanced

USA 2.3 2.5 2.4 2.1 1.8 0.2 0.2

Canada 3.0 1.9 1.7 1.7 1.7 -0.2 -0.2

Japan 1.6 1.4 1.0 0.6 0.7 0.2 0.1

Eurozone 2.5 2.3 1.9 1.7 1.3 0.1 0.0

France 1.9 2.2 1.9 1.6 1.5 0.2 0.1

Germany 2.5 2.4 1.9 1.7 1.1 0.0 0.0

Italy 1.5 1.4 1.2 1.0 1.0 0.0 0.0

Spain 3.1 2.7 2.3 1.9 1.4 0.2 0.1

UK 1.7 1.4 1.3 1.4 1.6 0.0 0.0

Emerging

China 6.9 6.5 6.3 6.0 5.3 0.0 0.0

India 6.3 7.4 7.5 7.5 6.5 0.0 0.0

Brazil 1.0 2.4 2.5 2.5 2.4 0.0 0.0

Mexico 2.3 2.2 2.3 2.4 2.8 0.0 -0.1

Russia 1.5 1.6 1.7 1.6 1.5 0.3 0.0



Inflation Forecasts - Revisions Over Last Quarter

OVERVIEW

Country 2017%

2018(f)%

2019(f)%

2020(f)%


%


Percentage points


Percentage points

Advanced

USA 2.1 2.4 2.3 2.1 2.0 0.2 0.1

Canada 1.6 2.0 2.1 2.0 2.0 0.2 0.1

Japan 0.5 0.9 1.2 1.6 1.3 0.2 0.1

Eurozone 1.5 1.5 1.6 1.7 1.9 0.0 0.0

France 1.1 1.5 1.5 1.6 1.8 0.2 0.1

Germany 1.7 1.7 1.7 1.8 2.0 0.0 0.0

Italy 1.2 1.1 1.3 1.5 1.7 0.0 0.0

Spain 2.0 1.4 1.6 1.8 2.0 0.0 0.0

UK 2.7 2.6 2.3 2.1 2.0 0.0 -0.1

Emerging

China 1.6 2.1 2.2 2.5 2.5 0.0 0.0

India 2.5 5.0 4.9 4.8 4.8 0.5 0.1

Brazil 3.5 3.5 3.9 4.0 4.0 -0.4 -0.2

Mexico 6.0 4.8 3.9 3.5 3.2 0.3 0.2

Russia 3.7 2.9 3.7 4.0 4.0 -0.8 -0.2



Interest Rate Forecast

OVERVIEW

Advanced Economies Interest Rate Forecast


% %

2015 2016 2017 2018 2019 2020 2021

USEurozone

0.00

1.42

0

0.5

1

1.5

2

2.5

3

3.5

0

0.5

1

1.5

2

2.5

3

3.5

% %

2015 2016 2017 2018 2019 2020 2021

UKJapan

0.00

0.50

-0.5

0

0.5

1

1.5

2

-0.5

0

0.5

1

1.5

2

BRIC Countries Interest Rate Forecast% %

2015 2016 2017 2018 2019 2020 2021

IndiaChina

0

1

2

3

4

5

6

7

8

9

0

1

2

3

4

5

6

7

8

9

4.35

6.00

% %

2015 2016 2017 2018 2019 2020 2021

0

2

4

6

8

10

12

14

16

18

0

2

4

6

8

10

12

14

16

18

BrazilRussia

6.887.63




The USWe have upgraded the 2018 real GDP growth forecast for the US to 2.5% in 2018, due stronger than expected growth at the end of 2017 and in early 2018. The key to this relatively fast growth is the rise in business investment in response to the Republican tax cuts. However, there is significant uncertainty about the responsiveness of investment to these tax cuts, combined with concerns about financial market valuations and risks of an escalation in recent protectionist measures.

JapanWe have raised the 2018 real GDP growth forecasts for Japan to 1.4%, reflecting greater confidence that the combination of ongoing loose monetary policy and strong global demand conditions will sustain the current expansion. Lower tensions in Korea also strengthen the outlook. However, growing uncertainty about trade wars and the risk of a global financial markets correction could eventually cause a downward revision to the forecast.

RussiaWe have upgraded the 2018 real GDP growth forecast to 1.6%, despite the weak performance in Q4 2017. Consumer confidence has increased and monetary policy normalisation is proceeding faster than expected earlier. The outlook for oil prices has also significantly improved. While the current increase in the price per barrel of Brent to almost USD80 is unlikely to last, a USD70-75 price per barrel is expected over a 1-year horizon.

CanadaWe have downgraded the 2018 outlook for Canada to 1.9% real GDP growth. This reflects worse than expected performance in the beginning of the year, with output declining in January. While part of the weak growth was due to temporary reduction in oil and gas output, the slowdown in housing markets is likely to persist.

Major Forecast Revisions

OVERVIEW



General Outlook

THE US

Indicator 2017%

2018(f)%

2019(f)%

2020(f)%


%


Percentage points


Percentage points

Real GDP Growth 2.3 2.5 2.4 2.1 1.8 0.2 0.2

Inflation 2.1 2.4 2.3 2.1 2.0 0.2 0.1

Federal Funds Rate 1.0 1.8 2.5 2.9 3.0 0.2 0.3

• We have upgraded the outlook for US economic growth by another 0.2 percentage points since February 2018, on the back of stronger than expected growth momentum at the end of 2017 and in early 2018. GDP growth is now forecast 2.5% in 2018, and 2.4% in 2019, compared with a long-term trend growth of 1.3-2.3%.

• The positive impact of business tax cuts on investment remains the main driver of this above-average performance, with business investment expected to rise by 4.5-6.5% in 2018 and 3-6% in 2019. Consumption growth is also expected to remain above its long-term trend, though rising by a more modest 2-2.6% annually in 2018-2019.

• Private sector sentiment remains high, though it is no longer rising and is vulnerable to uncertainty about import tariffs and the risks of financial markets.

• Financial conditions remain loose, with interest rates remaining low despite recent increases. However, the expected normalisation of monetary policy over 2018-2019 raises the risks of financial market turbulence.



Pessimistic and Optimistic Scenario

THE US

Pessimistic scenario Optimistic scenario

In the most likely pessimistic scenario, declining stock market prices, rising corporate bond yields and greater uncertainty about trade wars reduce GDP growth to 2.2% in 2018 and 1.7% in 2019.Estimated scenario probability: 15-25% over a 1-year horizon.

In the most likely optimistic scenario, a stronger than expected investment boost from the Republican tax cuts and further increases in stock markets and private sector optimism raise GDP growth to 2.8% in 2018, and 3.1% in 2019.Estimated scenario probability: 15-25% over a 1-year horizon.

There is significant uncertainty about the impact of the business tax cuts on investment. On the upside, provisions such as the expensing of equipment investment can encourage investment more than ordinary corporate tax cuts. On the downside, investment adjustment costs and a corporate bias towards raising dividends and share repurchases could lead to an under-reaction of capital expenditures to the tax cuts.

2016 2017 2018 2019


US Real GDP Growth Forecast% %

Euromonitor baselineOptimistic scenarioPessimistic scenario

0

1

2

3

4

0

1

2

3

4



Private Sector Sentiment and Financial Markets

THE US

• Private sector confidence levels have remained much higher than long-term historical averages. However, they are no longer increasing significantly. The Michigan Index of Consumer Sentiment declined in April, though it was up by 1.9% relative to its level a year ago. The Small Business Optimism index increased slightly in April, but it remains below the average levels in Q4 2017 and Q1 2018.

