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Strategic Asset Allocation over the Long-Term (SAALT)

Survey of Financial and Macroeconomic Prospects for 2017-2019

by D. E. Kusmerski Bilard

6-13-2017

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Contents

Figures 3

Tables 4

Introduction 5

Executive Summary 5

Financial Developments and Prospects 7

Advanced Economies 7

The aftermath of US elections 7

Brexit 9

Legacies of the financial crisis 9

Emerging Markets and Developing Economies 11

The aftermath of US elections 11

Capital flows 11

Debt 13

Oil 16

Other commodities 19

Real Effective Exchange Rates 20

Macroeconomic Developments and Prospects 22

Recent Developments 22

European elections 22

Macroeconomic conjuncture 24

Advanced Economies Outlook 30

US 30

Euro area 32

UK 33

Expected policy rates in US, Euro area, UK and Japan 33

Emerging Markets Outlook 35

Brazil 37

Russia 39

India 39

China 39

Statistical Appendix 40

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Figures

Figure 1: Equity Prices ....................................................................................................... 7

Figure 2: Nominal Exchange Rates ................................................................................... 8

Figure 3: Capital Flows .................................................................................................... 12

Figure 4: Capital Flows by Type of Investor ..................................................................... 12

Figure 5: Private Debt ...................................................................................................... 14

Figure 6: EM Corporate Leverage ................................................................................... 14

Figure 7: External Debt .................................................................................................... 15

Figure 8: Oil Prices .......................................................................................................... 16

Figure 9: Oil Demand / Supply (mb/d).............................................................................. 17

Figure 10: Major Oil Producers ........................................................................................ 17

Figure 11: Commodity Prices ........................................................................................... 19

Figure 12: Real Effective Exchange Rates (REER) ......................................................... 20

Figure 13: REER – US, Euro, UK and Japan (2010 = 100) ............................................. 21

Figure 14: REER – BRCS (2010 = 100) .......................................................................... 21

Figure 15: Output Gaps and Unexpected Growth Rates ................................................. 25

Figure 16: Real GDP Growth Rates (%) in 2016 – Advanced Economies ....................... 25

Figure 17: Real GDP Growth Rates (%) in 2016 – BRICS............................................... 25

Figure 18: Consumer Price Index (%) in 2016 - Advanced Economies ........................... 26

Figure 19: Consumer Price Index (%) in 2016 - BRICS ................................................... 26

Figure 20: CPI 2016 - Advanced Economies ................................................................... 26

Figure 21: CPI 2016 – BRICS .......................................................................................... 27

Figure 22: Central Bank Nominal Policy Rates and Inflation Targets .............................. 28

Figure 23: Central Bank Real Policy Rates - BRICS ........................................................ 28

Figure 24: Forecasts of Real GDP Growth Rates in 2017 - Advanced Economies .......... 30

Figure 25: FOMC and Market Expectations of the Federal Funds Rate .......................... 34

Figure 26: Market Expectations of Policy Rates - US, Euro, UK, JP ................................ 34

Figure 27: Exports as % of GDP and main destinations in 2015 ..................................... 35

Figure 28: Forecasts of Real GDP Growth Rates in 2017 – BRICS ................................ 37

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Tables

Table 1: US - Forecasts ................................................................................................... 40

Table 2: Euro area - Forecasts ........................................................................................ 41

Table 3: France - Forecasts ............................................................................................. 43

Table 4: Germany - Forecasts ......................................................................................... 44

Table 5: Italy - Forecasts ................................................................................................. 45

Table 6: Spain - Forecasts ............................................................................................... 47

Table 7: UK - Forecasts ................................................................................................... 48

Table 8: Japan - Forecasts .............................................................................................. 49

Table 9: Brazil - Forecasts ............................................................................................... 50

Table 10: Russia - Forecasts ........................................................................................... 51

Table 11: India - Forecasts .............................................................................................. 53

Table 12: China - Forecasts ............................................................................................. 54

Table 13: South Africa - Forecasts .................................................................................. 55

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Introduction

The survey compiles and interprets data, analyses and forecasts available from international organizations, major financial market participants, research institutions and specialized media. It focuses on economic developments that took place since fall 2016. Projections and forecasts are for the period 2017-2019.1

Executive Summary

In the aftermath of the US presidential election, following an initial adverse reaction, stock markets in developed economies rallied, especially in the US. The optimism was based on the prospects of fiscal expansion, deregulation and normalization of the monetary policy. However, given estimates that the US economy is close to full employment, the effectiveness and possible damages of the announced economic policy are being questioned. In the meantime, markets are lowering expectations, as the policies did not materialize yet.

Since March 2017, Brexit is officially under way. A prominent German economist advocates that EU should allow free trade with UK without conditioning it to free flow of people. In public pronouncements, both sides seem intransigent. The UK wants to limit the flow of people, while the EU does not want to open precedents. IMF analysts expect that negotiations will not lead to the creation of large economic barriers. Companies are trying to estimate costs and opportunities opened by Brexit.

As legacy of the financial crisis, the financial health of banks in Italy and Portugal is shaken and sovereign spreads are rising. Last December, the Italian parliament approved a package to avoid the collapse of the third largest bank in the country. In Spain, the 2012 banking restructuring is a costly success. Deutsche Bank has sealed a deal with U.S. Justice Department about the fine it needs to pay “for its illegal conduct and irresponsible lending practices” during the pre-crisis period. Greece outperformed one of it is main fiscal targets, leading to price increases of government bonds and reduced borrowing costs.

In emerging markets (EM) and developing economies (DE), financial markets adversely reacted to Trump’s election. Mexican peso fell sharply, as Trump anti-immigration and trade protectionist agenda may have significant impacts on Mexican economy.

Capital is flowing to Latin America (LA) and shortage periods that occur after reversals are being briefer. The attractiveness of capital to LA is due to lower indebtedness in the region and low or even negative returns in developed economies. The policy normalization in US has a limited effect so far, in terms of capital flows, as the interest rate gaps were kept unchanged.

In EM excluding China, private debt rose in the last five years. External debt is rising. Non- performing loans grew in India and Russia. China’s private debt has grown at a very accelerated pace. State-owned enterprises absorb most of the credit made available by governmental banks, while the private sector resorts to small banks and/or shadow (non-regulated) banks, increasing risks and threatening financial stability.

1 Comments and suggestions are very welcome: d.e.kusmerskibilard@gmail.com.

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Expectations of an agreement between OPEC members and Russia, and later commitments in the end of 2016 to cut oil production, increased oil prices by some 20 percent between August 2016 and February 2017. Following some weakening, oil prices stood at about $50 a barrel as of end-March, or 12 percent higher than in August 2016. Current prices are considerable below those before mid-2014, when they started to decline sharply. Price expectations are in the range of $55-60 in 2017. Non-conventional oil sources (mainly shale oil from US) are imposing a “New Oil Order” as it drives competition for market shares. OPEC cannot reap huge markups as it did before, competitors need to be more efficient and projects using conventional technologies for oil production are becoming economically unfeasible.

Expected prices of other commodities are higher, due to expected higher economic activity. The price of metals has risen in particular, following investments in infrastructure in China, and they are expected to rise further.

The currency of large commodity exporters appreciated along 2016. Mexico peso recovered almost the value prior the US election. US dollar appreciated, while euro and yen are weaker. The sterling continues to depreciate but at a slower pace.

Recent elections held in Austria, the Netherlands and France prevented populist and anti-EU politicians from ascending to power. These outcomes, especially from France, dissipated major political risks. An Italian referendum frustrated a constitutional reform that would pave the way for economic reforms. Italian populist and anti-Eurozone leader is currently ahead in the polls for 2018. UK snap general election for the lower house will take place in June. German elections will occur in September.

Several indicators show that economic activity is increasing since the last quarter of 2016, pushed by developed economies and China. Nevertheless, Brazil is in deep recession, India slowed down and geopolitical conflicts are obstacles for some developing countries.

Among advanced economies, oil price increases translated into higher headline inflation during the second half of 2016, whereas core inflation remained almost unchanged. CPI is falling in the BRICS, with the exception of China.

Since fall 2016, the US raised its policy rate twice. Euro area, UK and Japan left the rates unchanged. Brazil and Russia are loosening the monetary policy in light of falling inflation. A one-time event hit Indian economy adversely. A substitution of bank notes with the goal of curbing illicit activities was apparently poorly executed.

Analysts claim that the US economy cannot grow at the rate of 4 percent aimed by the new government. Markets expect growth rate below 3 percent and, even then, some overheating. In the Euro area, economic activity should continue to improve, pushed by domestic demand. In UK, reduced aggregate demand will moderately slow the economy. Markets expect gradual normalization of monetary policy in US, slower pace of hikes in UK and very accommodative monetary policies in the Euro area and in Japan.

Global trade is currently picking up. The key driver is the higher demand of EMs. As Trump retreats from international trade agreements, China expands and consolidates its global interests.

In Brazil, vital structural reforms are in course or on the sight, but the deflagration of a new and serious political crisis is threating the fragile economic recovery. Russia is emerging from a two-year recession. India’s economic outlook is strong. An important tax reform is about to be implemented in 2017. Other recent measures are improving the institutional setup and business environment. Chinese policy continues to pursue a way between growth in the short run and the need to rebalance in the medium term.

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Financial Developments and Prospects

This section discusses recent financial developments and prospects for advanced economies and emerging markets, followed by an overview of commodity prices and effective exchange rates.