• US stock markets declined again over March-April. The S&P500 stock market index has fluctuated with essentially no gains in 2018.

• US stock market prices have still significantly increased year-on-year and there are still concerns about over-valuation relative to historical averages. The current level of the price to earnings ratio is sustainable as long as real interest rates remain close to historical lows.

Source: Euromonitor International from University of Michigan Survey ofConsumers amd from the National Federation of Independent BusinessNote: Values above 0 indicate confidence above long term average

US Consumer and Business Confidence IndicesIndex Index

1.2

1.9Consumer sentimentSmall business optimism

-1

0

1

2

3

-1

0

1

2

32015 2016 2017 2018

Source: Euromonitor International from FRED

US Stock Market Indices, y-o-y Growth% %

2015 2016 2017 2018

14.4

12.513.8

-20

-10

0

10

20

30

40

50

-20

-10

0

10

20

30

40

50

S&P500Wilshire 5000 Total MarketRussell 2000 small cap stocks



Monetary Policy and Credit Conditions

THE US

• US long-term bond yields have now increased close to 3% (1% in real terms), in line with our long-term forecast for short-term interest rates. The rise in interest rates since mid-2016 has also shown up in rising corporate bond yields.

• However, so far signs of financial distress are low. The spread between low-grade and high grade bond yields has increased very little (in contrast to its rise during the financial markets’ turbulence of early 2016).

• The Federal Reserve increased its policy rate target to 1.5-1.75% in March. With an unemployment rate at around 4%, below its long-term forecast and inflation recently heading towards 2-2.5%, the Fed is likely to continue raising interest rates over 2018-2019.

• The policy rate is likely to reach 2-2.5% towards the end of 2018 and 2.5-3% by the end of 2019.

Source: Euromonitor International from FREDNote: Average yields to Maturity on US 10-year treasury bond,BAML AAA corporate bonds index, BAML BBB corporate bonds index

US Long-Term Interest Rates% %

2.9

3.4

2015 2016 2017 2018

0

1

2

3

4

5

0

1

2

3

4

5

10-Year Government Bond YieldCorporate AAA Bond YieldCorporate BBB Bond Yield

4.2


US Monetary Policy Rate and Inflation% %

1.1

2.0

202020192016 20172015 2018

-1

0

1

2

3

4

-1

0

1

2

3

4

Federal funds rateCPI inflation, y-o-y



• Consumption growth continues to exceed long-term average growth, especially for goods. Services’ consumption growth is close to long-term average. The robust consumption growth has been mainly sustained by high consumer confidence about the future and low financing costs.

• In our baseline forecast, consumption is expected to increase by 2-2.6% annually over 2018-2019, down from 2.8% in 2017. However, declining employment growth combined with low labour productivity and wage growth close to 1% in real terms suggest growth is likely to fall towards 1.5-2.5% by 2021.

Aggregate Demand

THE US

• Strong earnings growth and optimism about future profits, together with favourable financing costs, have driven a fast expansion in business investment, rising by 4.7% in 2017.

• The newly enacted business tax cuts are expected to sustain investment growth in 2018-2019. However, there is significant uncertainty about the responsiveness of capital expenditures to lower taxes.

• In our baseline, business investment increases by 4.5-6.5% in 2018 and by 3-6% in 2019.Source: Euromonitor International from FRED

US Real Fixed Investment, y-o-y Growth% %

8.9

5.02.6

201820172014 20152013 2016

6.3

Business structures Business equipment

Residential

Total business investment

-20

0

5

10

15

20

-15

-10

-5

-20

0

5

10

15

20

-15

-10

-5

Source: Euromonitor International from FRED

US Real Consumption, y-o-y Growth% %

7.3

2.1

3.1

0

1

2

3

4

5

0

2

4

6

8

10201820172014 20152013 2016

2.8

Non durable goodsDurable goods

Services consumption

Total private consumption



General Outlook

THE EUROZONE

Indicator 2017%

2018(f)%

2019(f)%

2020(f)%


%


Percentage points


Percentage points

Real GDP Growth 2.5 2.3 1.9 1.7 1.3 0.1 0.0

Inflation 1.5 1.5 1.6 1.7 1.9 0.0 0.0

ECB Refinancing Rate 0.0 0.0 0.3 0.6 1.5 0.0 0.0

• Eurozone growth has slowed down since the end of 2017 to a still solid 2.5% year-on-year in the first quarter of 2018 (compared to a long-term potential annual growth rate of 0.8-1.8%). Private sector sentiment has declined slightly, though it remains high. External financing costs have also started to rise, but they are likely to remain low over a 5-year horizon.

• Eurozone GDP is forecast to increase by 2.3% in 2018 and by 1.9% in 2019, down from 2.5% growth in 2017. Investment and net exports are responsible for most of the outperformance relative to the long-term trend. Fixed investment is expected to grow by 2.9-4.7% in 2018 and by 2.1-4.3% in 2019. Consumption growth is expected to continue at a slower pace of 1.4-2% in 2018 and 1.4-2.2% in 2019.

• In early March Germany’s SPD party members agreed to form a coalition government with the CDU/CSU, and Angela Merkel started her fourth term as German Chancellor. The coalition agreement resolved several months of political uncertainty, and set the groundwork for strong German-French collaboration on solidifying the Eurozone’s fiscal and monetary institutions.

• EU and UK negotiators announced reaching a deal on the Brexit transition period in mid-March, allowing negotiations to continue to the discussion of a final trade agreement. The transition period should last for 21 months until December 2020.



Pessimistic and Optimistic Scenarios

THE EUROZONE


In the most likely pessimistic scenario, significant declines in private sector confidence due to fears of a trade war and the growing influence of populist parties, falling stock market prices and rising credit yields lead to a slowdown in the economy, with GDP growth of 2.0% in 2018 and 0.8% in 2019. Estimated scenario probability: 15-25% over a 1-year horizon.

In the most likely optimistic scenario, the 2017 growth momentum turns out to be more persistent, with businesses more aggressive in investing to replace ageing capital, and private sector confidence rises further. GDP growth reaches 2.5% in 2018, followed by 2.6% in 2019. Estimated scenario probability: 15-25% over a 1-year horizon.

2016 2017 2018 2019


Eurozone Real GDP Growth Forecast% %


0

1

2

3

4

0

1

2

3

4



• Economic sentiment indices are still significantly above long-term averages but have declined slightly since the end of 2017. Consumer confidence has barely changed since the end of 2017, though it remains significantly above average.

• At the country level, Italian consumer confidence has increased significantly since mid-2017, while French consumer confidence has declined.

Private Sector Sentiment

THE EUROZONE

• Other surveys such as the Sentix investor sentiment index also show a decline in confidence in recent months. Meanwhile purchasing managers’ indices have declined in early 2018, though they remain consistent with an annual GDP growth rate of 2-2.5%.

• All these indicators point to a modest slowdown in growth in 2018, relative to the fast pace of 2017.