Advanced Economies

The aftermath of US elections

After an initial negative shock, equity prices in US and Europe are rising. In the aftermath of Trump’s election on November 8, stock prices rallied sharply in US (FT Apr17a) and less pronouncedly in Europe. The prospects of tax cuts, fiscal expansion and rising interest rates in US, higher consumer confidence and positive macroeconomic data in both US and Europe are contributing to strong stock markets performance in recent months (WEO

Apr17, p. 7), (Figure 1).

Figure 1: Equity Prices

(Source: ECB_03_17, p. 14)

However, the “honeymoon” between US markets and Trump may be temporary. First, the proposed tax cuts may be less inclusive than expected. “According to the nonpartisan Tax Policy Center, almost half of the benefits from Trump’s proposed tax cuts would go to the top 1% of income earners.” Second, the fiscal expansion may crowd out investments as the interest rate rises. Third, rising interest rates in US induce capital inflows, dollar appreciation and less US competitiveness: “the US dollar’s appreciation since the election could destroy almost 400,000 manufacturing jobs over time”. Fourth, the resulting fiscal deficit from a fiscal expansion and tax cuts will increase interest rates and strengthen the dollar further. Fifth, US economy is close to full employment and the

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fiscal expansion is likely to pressure inflation, and thereby speed up the interest rate hiking cycle and further strengthen the dollar value. Sixth, US competitiveness loss might push further an already protectionist Trump administration, which can hamper economic growth and diminishing corporate profits. Seventh, a trade war trigged by US protectionism would hinder global economic growth (PS Roubini Feb17).

Trump’s administration suffered a major first defeat at the domestic front in March. An attempt of voting a new health care legislation that would replace the Affordable Care Act, known as Obamacare, failed at the low chamber of US Congress. Conservative members of the House were skeptical about how far the Republican proposal would go while “moderates were concerned about an estimate by the nonpartisan Congressional Budget Office that 24 million Americans would be left without insurance” (NYT March17). The defeat rose concerns among some investors about Trump’s ability to succeed in other ambitious agenda items, such as tax reform and infrastructure spending (PIMCO Apr17). While on the second attempt the House of Representatives narrowly approved legislation to repeal and replace parts of Obamacare, a lack of understanding of cost implications and wider ramifications has deepened a sense of skepticism of policymaking standards.

Figure 2 shows nominal exchange rates of the Euro since Brexit referendum and US elections. As of March 2017, the euro has depreciated by 1.9 percent against the US dollar.

Figure 2: Nominal Exchange Rates

(Source: ECB_03_17, p. 15)

Recent developments in North Korea are a global threat. New tail risk of armed conflict on the Korean peninsula could induce large sell off across markets and propel global asset volatility.

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Brexit

The process of leaving EU is officially under way. On March 29, British PM Theresa May officially triggered the procedure by invoking Article 50 of the Treaty on European Union. The negotiations can take up to two years (FT Mar17).

A prominent German economist advocates that EU should allow free trade with UK without conditioning it to free flow of people. Hans-Werner Sinn reasons that, although EU would not like to open this precedent and would like to punish UK for leaving EU, free trade is the best deal for both sides. On the ground of trade theory, he argues: “the economic effects and welfare gains resulting from free trade are substituted, not enhanced, by those of free movement of labor.” In the absence of free labor flows, “different wage structures are more likely to arise among countries – bringing different price structures with them. These differences increase gains from trade; indeed, exploiting such differences is the entire point of trade.” (PS Werner Sinn Jan17).

The proposed generosity towards the UK is in tune with a view of what EU should be. According to Sinn, the EU should fulfil the Pareto optimality criterion, i.e. none member should be better off by leaving the EU. In this context, there is no reason to fear opening a precedent to UK. However, in order to become this Pareto optimal union, “the EU must transform itself from a redistributive union ruled by the majority to an optimal and voluntary union ruled by unanimity”. Otherwise, “it risks becoming a non-consensual community”, where “penalties and other coercive measures may be able to keep wavering member states in for a while”, but ultimately “this approach would leave the EU susceptible to instability and its members vulnerable to exploitation. Europe could end up suffering the fate of the Soviet Union.” (PS Werner Sinn Jan17).

The IMF view and the current state of affairs. IMF analysts expect that negotiations will not raise excessive uncertainty and will not lead to the creation of large economic barriers (WEO Apr17, p. 15). However, current official statements from both sides are not conciliatory, for instance: “no deal is better than a bad deal for the UK”; and “UK is either in the EU or outside it, with no in-between”. Further, both sides will need to deal with discontents: Scotland may realize another referendum about staying in the EU and separating from UK, while other EU members may want to leave and reach particular agreements following the example of UK (Link El-Erian Mar17).

From a business perspective, several scenarios need to be considered. Business will accommodate and/or take advantages of the institutional changes according to their particular context. In a forum set at LinkedIn, professionals discuss their views. In the last edition of Global Financial Stability Report (GFSR), IMF presents some metrics of UK’s financial hub, its linkages with EU, and the way segments of that hub are trying to anticipate Brexit related costs. See: GFSR Apr17, p. 45-47.