Source: Euromonitor International from the European CommissionNote: Values above 0 indicate confidence above long-term historic average

Eurozone Consumer Confidence IndicesIndex Index

-1

0

1

2

3

-1

0

1

2

3

2015 2016 2017 2018

1.401.361.151.12

France

ItalySpain

Germany

1.69Eurozone consumer confidence

Source: Euromonitor International from the European CommissionNote: 100=Long-term historical average

Eurozone Economic Sentiment IndicesIndex Index

2015 2016 2017 2018

112.2

110.3109.4

110.6

France

ItalySpain

Germany

112.7Eurozone economic sentiment

90

95

100

105

110

115

120

125

90

95

100

105

110

115

120

125



• Credit conditions have remained loose overall, despite modest increases in certain interest rates. The ECB has maintained monetary policy unchanged in recent meetings. However, in March, it removed from its polidy statement the possibility of expanding quantitative easing (QE) if necessary. This suggests a slight tightening of the monetary policy stance and a reduced perception of the risk of negative shocks. QE asset purchases are expected to end in September 2018.

• We continue to expect a slow increase in interest rates, with monetary policy rates only reaching their long-term value by 2025-2026. Even then, Eurozone interest rates will likely remain far below their pre-Global Financial Crisis (GFC) level, close to zero in real terms.

• Longer-term Eurozone interest rates have increased slightly since the end of 2017, though they remain quite low by historical standards. The spread between Italian and Spanish versus German bond yields has declined significantly since mid-2017. Financial markets seem to have priced in a mild outlook on the risks of Catalan secession from Spain, and low risks of Italian Eurozone exit, despite uncertainty about the new Italian Government.

Monetary Policy and Credit Conditions

THE EUROZONE


ECB Refinancing Rate% %

0.0-1

0

1

2

3

4

5

-1

0

1

2

3

4

5202120172011 20122007 2016 20262022

Source: Euromonitor International from Eurostat

Eurozone 10-Year Government Bond Yields% %

-1

0

1

2

3

-1

0

1

2

3

2015 2016 2017 2018

0.53

0.75

1.79

1.23France

Italy

Spain

Germany



• The contribution of consumption to the recent Eurozone boom has been more modest than in past recoveries, with consumption growth of 1.7% in 2017 (compared to 2.5% GDP growth). While consumer confidence is high and the unemployment rate has declined to 8.5% (compared to a Eurozone crisis peak of 12.1%), real wage growth has been close to zero, and is expected to remain below 1% annually over 2018-2022.

Aggregate Demand

THE EUROZONE

• With an upcoming slowdown in employment growth, prospects for disposable income growth are moderate. As a result, consumption growth is forecast at 1.4-2% in 2018 and 1.4-2.2% in 2019.

• Investment has been the main component of the recent Eurozone boom. Businesses are catching up with the large backlog in investment since the 2008 GFC, which has led to an ageing capital stock. Financing costs remain low and profit expectation remain higher than average.

• Investment growth is likely to reach 2.9-4.7% in 2018, declining to 2.1-4.3% in 2019.Source: Euromonitor International from Eurostat

Eurozone Real Fixed Investment, y-o-y Growth% %

20172014 2015 20162013 2018

Eurozone real fixed investment

4.64.7

4.4

5.6

3.0

FranceItaly

SpainGermany

-10

-5

0

5

10

-10

-5

0

5

10


Eurozone Real Consumption, y-o-y Growth% %

-6

-4

-2

0

2

4

-6

-4

-2

0

2

4

20172014 2015 20162013 2018

Eurozone real consumption

1.51.31.2

2.51.5France

Italy

SpainGermany



Economic Outlook and Brexit

THE UK

• In March 2018, the UK and EU reached a milestone in negotiations – a conditional agreement on a 21-month transition period between 29 March 2019 and 31 December 2020. During this time the UK will lose its part in decision-making, but will remain in the EU and be free to negotiate other trade deals to be implemented after transition ends. New EU citizens arriving in the UK during transition, and UK citizens in the EU, will have the same rights as those moving before transition.

• Agreeing on a transition period has allowed the talks to move on trade. In our baseline, we expect the trade deal to be made in 2020. While a no-deal Brexit became less likely, the risk of negotiations breaking down during the trade talks remains.

• Brexit has taken a toll on the UK economy. Real GDP growth slowed down to 1.4% y-o-y in Q4 2017 from 1.8% in Q3 2017. The preliminary estimates suggest a further moderation in Q1 2018 to 1.2%, marking the lowest reading since 2012.

• Our baseline real GDP growth forecast remains unchanged at 1.4% in 2018 and 1.3% in 2019. We expect growth to remain mediocre on the back of dim fixed investment growth amid the Brexit uncertainty, and depressed private consumption weighted by low consumer confidence.


UK Real GDP, Private Consumptionand Investment, y-o-y Growth

% %

-2

0

2

4

6

8

10

12

-2

0

2

4

6

8

10

12

1.41.3

3.8

2014 2015 2016 2017 2018

Real GDPReal fixed investmentReal private consumption

Source: Euromonitor International Macro ModelNote: The scenario assumes that UK-EU negotiations break down,and the UK leaves the EU in 2019 without a deal

No-Deal Brexit Probability% %

30

2016 2017 2018

0

30

35

40

45

50

0

30

35

40

45

50

No-Deal Brexit probability is thelowest since we introduced thisscenario in 2016




THE UK

Pessimistic scenarios Optimistic scenarios

The main downside risk is Prime Minister Theresa May failing to get enough parliament support to pass the EU Withdrawal Bill swiftly. Lack of position on UK customs plans after leaving the EU would keep stalling the negotiations. Weighted by Brexit uncertainty, the UK economy would continue to lose momentum, while private consumption and fixed investment growth would decelerate. Real GDP growth could slow to 1.1% in 2018 and 0.6% in 2019. We assign this scenario a 10-15% probability.

The main upside to the forecast is Prime Minister Theresa May yielding to the demands of keeping the UK in the EU’s single market. This would be a welcome outcome for UK business and would finally lift the veil of Brexit uncertainty. The recovery of business and consumer optimism would prompt the private consumption and fixed investment growth, which would help revive the UK economy. Real GDP growth could increase to 1.7% in 2018 and 2.0% in 2019. We assign this scenario a 10-15% probability.

Our baseline assumes that the UK and the EU fail to reach a final deal by the March 2019 Article 50 deadline. The UK remains a member of the common market during the transition period until the end of 2020. A final FTA is reached in 2020.

2016 2017 2018 2019


UK Real GDP Growth Forecast% %


0

1

2

3

0

1

2

3



• The UK unemployment rate dropped to a new low and arrived at 4.2% in January 2018. The real wage dynamics finally reversed to a 0.1% y-o-y increase in January and 0.5% in February, which means the easing pay squeeze for consumers. Wages could be expected to rise further in light of the tightening labour market.

• Retail sales growth picked up a notch in March to 1.9% y-o-y from 0.9% in February. As inflation eased, some of the pressure has lifted off, but with real pay barely rising and the economic outlook highly uncertain, a quick recovery in retail sales dynamics remains doubtful. After a short upsurge in January, UK consumer confidence slid back to a decay throughout the February-April period, with even more consumer pessimism expected this year.

• The business confidence index has shown hardly any development during the first months of 2018. Meanwhile, business output index fell below its long-term growth trend in March as business activity has been hurt by the unusually poor weather conditions in the UK. Economic uncertainty is an important factor for the lack of business optimism. While a draft deal on the Brexit transition period has brought some assurance, the government has yet to clarify the UK’s customs plans with the EU after the transition.

Labour and Private Sentiment

THE UK

UK Real Pay Growth and Unemployment

% %

Source: Euromonitor International from national statistics

% %

4.20

7

0

4

65

7

0

4

65

0.48

Unemployment rate, % ofeconomically active population

20172015 20162014 2018

2

-2

0

4

2

-2

0

4

20172015 2016 2018

Real average weekly earnings(regular pay), y-o-y growth

-0.11

Source: Euromonitor International from Eurostat and BDONote: Values above 0 indicate sentiment above long term average

UK Confidence Indices, StandardisedIndex Index

0.942016 2017 2018

Business confidenceConsumer confidence -0.5

0

0.5

1

1.5

-0.5

0

0.5

1

1.5



• Inflationary pressures continuously eased during the first months of 2018, with the effects of past pound depreciation gradually fading. Consumer prices rose by 2.4% in March, which brought inflation closer to the BoE’s 2.0% target.

• The pound has held more or less steady against euro during the first months of this year. Brexit developments remain a significant headwind as financial markets are discouraged by the lack of clarity and keep their expectations low from Brexit negotiations. Further volatility is likely if the euro appeal picks up in response to strong Eurozone growth.

Inflation and Monetary Policy

THE UK

Source: Euromonitor International from Bank of England

Great Britain Pound Exchange RateUnits per GBP Units per GBP

1.38

1.14

2016 2017 2018

USDEUR

0

1.2

1.3

1.4

1.5

1.6

1.1

1

0

1.2

1.3

1.4

1.5

1.6

1.1

1

• We forecast inflation to ease further in the coming months, averaging 2.6% in 2018 and 2.3% in 2019.

• In response to the subsiding inflation and economic growth weakening considerably in Q1 2018, the BoE Monetary Policy Committee voted to maintain the bank rate at 0.50% at its May meeting. The bank, however, noted that the tightening of monetary policy should be expected in future to return inflation to its target, whilst maintaining balance with the support for jobs and economic activity.

• In our baseline, the central bank policy rate is expected to reach 0.75% by the end of 2018 and 1.0% by the end of 2019.

Source: Euromonitor International from national statistics and BoE

UK Inflation and Interest Rate% %

2016 2017 2018

2.44

0

1

2

3

4

0

1

2

3

4

InflationCentral Bank policy rate

Despite dimming effects of pounddepreciation, the BoE foreseesmonetary policy tightening 0.50



Economic Activity

JAPAN

• In recent months inflation has been pushed up by higher prices in fresh food and energy, ending at 1.1% year-on-year in March 2018. Without the effect of fuel and food, the growth in prices is more subdued, standing at 0.5% year-on-year.

• Bank of Japan has recently dropped a timeframe for reaching its 2% inflation target. Since 2013, when the timeframe for 2% inflation was introduced, it was pushed back six times, meaning that it is not easy to change the public deflationary mindset. The central bank currently expects inflation to reach 1.8% in fiscal 2019 and 2020.

• The growth momentum in Japan has receded somewhat in Q4 2017, with real GDP increasing by 1.6%, although the economy is still on the recovery track. Growth has been supported by increasing household consumption and healthy capital expenditure; on the other hand, the effect of net exports has been lower, with increasing oil prices and a stronger yen weighing on foreign trade developments.

• We expect the robust global growth to support Japan’s economy further, and forecast real GDP growth to reach 1.4% in 2018 and 1.0% in 2019 (up from 1.2% and 0.9%, respectively, in our previous report).

2016 2017 2018


Japan Inflation% %

Inflation has been spurred byhigher prices in fresh food andenergy in the last few months 1.1

Total inflationInflation, less fresh food and energy

-1

-0.5

0

0.5

1

1.5

2

-1

-0.5

0

0.5

1

1.5

2

0.5


Japan Real GDP Growth by Expenditure Component% %

1.6

-3

-2

-1

0

1

2

3

-3

-2

-1

0

1

2

32015 2016 2017

StocksInvestmentNet exportsPrivate consumptionPublic consumptionReal GDP growth




On the domestic front, the most immediate risks to Japan’s growth are related to failing to normalise the labour market and stimulate a hike in salaries, private spending and investments. In this scenario, inflation remains slow and wage growth continues to be weak. Annual real GDP growth could slow to 1.0% in 2018 and 0.3% in 2019. We assign a probability of around 10-15% to such a scenario over a 1-year horizon.

Our optimistic scenario assumes that the government’s measures successfully translate into reforming the labourmarket, restoring wage growth and finally reviving inflation. This would provide a boost to consumer spending and investments. Under this scenario, annual real GDP growth could accelerate to 1.7% in 2018 and 2019. We assign a probability of around 10-15% for optimistic growth scenario over a one-year horizon.


JAPAN

2016 2017 2018 2019


Japan Real GDP Growth Forecast% %


-1

0

1

2

3

-1

0

1

2

3



Foreign Trade

JAPAN

• Japan and another 10 countries are heading towards signing the Trans-Pacific Partnership agreement, even with the US out of the deal. The US withdrew from the agreement in January 2017 after US President Donald Trump came to office, and is currently seeking a bilateral trade deal with Japan.

• In March 2018 the US imposed a 25% tariff on steel imports and 10% on aluminium imports. The US administration granted temporary tariff exemptions to several of the major US allies but not Japan, which is likely to spur bilateral trade negotiations. According to the Japan Iron and Steel Federation, there was a 38% decline in steel shipments to the US in March from a year earlier, mostly due to the effect of tariffs.

Source: Euromonitor International from OECD, IMF

Japan Trade Balance and Exchange RateUSD billion JPY/USD

2016 2017 2018-3-2-10123456

0

105110115120125

106.0

1.12

Exchange rateTrade balance

Stronger yen has put somepressure on the trade balance

Source: Euromonitor International from Ministry of Finance

Japan Major Foreign Trade Partners, March 2018

Rest of theWorldHong Kong, China

ThailandTaiwanSouth Korea

USAChina

0% 100%

19.5 40.718.4 7.4

5.54.4

4.1

Exportshare

Importshare

0% 100%

20.5 49.711.1 5.9

4.64.2

4.0

GermanySaudi Arabia

South KoreaAustralia

USAChina Rest of the

World

• With tension present on the global trade arena, Japanese exports were somewhat slower in March 2018 as the yen has been growing stronger. Imports were somewhat affected by a slump in trade with China due to factory shutdowns over the lunar New Year. Going forward, strong currency is expected to put further pressure on exports, while increasing oil prices should push up imports, resulting in a shrinking trade balance.



General Outlook

CHINA

Indicator 2017%

2018(f)%

2019(f)%

2020(f)%


%


Percentage points


Percentage points

Real GDP Growth 6.9 6.5 6.3 6.0 5.3 0.0 0.0

Inflation 1.6 2.1 2.2 2.5 2.5 0.0 0.0

1-Year Lending Rate 4.4 4.4 4.4 4.5 4.9 -0.1 -0.1

• China’s economy is expected to slow down from 6.9% growth in 2017 to 6.5% in 2018 and 6.0% in 2019. Subsequently, annual growth is expected to decline smoothly towards 4.5-5.5% over 2023-2027.

• The economy expanded by 6.8% year-on-year in the first quarter of 2018, slightly beating expectations. Domestic demand growth was 7-7.5%. In contrast, net exports declined in Q1 (mainly due to a fast rise in imports) and China reported its first current account deficit in almost 17 years in Q1 2018.