Legacies of the financial crisis

The financial health of Southern European banks is a major threat for stability. Italian banks are a considerable source of concern. According to 2015 estimates, nonperforming loans (NPLs) amounted to €360bn, or 18 percent of total loans (IMF WP

Aug16, p. 4), and these figures are growing (Brue Oct16). See Figure 5. In Portugal, “The ratio

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of NPLs to total loans nearly tripled from less than 4 percent in late-2008 to 11 percent by 2013” (IMF WP Sep16, p. 30). Moody’s estimates that NPLs in Italy will fall to 17.6 per cent in 2017 through securitization (FT Jan17).

The third largest bank of Italy is struggling to avoid a collapse. On December 21, the Italian parliament approved a €20 billion rescue package for Banca Monte dei Paschi di Siena (BMPS) and other struggling banks. BMPS was the third largest Italian commercial retail bank in assets, before its share prices collapse last year (Invest Dec16). “On 9 February 2017 BMPS announced their 2016 financial results (…). Combined with the write-down and provisions for NPLs, the net loss of the year was €3.380 billion. The CET1 ratio was reaching the legal minimal threshold of 8.0% (below ECB requirement in individual basis on the bank for 10.75%)” (Wiki BMPS). See CET1 ratio.

The weaknesses in Italian and Portuguese bank systems are raising sovereign spreads. Italian and Portuguese banks faced higher spreads in credit default swaps in 2016. In turn, sovereign spreads are also rising due to “market concerns about contingent liabilities for the government” (GFSR Apr17, p. 36).

In Spain, the 2012 bank restructuring is a costly success. The threats to stability seem to be removed, but data from Spain’s central bank shows that the government “has recovered just €2.69bn of the €53.55bn it spent on bailing out” (FT Sep16).

The efforts to keep financial stability in Europe are increasingly under scrutiny. Sovereign and bank crises in Europe have prompted the EU to create several mechanisms to maintain financial stability in the Euro zone. See, for instance, Wiki Euro debt crisis. The lack of transparency of bailouts and implicit transfers is increasingly criticized, see also: Europe’s Secret Bailout.

Greece outperformed one of it is main fiscal targets leading to price increases of government bonds and reduced borrowing costs. The primary budget surplus in 2016 was 4.2 percent against a creditor target of 0.5 percent. “The fiscal outperformance, coupled with market relief at France’s first round election result, has driven the 10-year bond yield down 16 basis points lower to 6.2 per cent today – its lowest level since November 2014 (…)” (FT Apr17).

Deutsche Bank has sealed a deal with U.S. Justice Department (JOD). On January 17, a final deal was announced. According to it, the German largest bank will pay $3.1 billion in civil penalties and $4.1 billion in relief to homeowners, “for its illegal conduct and irresponsible lending practices”, during the pre-crisis period of 2005-2007(Bloom Jan17). “The fine had been a source of anxiety since September, when the DOJ asked for a potentially crushing settlement of $14 billion (…). While the reduced fine has come as a relief, it is still larger than Deutsche Bank's litigation provisions, and the bank faces further fines that could renew questions about its capital position.” (Invest Dec16).

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Emerging Markets and Developing Economies

The aftermath of US elections

The initial reaction in emerging markets (EM) and developing economies (DE) was very negative. According to aggregate data presented ten days after the election: “Since Nov. 8, EM equities are down -3.6% in local currency, EM USD sovereign bonds are down -4.0% and EM currencies are down -4.0% versus the dollar.” (JPM Nov16). Mexican peso fell by 13 percent, “the largest drop since 1994 devaluation crisis” (FTNov16).

Mexico is facing financial threats. Trump threatened to tax or block remittances from workers living in US, in order to pay for a wall along the border of the two countries, with an estimated cost of $5bn-10bn. In 2015, remittances represented 2.3 percent of Mexico´s GDP and 98 percent came from US. (TE Jan17). It surpassed the receipt from oil exports (CNN Jan17). “Last year’s record $26.97bn in remittances surpassed the previous peak of $26.06bn recorded in 2007.” In 2017, “Mexicans sent home $2.52bn in March, a 15 per cent increase over the amount transferred during the same period in 2016, according to data from Mexico’s central bank.” (FT Mai17).

Capital flows

Capital is flowing to Latin America and shortage periods that occur after reversals are being briefer. “(…) all Latin American countries, with the exception of Venezuela, have retained access to private external financing. (…). During the first quarter of 2017, bond issuance in Latin America was up 53% year on year, and it came at a lower cost.” (PS

Apr17). The first panel of Figure 3 shows a brief reversal of capital flows in the aftermath of US elections and renewed inflows this year.