• Secondary sector (mostly manufacturing and construction) growth was 6.3% year-on-year, while tertiary sector (mostly services) was 7.5%. Industrial production growth was 6.8% year-on-year, while services output increased by 8.1% year-on-year, accounting for 60% of GDP growth.

• The Q1 GDP statistics highlight the ongoing transition to a more consumption and services oriented economy. It also highlights the much greater reliance on domestic demand in China’s economy compared to 10 years ago.




CHINA


In the most likely pessimistic scenario, an abrupt decline in house prices, lower private sector confidence and tightening credit markets cause GDP growth to drop to 5.9% in 2018 and to 4.8% in 2019.Estimated scenario probability: 15-25% over a 1-year horizon.

In the most likely optimistic scenario, the government decides to delay some of the costs of economic restructuring via more aggressive fiscal stimulus and reversing its current tightening of access to credit. GDP growth rises to 7.0% in 2018 and 7.4% in 2019. However, this scenario comes with higher medium-term risks of a more severe future downturn or hard landing.Estimated scenario probability: 15-25% over a 1-year horizon.

2016 2017 2018 2019


China Real GDP Growth Forecast% %


0

1

2

3

4

5

6

7

8

9

0

1

2

3

4

5

6

7

8

9



Global Risks

CHINA

• The recently announced US tariffs on Chinese imports have quite a small macro impact, reducing the size of China’s economy by 0-0.2% over 2018-2020. However the risk of a US-China trade war has increased to a 10-20% probability over a 1-year horizon and a 15-35% probability over a 2-year horizon. Our trade war scenario assumes a 15-25 percentage points increase in bilateral China-US tariffs. It would reduce China’s annual GDP growth rate by 0.3-0.6 percentage points over 2018-2020.

• China’s economy is vulnerable to other significant risks, such as a global financial markets correction and loss of private sector confidence, leading to a downturn. A global downturn would lower China’s annual GDP growth rate over 2018-2020 by 1-2.5 percentage points. We assign this scenario an 8-13% probability over a 1-year horizon and a 15-25% probability over a 2-year horizon. China’s debt levels have stabilised recently relative to GDP, and the government has prioritised controlling financial system risks. Nevertheless, a Hard Landing Scenario still has a 6-11% probability over a 1-year horizon, and 11-21% probability over 2 years.

China Baseline Forecast and Risk Scenarios

Real GDP Growth Unemployment Rate

Inflation Interest Rate

Source: Euromonitor International from Euromonitor Macro Model

Euromonitor baselineGlobal Downturn: 2018 Q3EM Slowdown: 2018 Q3China Hard Landing: 2018 Q3Trade War: 2018 Q3



Aggregate Demand

CHINA

• Consumption accounted for almost 80% of GDP growth in Q1 2018, while fixed investment accounted for 31.3% of GDP growth. Consumption growth was supported by solid real disposable income per capita growth of 6.6% year-on-year, though this reflects weaker 5.7% growth in urban areas combined with faster 6.8% growth in rural areas. Consumer confidence also remains extremely high, though it is no longer increasing relative to the end of 2017.

• Real consumer spending has increased significantly faster than GDP growth over 2012-2017, at an annual rate of 7.8%. Consumer spending growth is expected to slow down to 6.2-7.2% annually over 2018-2022, but it will continue to exceed overall economic growth.

• The shift towards consumption by middle and high income households, with annual household income above USD15000 will continue. Real spending of middle income households is expected to increase by 8.5-9.5% annually, while spending growth in the top segment (with annual household income above USD45000) is expected to reach 11-13% annually.

Source: Euromonitor International from national statisticsNote: Values above zero represent confidence levels above the long-term/sample average

China Confidence Indices, StandardisedIndex Index

2015 2016 2017 2018

1.1

4.1

-2

-1

0

1

2

3

4

5

-2

-1

0

1

2

3

4

5

BusinessConsumer

China Real Consumer Spending by Household Income Segment, Annual Growth

Source: Euromonitor International Consumer Spending by Income Bands ModelNote: Bottom segment annual household income is below USD15,000,Middle segment annual household income is USD15,000-45,000,Top segment annual household income is above USD45,000

%

Bottom

Top

Middle

2012-20172018-2022

9630-3 12 15

%9630-3 12 15

Total



Financial Conditions

CHINA

• Bank for International Settlements (BIS) data shows China’s non-financial sector debt to GDP has increased slightly to 256.8% in Q3 2017, with corporate debt to GDP declining. Debt to GDP is expected to stabilise at 255-265% by the end of 2018. Household debt to income levels are expected to continue rising, though remaining low by international standards.

• In its recent report, the BIS still classifies China as having a high risk of a banking crisis. But the BIS credit to GDP gap measure for China (credit to GDP relative to its long-term trend) has declined, signalling lower financial system risks. Source: Euromonitor International from the BIS

China Debt to GDP% %

48.0

20172013 2015 20162012 2014

0

50

100

150

200

250

300

0

10

20

30

40

50

60

Private non-financial sector debtNon-financial corporations' debtGovernment debtHousehold debt

Non-financial sector debt 46.3210.5162.5

256.8

Source: Euromonitor International from the BISNote: Credit gap is defined as difference between credit to GDP ratioand its long-term trend

China Credit GapPercentage points Percentage points

16.7

0

5

10

15

20

25

30

35

0

5

10

15

20

25

30

35

20172013 2015 20162012 2014

• The Chinese Government continues to show a stronger commitment to controlling local government and State Owned Enterprise (SOE) debt, with a recent ban on further lending by state banks to local governments. In recent statements President Xi has directly put pressure on SOEs and local governments to reduce their debt levels faster.



GDP Growth

RUSSIA

• In Q1 2018 the greatest positive impulse to the economy came from oil price. The average Brent price in March was USD67 per barrel, around 25% more than a year earlier. This, coupled with increased payments to public employees, supports the positive dynamics of consumer demand and encourages economic growth, which remains rather modest.

• Real GDP growth slowed from 2.5% in Q2 2017 to 2.2% and 0.9% in Q3 and Q4 respectively. In general, the beginning of 2018 brought encouraging statistics, indicating the completion of GDP correction in H2 2017. However, the risks of the situation deteriorating remain significant, e.g. reverse turn in the positive dynamics of the oil price, further tightening of Western sanctions against Russia, as well as the potential introduction of counter sanctions by Russia.

• Almost throughout 2017, investments and consumption were the main contributors to the positive real GDP growth in Russia, with 4.3% and 2.6% year-on-year growth respectively. At the same time, the main contribution to the decline in the annual growth rates of GDP over Q2-Q4 2017 was made by the deterioration in the dynamics of stocks, which also correlates with the negative dynamics of industrial production at the end of 2017.

• In our baseline, we expect real GDP to grow by around 1.6-1.7% over 2018-2020. Further in the mid-term perspective the main contributions to GDP are expected to come from the dynamics of consumer and investment demand. Amid fiscal consolidation public spending will not provide any significant support for GDP, and the contribution of net exports is also expected to remain negative.


Russia Real GDP Growth by Expenditure Component% %

-12

-10

-8

-6

-4

4

6

8

-2

0

2

-12

-10

-8

-6

-4

4

6

8

-2

0

2

2015 2016 2017

StocksInvestmentNet exportsConsumption

Real GDP growth

0.9




RUSSIA


The pessimistic scenario implies a drop in oil prices to USD50 per barrel to the end of the year, amid the lifting of production restrictions under OPEC agreement after 2018. Newly-introduced international sanctions will remain in force and potentially expanded, restricting investments in Russia. This will be reflected in noticeably slower economic growth in the mid-term. Given the reduced support from both income and lending, consumer and investment activity will slow down in 2019. Under this scenario, we expect real GDP to grow by 1.3% in 2018 and by just 0.4% in 2019. We assign a 10-15% probability to this scenario over a 1-year horizon.