The composition of foreign capital sheds light on the flow patterns. Figure 4 depicts capital flows in EM according to the type of investor. It shows that retail investors drive capital reversals. Institutional investors, e.g. pension funds, tend to have a longer investment horizon and behave in a less volatile way.

The policy normalization in US has a limited effect so far, in terms of capital flows, as the interest rate gaps were kept unchanged. “(…) Fed’s two recent interest-rate hikes have had no perceptible impact on risk margins and financial flows, though higher rates have been transmitted to Latin America. (…)” (PS Apr17).

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Figure 3: Capital Flows

(WEO Apr17, p. 10).

Figure 4: Capital Flows by Type of Investor

Billions of U.S. dollars, three-month moving average

(GFSR Apr17, p. 17).

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The attractiveness of capital to Latin America is due to lower indebtedness in the region and low or even negative returns in developed economies. According to Professor José Antonio Ocampo, from Columbia University and former Finance Minister of Colombia: “(…) Latin American countries experienced a sharp reduction in their debt ratios from 2003 to 2008. With the commodity boom during this period sustaining massive accumulation of foreign-exchange reserves, the region’s external debt, net of reserves, fell from more than 30% of GDP to less than 6%.” (PS Apr17). “(…) Low interest rates in developed countries since the financial crisis have made those markets less attractive to investors, who have sought higher yields in emerging economies. Whether Latin America can continue to avoid sudden stops in the face of new shocks depends on whether these conditions persist.” (PS Apr17).

EM and DE are still vulnerable to changing policies in advance economies. IMF analyses potential adverse spillovers in two scenarios. One is an unproductive fiscal expansion in US that would raise US policy interest rates quicker and/or steeper than expected. The other is a rise in protectionism. See (GFSR Apr17, p. 15-20).

Debt

Private debt in EMs excluding China

Despite episodes of reduction, private debt rose in the last five years. The left panel of Figure 5 shows credit as a percentage of GDP for private non-financial sectors in EM, China and developed economies. In EM excluding China, the debt reduction in 2012-2013 can be explained by the decline in capital expenditures associated with the end of the commodities boom, combined with tighter credit conditions in the domestic market and expectations of higher US interest rates starting from 2013 (the “Taper Tantrum”).

Corporate leverage rose after 2012 and declined in 2015-2016. Figure 6 disentangles debt from GDP and shows debt to equities ratios in EM disaggregated by regions. Leverage rose in all EM after 2012, especially in Latin America, but there is deleveraging in 2015-2016, which is a period of negative growth in large EM (Brazil and Russia).

External debt is rising. In a comparison between 2016 and 2010, external debt as a percentage of GDP grew in BRICS, excluding China. Russia (not depicted) is facing sanctions that prevent access to international markets since 2014. Mexico and Turkey increased their external debt markedly, by about 20 percent, during the period (Figure 7, left panel). Exports revenues and dollar-denominated obligations in 2015 (Figure 7, right panel) provide an indicator of payment ability for selected countries.

NPLs grew in India and Russia. These large EM economies are in the downturn phase of the credit cycle, when credit conditions are tightening and NPLs rise (Figure 5, right panel).

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Figure 5: Private Debt

(Source: OECD_Outlook_03_17, p. 7)

Figure 6: EM Corporate Leverage

Debt to equity, percent, 2007-2016

(GFSR Apr17, p. 15).

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Figure 7: External Debt

(Source: OECD_Outlook_03_17, p. 8)

Private debt In China

China’s private debt has grown at a very accelerated pace as a percentage of GDP. Private debt of non-financial institutions grew from about less than 1.5 times the GDP to more than 2.5 times during the period 2002-2016 (Figure 5, left panel).

Governmental banks and state-owned enterprises are likely to be misallocating financial resources. State-owned enterprises absorb most of the credit made available by governmental banks (FT_02_16). Due to ease access to credit and lack of accountability, most of NPLs in China are due to them (OECD_Outlook_03_17, p. 7).

As the capital market is incipient, debt is the main source of finance and shadow banks are proliferating. The private sector resorts to small banks and/or shadow banks, which are not under regulation and are willing to incur higher risks (GFSR_10_16, p. 35).

Since 2014 there are signs of deleveraging (Figure 6). Notwithstanding ongoing reforms, there is a long way for establishing a sound Chinese capital market. “(…) In China, although the authorities have recognized the urgent need to deleverage the financial system and have undertaken substantive corrective measures, supervisory attention should concentrate on banks’ emerging risks, especially fast asset growth among smaller banks, increasing reliance on wholesale funding, and risks from interconnections between shadow products and interbank markets. (…)” (GFSR Apr17, p. XI).

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Oil

Between June 2014 and January 2016, oil prices dropped sharply in international markets (Figure 8). Supply conditions, i.e. growing production from non-conventional oil sources (e.g. shale oil in US and oil sands in Canada) and conflict of interests inside OPEC, combined with weaker global demand – all led to a glut in international markets. (WB Mar15), (WEO Apr15, p. 36-38).