An optimistic scenario assumes oil prices stay at around the USD70 per barrel level over 2018-2019. The more conducive conditions in the global commodity markets will enhance foreign investors’ interest in Russia, and have a positive impact on economic activity in the country. In the absence of downward oil price dynamics and the strengthening of economic sanctions, there will be higher investment and consumption growth relative to the baseline scenario. Real GDP growth is expected to reach 1.9% in 2018 and exceed 3.0% in 2019. This scenario is assigned a probability of 10-15% over a 1-year horizon.

2016 2017 2018 2019


Russia Real GDP Growth Forecast% %


-2

-1

0

1

2

3

4

-2

-1

0

1

2

3

4



Production and Wages

RUSSIA

• In early 2018 industrial production growth resumed after a contraction in Q4 2017 of 1.7% relative to the same period in 2016, amounting to 1.8% year-on-year growth in the first quarter. If in 2017 the main contribution to the positive dynamics of industrial production was made by the mining industry, in the first quarter of this year the greatest support was provided by manufacturing (+2.1% year-on-year). However, the sustainability of the observed improvement remains debatable, as confirmed by the March data, with a 0.2% year-on-year decrease in manufacturing (potentially due to unusually cold weather effect in March).

• Recently accelerated growth of real wages (especially over January-February 2018) helped to improve the dynamics of consumer demand. Retail trade turnover in Q1 2018 showed continuous growth (2.2% year-on-year), forming a positive trend after stagnation almost throughout the whole of 2017.

• Among another activities sustainable growth was shown by freight turnover (3.2% year-on-year growth in Q1 2018), which was mainly supported by pipeline and railway transport dynamics. Mining showed a moderate 1% growth in Q1 2018 relative to a 2% increase in 2018.

• Wage growth was mainly related to the public sector. In January, real wages in the health industry, social services, sports, culture and entertainment spheres grew by more than 25%, in education – above 15%. High wage growth in the budget sector are likely related to the implementation of the President’s (May 2012) decrees, and presidential elections held in March. Over 10% growth in real wages was also observed in construction, retail, information, communication, scientific and financial activities.


Russia Economic Activity Indicators, y-o-y Growth% %

MiningManufacturingConstructionRetail tradeFreight turnoverIndustrial production index

6.7

-9.7

1.42.0

1.0

-0.2

-15

-10

-5

0

5

10

15

-15

-10

-5

0

5

10

152017 2018



Inflation and Income

RUSSIA

• In Q1 2018 inflation continued to slow down amid lowering inflation expectations and restraining demand dynamics, supported by tight monetary policy. Over January-February 2018, annual inflation was at its lowest ever level – 2.2%, slightly increasing to 2.4% over March-April.

• In the first half of 2018 we expect annual inflation to remain low, mainly due to food price behaviour. Without external shocks on the commodities market or a significant tightening of economic sanctions to the end of the year, annual inflation is expected to return to 4%, mainly due to the steady recovery in consumer demand supported by income growth and relaxing of monetary policy.

• In our baseline scenario, we project around 2.9% annual inflation in 2018, and further stabilisation of consumer price dynamics close to the 4.0% level.

• The main inflationary risks are associated with escalation of economic sanctions, which will result in acceleration of capital outflow and a decrease in exports, and a potential drop in oil prices. Both factors could cause a subsequent significant weakening of the rouble.

• In Q1 2018 real incomes increased by 2.8% year-on-year for the first time since mid-2014. Growth was supported by 9.3% year-on-year increase in real wages and indexation of pensions (+3.7% since 1 January).

• Another indexation of social pensions by almost 3% will be held in April, and in May the minimum wage is expected to be increased. All of this will contribute to the recovery of consumption in the mid-term.


Russia Real Income and Wages, y-o-y Growth% %

6.5

4.1

Real incomeReal wage

-15

-10

-5

0

5

10

15

-15

-10

-5

0

5

10

15

2016 2017 2018



Economic Activity

BRAZIL

• Both industrial production and retail sales have dipped at the beginning of 2018, with industrial activity affected mostly by a decline in auto vehicle output, while retail trade was held back by weaker fuel sales. Nevertheless, growth bounced back in March 2018, indicating that the recovery is still on track, albeit at an uneven pace.

• Due to bumpy economic activity, we expect the central bank to keep the interest rate at 6.25% in 2018 to support the economy, and lift inflation back to its target of 4.5% for 2018. For the last several months, inflation has been fluctuating in the range of 2.5-3.0%.

• Brazil’s real GDP picked up pace further in Q4 2017, increasing by 2.2% year-on-year. The growth was boosted by a further increase in private consumption, aided by low inflation and interest rates, and a strong recovery in capital expenditure as a sign of improved investor confidence.

• Despite the stronger growth in Q4 2017, continuous political uncertainty has started to weigh on economic activity, with the first few months of 2018 displaying signs of volatility.As a result, we maintain our real GDP growth forecast unchanged at 2.4% in 2018 and 2.5% in 2019.

StocksInvestmentNet exportsPrivate consumptionPublic consumptionReal GDP growth

Source: Euromonitor International from OECD

Brazil Real GDP Growth by Expenditure Component% %

2015 2016 2017

-12

-10

-8

-6

-4

-2

0

2

4

6

-12

-10

-8

-6

-4

-2

0

2

4

6

2.2


Brazil Industrial Production and Retail Sales Indices, y-o-y Growth

% %

-15

-10

-5

0

5

10

-15

-10

-5

0

5

10

2016 20182017

4.5

3.2

Burdened by politicaluncertainty, recovery in economic activityhas been uneven

Retail sales Industrial production




BRAZIL


The major negative risks to Brazil’s economic growth stem from the political front. This includes delaying pension reform, which would diminish future savings and hurt investor confidence, as well as uncertainty regarding the October 2018 presidential election outcome. These events could prolong Brazil’s economic recovery, reducing real GDP growth to 1.9% in 2018 and 0.8% in 2019. We assign a probability of 10-15% to this scenario.

Under the optimistic scenario, the government manages to accelerate the implementation of measures to improve Brazil’s fiscal position, including pension reform. This would give a boost to investor confidence, resulting in returning capital inflows and improving economic activity. In this case, real GDP growth could reach 2.9% in 2018 and 4.4% in 2019. We assign a 10-15% probability to this scenario.

2016 2017 2018 2019


Brazil Real GDP Growth Forecast% %


-6

-4

-2

0

2

4

6

-6

-4

-2

0

2

4

6



Fiscal Accounts and Presidential Election

BRAZIL

• The government has recently updated its primary budget deficit target to BRL139 billion for 2019 (unchanged), BRL110 billion for 2020 (up from BRL65 billion previously), and a new estimate of BRL70 billion for 2021. A looser target for 2020 reflects challenges facing the current administration in implementing unpopular austerity measures.

• Investor attention is still on balancing the public accounts through the pension reform. The progress on this measure has stalled, as Congress is reluctant to go ahead with the reform in light of the approaching presidential run. Federal intervention in the state of Rio de Janeiro has legally barred Congress from voting on constitutional amendments, meaning that the reform is unlikely to go through until after the elections.