Figure 8: Oil Prices

(Source: JP Morgan_2Q17, p. 30)

Mixed expectations in between OPEC meetings caused oil price swings in the second half of 2016 (2H16). Last September, a preliminary OPEC meeting signaled production cuts to be sealed in another OPEC meeting on November, where Russia was invited as a guest. Analysts were skeptical about OPEC’s ability to coordinate production, but a possible cooperation with Russia led to price swings in 2H16 (TE Dec16).

By the end of 2016, commitments of OPEC and non-OPEC members to cut production increased oil prices. On November, OPEC decided to cut 1.2 million barrels a day (mbd), which represents about 1.2 percent of global production in 2016, according to data from the International Energy Agency (Figure 9). On December, in an OPEC and non-OPEC meeting, an additional cut of 0.6mbd was decided (WEO Apr17, p. 52-53). “(…) Oil prices increased by some 20 percent between August 2016 and February 2017 (…). Following some weakening in recent weeks, oil prices stood at about $50 a barrel as of end-March, still some 12 percent stronger than in August 2016. ” (WEO Apr17, p. 4-5).

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Figure 9: Oil Demand / Supply (mb/d)

2015 1Q16 2Q16 3Q16 4Q16 2016 1Q17

World demand 1 95.0 95.4 95.9 97.1 97.9 96.6 96.7

OPEC crude oil 31.7 32.1 32.4 32.8 33.2 32.6

OPEC NGLs 2 6.5 6.5 6.7 6.8 6.8 6.7 6.7

Total OPEC Supply 38.1 38.7 39.0 39.5 40.0 39.3

World Supply 3 96.6 96.7 96.0 97.0 98.3 97.0

Glut 1.6 1.2 0.1 -0.1 0.4 0.4 1 Measured as deliveries from refineries and primary stocks, comprises inland deliveries, international marine

bunkers, refinery fuel, crude for direct burning, oil from non-conventional sources and other sources of supply. 2

Natural Gas Liquids. 3 Comprises crude oil, condensates, NGLs, oil from non-conventional sources and other sources of supply.

(Source: IEA_03_17, p. 1)

OPEC made a turning point with the help of non-OPEC members, notably Russia. About two years ago, Saudi Arabia blocked an attempt of poorer OPEC members to cut production in order to defend prices (TE Dec16). The fear of losing market share to non-OPEC members was probably a main reason behind that decision. Then, in the absence of production control, a glut drove oil price down. Richest members of OPEC, e.g. Saudi Arabia, could stand the drop and gain market share by displacing non-OPEC competitors: “A price war might make some future U.S. shale oil projects uncompetitive due to high production costs, easing competitive pressures on OPEC in the longer term.” (Reu Nov14). Now, Saudi Arabia took the lead again and changed strategy, backed by Russia, the second biggest global oil producer (Figure 10).

Figure 10: Major Oil Producers

Average mb/d

in 2016

% of world supply

US 12.5 12.9

Russia 11.3 11.6

Saudi Arabia 10.4 11.7

(Source: IEA_02_17, p. 6)

The distribution of the production cuts is uneven. “(…) Iran was permitted a token increase as it recovers from nuclear-related sanctions. (…) “(TE Dec16). “(…) Iraq, Kuwait, Saudi, Arabia, and the United Arab Emirates are bearing the brunt of the cuts (…). Libya and Nigeria are exempt. (…)”. Russia “(…) has committed to reducing production by 0.3 mbd, and 10 other non-OPEC countries agreed to contribute the remainder (…)” of the 0.6 mbd cut. (WEO Apr17, p. 52-53).

Compliance is not integral. “(…) Production data from the International Energy Agency (IEA) for January 2017 indicate that only a few OPEC members fully complied with the agreement, although Saudi Arabia has cut more than initially agreed on. (…)” (WEO Apr17, p.

53).

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Views about oil demand are contrasting. “Oil demand grew at 1.6 mbd in 2016, which is lower than during 2015. The IEA expects demand growth to slow further to 1.4 mbd in 2017” (WEO Apr17, p. 53). In contrast to IEA, Morgan Stanley’s analyst argues: “(…) even amid rising renewable energy and electric vehicle sales, demand for oil has been growing steadily since crude prices started their precipitous decline in 2014 (…)” (MS Mar17). In addition, “Higher demand is at the heart of Goldman Sachs Research’s positive commodity outlook for 2017 (…)” (GS Jan17).

Expectations point to oil prices in the range of $55-60 in 2017 and balanced market in 2018.

IMF: “(…) Oil prices are expected to rise to an average of $55 a barrel in 2017–18, compared with an average of $43 a barrel in 2016. (…)” (WEO Apr17, p. 15).