• In such conditions, current ruling government has little room to manoeuvre. To support confidence, which experienced some retraction in April, President Michel Temer is aiming for a number of milder economic measures such as privatisation of Eletrobras and the overhaul of several federal taxes; however, the effect of these should be slender and the pension system will still need to be reformed sooner or later.

20162015 2017 2018

Source: Euromonitor International from Brazil Central Bank

Brazil Primary Fiscal Balance, 12 MonthsBRL billion BRL billion

-108.4

-200

-100

-75

-50

-25

0

-175

-150

-125

-200

-100

-75

-50

-25

0

-175

-150

-125

12-month primary fiscal deficithas narrowed in the last fewmonths, although additionalmeasures are still needed fora sustainable recovery

20172016 2018


Brazil Confidence Indices, StandardisedIndex Index

-4

-3

-2

-1

0

1

-4

-3

-2

-1

0

1 Consumer confidenceBusiness confidence 0.2

-1.4Uncertainty in the political arenaand uneven economic recovery haveprompted confidence to edge downafter a period of improvement



Foreign Trade

BRAZIL

• US President Donald Trump has recently announced plans to impose possible tariffs on USD50 billion of Chinese goods, such as machinery and robotics. In retaliation China is planning to put a 25% tariff on some US imports, including a number of agricultural commodities such as soybeans, for which Brazil is the second-largest global producer. Together with a drought in Argentina (the third-largest soy exporter), increased soybean prices, an expected bumper crop in Brazil and a weaker real, this gave a boost to Brazilian exports over March-April 2018.Exports of soybeans and soybean products comprise around a quarter of total Brazilian export value.

• China buys around 60% of globally traded soybeans; last year, half of its imports was supplied by Brazil, and around a third by the US. Brazil’s import share is expected to grow in 2018, backed by China penalising the US beans with higher import standards, as well as a higher protein content in Brazilian beans. Nevertheless, at its current production levels, Brazil does not have the capacity to fully replace US output, which may help China and the US settle the dispute sooner rather than later.

Source: Euromonitor International from Ministry of Industry, ForeignTrade and Services

Brazil Export Structure, April 2018

OtherChicken meat and its productsCellulose and its productsPassenger cars and their parts

Crude oil and its productsIron ore and its productsSoybeans and their products

0% 100%

24.5 42.013.1 9.5

5.23.3

2.3

2016 2017 2018

Source: Euromonitor International from CEPEA, Ministry of Industry,Foreign Trade and Services

Soybean Price and Trade Balance in BrazilUSD billion USD per bag

Soybean cash priceTrade balance

Increasing soybeans price and strong export volumes have supported tradebalance over the last few months

6.0

25.1

0

5

10

15

20

25

30

35

0

1.5

3

4.5

6

7.5

9

10.5



GDP and Components

INDIA

• The recovery of the Indian economy from the Goods and Services Tax (GST) and demonetisation reforms continues to gain traction. Real GDP growth picked up from 6.4% y-o-y in Q3 2017 to 6.8% in Q4 2017.

• Investment activity has been an important economic growth driver. Real fixed investment growth accelerated from 7.3% y-o-y in Q3 2017 to 10.1% in Q4 2017, which marked the best quarterly performance in over a year.

• Private consumption growth has moderated for the second consecutive quarter. However, it was more than compensated by a pick-up in government spending growth, from 2.9% in Q2 2018 to 6.1% in Q3 2018.

• External sector performance, on the other hand, has dragged down aggregate demand. Import growth surged, driven by increasing commodity prices, while exports decelerated, leading to a widening trade deficit.

• Our baseline forecast for the coming quarters remains upbeat. We expect real GDP growth to stand at 7.4% for the year 2018, and strengthen to 7.5% in 2019. The Indian economy is anticipated to benefit from strong global demand and relatively low credit costs, while domestic economic activity has proven more resilient to the policy shocks than expected.


India Real GDP, Consumption and Investment, y-o-y Growth

% %

6.86.1

10.1

2015 2016 2017 2018

Real GDPReal fixed investmentReal private consumption

0

8

10

12

14

16

2

4

6

0

8

10

12

14

16

2

4

6


India Foreign Trade (3-month moving sum)USD billion %

20182016 2017

-44.6

Imports, y-o-y growthExports, y-o-y growth

Trade balance

-50

-25

0

25

50

-50

-25

0

25

50

18.911.5




INDIA


In the most likely pessimistic scenario, economic activity disruptions from implementation of the GST reform persist longer than expected. The government’s efforts to stimulate economic growth are less effective than expected. Consumer and business confidence declines. Private consumption growth continues sliding, while investment growth recovery does not persist. India’s real GDP growth drops to 6.8% in 2018 and to 5.9% in 2019. We assign this scenario a 15-20% probability over a 1-year horizon.

The most likely optimistic scenario sees a more rapid recovery from the cash crunch and the GST reform, accompanied by swiftly improving business conditions and consumer confidence. Both urban and rural demand picks up and boosts manufacturing activity, while revival of investment leads economic growth. The markets are convinced of the long-term benefits arising from recent government policies. India’s real GDP increases by 8.1% in 2018 and 9.1% in 2019. We assign this scenario a 15-20% probability over a year.

2016 2017 2018 2019


India Real GDP Growth Forecast% %

0

2

4

6

8

10

12

0

2

4

6

8

10

12




• Industrial production has continued to exhibit a strong performance since November 2017. In February 2018 the overall index increased by 7.1% y-o-y, chiefly driven by confident manufacturing output expansion.

• Production of capital goods (that are used to produce other goods) has demonstrated a strong rebound over the last four months, and jumped by 20% y-o-y in February. Consumer durables also picked up notably, while growth of consumer non-durables and intermediate goods production decelerated, and conditioned a slight moderation in overall industrial production growth.

Industrial Production and Business Sentiment

INDIA

• Indian manufacturing sector companies have been increasingly optimistic about the demand conditions and the overall financial situation. This has led to the improving Business Expectations Index by the Reserve Bank of India (RBI), which reached 112.4 in Q1 2018, marking the best reading since 2012.

• Despite the upbeat sentiment, the pressure on input prices from higher costs of raw materials and finance persists. This is causing concerns about lower profit margins in the manufacturing sector.Source: Euromonitor International from MOSPI

India Industrial Production Index, y-o-y Growth% %

7.1

12.620.0

7.97.4

3.3

-20

-10

0

10

20

30

40

-20

-10

0

10

20

30

40Primary goodsCapital goodsIntermediate goodsInfrastructure/ construction goodsConsumer durablesConsumer non-durablesIndustrial production index

2017 2018

3.7

Source: Euromonitor International from the RBINote: BEI lies between 0 to 200, with 100 separating expansion from contraction

India Business Expectations IndexIndex Index

112.4

90

95

100

105

110

115

120

90

95

100

105

110

115

120

2012 20142013 2015 2016 2017 2018



• Having climbed just above 5.1% in January 2018 (the highest reading since August 2016), inflation slid back to 4.7% in February. This was backed by softening prices for vegetable and other perishable foods, which had earlier forced the inflation increase from the lows of June 2017.

• Inflation being close to the RBI medium-term target of 4% is allowing the bank to maintain the neutral monetary policy stance. In its April meeting, the central bank kept the policy repo rate unchanged at 6.0%. We anticipate the bank to refrain from interest rate hikes this year.