Morgan Stanley: “(…) OPEC has successfully constrained the supply side of the market by lowering output targets. Drilling activity in U.S. shale oil is picking up rapidly, but not fast enough to prevent a period of sizeable inventory draws late this year.”

“(…) short-dated oil futures will need to move higher—we think into the low $60s—toward year-end.

At that point, we believe that OPEC discipline will probably start to wane, and U.S. shale oil production will accelerate. We estimate that U.S. shale may return to growth of around a million barrels a day sometime between the fourth quarter, 2017, and fourth quarter, 2018.

Still, with demand growing at, or slightly above, the historical trend rate and declines in supply from several non-U.S./non-OPEC countries, the market looks broadly balanced over the next year. (…)

With a broadly balanced market, prices should remain stable in the low $60s throughout 2018. (…)” (MS Mar17).

According to Goldman Sachs’ analyst, in 2017 demand will be above supply due to the current business cycle and, to a lesser extent, the planned OPEC cut in production and possible outages in some regions (Venezuela, Nigeria, and Canada). Oil stocks will go down and prices will be in a range of $55-60. (GS Jan17).

From a broader perspective, shale oil from US is imposing a “New Oil Order”. In Goldman Sachs’ view, OPEC is no longer the only “swing producer”. Shale oil producers (notably US, but also Argentina) are the new ones. Shale oil has a time response, i.e. a time for investment to mature until production, which is less than one year and well below the time response of conventional oil sources (GS may16). Thus, if expected oil prices increase at least on the level that production of shale oil is economically feasible2, oil production tends to increase. Hence, OPEC cannot reap huge markups as it did before, as the competition for market shares will keep oil prices on a new lower level. As Goldman Sachs also observes, in this new order with lower oil prices, competitors will need to be more efficient and projects using conventional technologies for oil production are becoming economically unfeasible (GS may16).

2 According to a study from 2015: “(…) If oil prices stay around $60 per barrel, roughly one-third of current

oil production and more than two-thirds of the expected increase in global oil production could become uneconomical (Bank of Canada 2015). Over time, cost of unconventional oil production is likely to decline as new technologies will reduce the cost of exploration and extraction (Benes et al. 2012).” (WB Mar15).

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Other commodities

Figure 11 shows commodity prices (in blue), as of March 31, and price z-scores, i.e. prices computed according to (3 till 5) standard deviations from the mean, taken from daily prices over the past 10 years.

Figure 11: Commodity Prices

(Source: JP Morgan_2Q17, p. 57)

Expected commodities prices are higher, due to expected higher economic activity. Although most of commodity prices are below their historical means, with the exception of gold (Figure 11), expectations are that ongoing economic recovery in advanced economies and infrastructure expenditure in China will drive prices of nonfuel commodities up. In particular, the price of metals is expected to rise in 2017. According to the IMF, the main drives will be “(…) substantial infrastructure spending in China, expectations of fiscal easing in the United States, and a general pickup in global demand. (…)” (WEO Apr17,

p. 15).

Latest developments show substantial increases in the price of metals, coal and natural gas. Price increases of agricultural products were relatively modest. As of February 2017 relative to August 2016: “(…) metal prices have increased by 23.6 percent (…)”; “(…) Coal prices have rallied, with the average of Australian and South African prices in February 2017 more than 20 percent higher than in August 2016. That rally has followed government-led reductions in coal production in China and production and shipment outages in Australia. ”; for natural gas “(…) the average price for Europe, Japan, and the United States was up by about 19 percent relative to August 2016. In Europe, natural gas prices have risen following higher oil prices. While prices in Asia and the United States initially rose because of expectations of strong winter demand, a fairly mild winter led to

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subdued demand for gas-fired power generation and helped contain gas prices.”; agriculture-related commodities rose by 4.3 percent and food, in particular, rose by 4.9 percent (WEO Apr17, p. 5-6).

Real Effective Exchange Rates

The left panel of Figure 12 shows real effective exchange rates (REERs). The value as of March 31, 2017 (in blue) is placed within a 10-year range of values (the gray area), and it is normalized by the average. The average is a proxy for the equilibrium value. For instance, during the last ten years, Russian ruble REER assumed a range of values between 0.6 and 1.8 its average value in the same period. As of March 31, it is almost 20 percent higher than the average value.

Figure 12: Real Effective Exchange Rates (REER)

(Source: JP Morgan_2Q17, p. 52)

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Figure 13: REER – US, Euro, UK and Japan (2010 = 100)

(Source: IMF_IFS_04_17)

Figure 14: REER – BRCS (2010 = 100)

(Source: IMF_IFS_04_17)

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In REER terms, US dollar appreciated due to its higher interest rate, while euro and yen are weaker. The sterling continues to depreciate but at a slower pace. “With widening interest differentials, the U.S. dollar has strengthened in real effective terms by about 3.5 percent between August 2016 and late March 2017 (…), whereas the euro and especially the Japanese yen have weakened.“ (WEO Apr17, p. 7). After a sharp depreciation post-Brexit, the depreciation pace of sterling has been slowing since the third quarter of 2016 (3Q16), see Figure 13.