• The RBI has, however, flagged the upside inflationary risks stemming from the expansionary federal budget, rising commodity prices and the risk of fiscal slippage as the government seeks to stimulate economic growth from a 4-year low. The bank also needs to keep an eye for the potential inflationary impact arising from the revised minimum support prices policy for kharif crops, the details of which are still awaited.

• With a likely reversal in food price dynamics, volatile oil prices and the expected strengthening of domestic demand, we forecast inflation to come back to the growth path and average 4.9-5.0% in 2018 and 2019.

Inflation and Monetary Policy

INDIA


India CPI Inflation% %

2016 2017 2018

0

4

5

6

7

8

1

2

3

0

4

5

6

7

8

1

2

3

4.7

Inflation upsurge to the level of August 2016

Lows of June 2017

Source: Euromonitor International from IMF

Indian Rupee Exchange RateRupee per USD Rupee per USD

2016 2017 2018

66.8

0

65

66

67

68

69

63

64

0

65

66

67

68

69

63

64



* Impact is measured as world GDPchange over 3 years compared tobaseline scenario, in percentage points

Increasing probability

Unchanged probability

Decreasing probability

EurozoneDebt Crisis

China HardLanding

Trump AdversePolicies

Global Crisis

Emerging MarketsSlowdown

No-Deal Brexit

Trade War

Korean Conflict

Global Downturn

14

16

10

12

6

8

0

2

32

28

30

4

0-8-10 -4-12 -6 -2GDP Impact, % *

Probability, %

EurozoneRecession

Global Risk Scenarios

RISK SCENARIOS

Summary

China Hard Landing risks have fallen slightly after the Chinese Government has taken more measures to reduce excess borrowing by SOEs and local government debt. A draft Brexit transition deal has led to a lower probability of No-deal outcome. We have also reduced the probability of Korean Conflict in light of lower tensions between the US and North Korea. However, risks are still present due to uncertainty regarding the possible outcomes of any meetings between the US and North Korea. In contrast, the likelihood of Trump Adverse Policies has increased since the more moderate Republican faction in the White House has been decimated since February. Trade war risks have also increased, following the import tariff actions between the US and China.



Scenario Descriptions

RISK SCENARIOS

SCENARIO DESCRIPTION

Global DownturnFears about trade wars and populist policies in advanced economies cause a fall in private confidence. Uncertainty and overvaluation concerns lead to a sell-off in financial markets, while global spill-overs cause a slowdown in emerging markets.

Emerging Markets Slowdown

Higher uncertainty about long-term growth potential and greater protectionism. Slower global trade growth. Domestic business and consumer confidence drop. Rise in capital outflows leads to higher financing costs.

China Hard Landing A rise in the proportion of non-performing loans leads to a banking crisis and tightening credit conditions, especially for the private sector. Private sector confidence declines, slowing the rebalancing process.

Trump Adverse Policies The US imposes tariffs on imports from Mexico, China and other Asian countries, leading to a trade war. Stricter immigration restrictions reduce labour supply. Stock market declines, and interest rates increase.

Trade WarThe US raises tariffs on Chinese imports by 15-25 p.p., and tariffs on other Asian countries by 5-15 p.p. The US withdraws from NAFTA. It increases trade tariffs on Mexico by 10-20 p.p., and on Canada by 5-15 p.p. Asian countries, Canada and Mexico retaliate with symmetric tariff increases on US goods.

Eurozone Recession Growing geopolitical and EU break-up risks increase uncertainty and reduce investment. Significant deterioration takes place in Eurozone credit markets, consumer and business confidence.

No-deal Brexit UK-EU negotiations break down, and the UK leaves the EU in 2019 without making a trade deal. Trade relations with the EU default to WTO conditions with significantly higher barriers.

Eurozone Debt Crisis Growing geopolitical and EU break-up risks increase uncertainty and reduce investment. Renewed tensions in Italian and Spanish sovereign debt markets cause turmoil in financial markets. Collapse in confidence.

Global CrisisAdvanced economies stagnate. Long-term potential growth in emerging markets is significantly below expectations. A rise in distressed loans leads to a financial crisis in China. Greater pessimism about Eurozone growth prospects leads to lower private sector spending and deteriorating Eurozone credit markets.



Scenario News

RISK SCENARIOS

• We have introduced two new scenarios this quarter, the Global Downturn Scenario and the Korean Conflict Scenario.

• The Global Downturn is now our main global downside risk scenario, replacing the previous Advanced Economies Stagnation scenario. It assumes a combination of a large hit to business confidence from fears of trade wars and more populist policies in advanced economies, and a major financial markets’ correction. This scenario could reduce global annual GDP growth in 2018-2020 by 1-2%, depending on the exact timing.

• The Korean Conflict scenario provides a rough quantification of the impact of the break out of war between North Korea, South Korean and the US. Recent talks between South and North Korea, and upcoming negotiations between the heads of state of the US and North Korea have significantly reduced tensions in the region and the probability of this scenario. Nevertheless, the outcome of negotiations is far from certain, and the probability of this scenario could increase again.

• We have also revised the Emerging Markets Slowdown, China Hard Landing and Trade War scenarios.

• The Trade War scenario in particular has been redesigned to capture the most likely escalation of current protectionist measures between the US and China, and the risks of a breakdown in NAFTA negotiations. While, we expect any exchange of tariffs between the US and China to be limited and NAFTA to survive, trade war risks have increased during the first half of 2018.

2016 2017 2018 2019 2020


Global Economy Real GDP Growth Under Alternative Scenarios% %

0

1

2

3

4

5

0

1

2

3

4

5

Euromonitor baselineTrade WarChina Hard LandingEmerging Markets SlowdownGlobal Downturn



Scope and Objectives

NOTES

• Global Economic Forecasts quarterly overview is a partner piece to EuromonitorMacro Model, which is represented in Macro Model dashboard.

• The overview is an explainer of quarterly forecast updates of Macro Model. The analysis is focused on quarterly macro changes and what these mean to our view of the likely, optimistic and pessimistic scenarios for the global economy.

• Euromonitor International’s Macro Model (EMM) is a quarterly forecast model for the global economy.

• EMM is a global model, with countries simultaneously interacting through trade and aggregate demand spillovers. It currently produces GDP, Unemployment, Inflation and Interest Rate forecasts for 58 countries.

• The EMM forecasts are revised quarterly, with some inter-quarter revisions for key economies.

• Global Economic Forecasts quarterly overview focuses on world’s key economies and explains the latest macroeconomic changes in them, as well as the most up-to-date baseline, optimistic and pessimistic scenarios for these economies.



Definitions

NOTES

• Forecast closing date: 27th April 2018• All baseline forecasts (expected or most likely outcomes) are assigned a 20-30% probability unless stated otherwise. • All most likely pessimistic and optimistic scenarios are assigned a probability of 15-25% unless stated otherwise. • All GDP and GDP components growth rates are in real (inflation adjusted) terms unless stated otherwise.• All GDP and GDP components growth rates are year-on-year unless stated otherwise.

For further insight, do not hesitate to contact us at [email protected]

mailto:[email protected]

CONTACT DETAILSAleksej BaksajevEconomist, PhD [email protected]

Ana SolovjovaSenior Data [email protected]

Daniel SolomonPhD [email protected]

Ugne SaltenyteMacro Analysis [email protected]





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