In EM, the currency of large commodity exporters recovered, including the Mexico peso. “(…) the Indian rupee and the currencies of commodity exporting emerging market economies—in particular the Russian ruble—have gained. The Mexican peso has also strengthened in recent weeks and now stands little changed relative to August. “(WEO Apr17,

p. 8). Figure 14 shows that the REER of Brazil, Russia and South Africa appreciated during 2Q16-1M17, after bottoming in 1Q16. However, they still below the levels observed in 2012, by the end of the commodities boom.

Macroeconomic Developments and Prospects

This section reviews recent political and macroeconomic developments and analyzes prospects and expectations for advanced economies and BRICS.

Recent Developments

European elections

In Austria’s presidential election, the extreme-right was defeated, but this political wing is well rooted and remains vigorous. The independent (former Green) Alexander Van der Bellen won the dispute with 53.8 percent on December 2016, in detriment of Norbert Hofer from a nationalist and extreme-right party. According to a specialist in radical right, the roots of anti-liberal values in Austria and other Western democracies precede the financial and immigration crises.3 Further, latest polls indicate that in the national elections of 2018, Hofer’s party is comfortably ahead (Tel Dec16).

Italian referendum frustrated a constitutional reform that would pave the way for economic reforms. On December 2016, 59.4 percent voted against a reform of the Senate and the Chamber of Deputies that meant to simplify and unlock the decision-making process. The “No” campaign lead by the populist Five Star party ultimately won and the centre-left Prime Minister, Matteo Renzi, resigned in consequence. A new PM was appointed and general elections will take place before spring 2018. (Exp Dec16), (Ind

Nov16).

3 “(...) It has been rooted in a coalition of blue collar and lower middle class workers, mainly white men, as

well as older social conservatives, all of whom firmly oppose liberalism’s enthusiasm for open borders, global markets and relaxed social norms. Feeling as though their traditional values were under threat, from the late 1970s onward these voters began to turn in growing numbers to more radical parties (…)” (Tel

Dec16).

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Italian populist and anti-Eurozone leader is currently ahead in the polls for 2018, but the electoral process itself is uncertain. Recent polls show Beppe Grillo, the founder of populist Five Star Movement, with 32 per cent of intended votes whereas the central-left has 26.8 percent. However, the electoral law itself is under discussion and may prevent Five Star Movement from rising to power. (LSE Apr17).

Dutch election has favored the EU and limited the advance of populism and anti-immigration policies. This year, on March 15, the Freedom Party (PVV) of Geert Wilders, who supports anti-Muslim and anti-EU positions, was surprisingly defeated after leading the polls. PVV, placed second, obtained 20 of the 150 seats in the Dutch parliament. The conservative-liberal party (VVD) of the actual Prime-Minister Mark Rutte has won the dispute with 33 seats and is leading coalition talks for forming the new cabinet with other three parties (Dutch Eng News Apr17).

While Macron’s win sends a positive signal for Europe and market stability, markets see the obstacles to foster his liberal agenda in the domestic front. Macron received 65 percent of the votes in the second round and became the new French president. However, according to Goldman Sachs, the lack of a well-established party behind Macron will force him to make coalitions, and the political constellation will be fully determined only after the elections for the National Assembly on June (GS Apr17a). Nevertheless, the nomination of the Prime Minister Edouard Philippe from the center-right party is seen as an important move for a broader political basis and one that does not compromise Macron’s economic agenda (TE_17_05).

Germany’s government welcomes Macron as a central EU partner but has moderate expectations. German officials are aware that 41 percent of French votes in the first round went to the two anti-EU candidates. That, together with Macron’s political inexperience and lack of broad internal support, may force domestic concessions at expenses of Euro zone interests. German would like to see tax cuts and labor deregulation policy in France (FT Aprb).

Better macroeconomic performance and falling political risks increase the pressure on ECB to reduce its massive quantitative easing policy. Central banks from the Euro zone, notably the Bundesbank, defend the reduction of the quantitative ease policy. However, the ECB seems inclined to keep its monetary policy throughout the current year. (FT Aprc).

UK snap general election will elect a new lower house of Parliament. On April 19, Prime Minister Theresa May obtained from the House of Commons, the lower house of Parliament, approval to realize new elections on June 8. Originally, such election would take place only in 2020 (Wiki May17).The declared intention is related to Brexit: “to broaden the Parliament majority before entering the negotiations and to insure political stability for the years ahead” (BNP Paribas_Eco Perspectives_2Q17).

German elections this year is centralized on labor market conditions and income inequality. The elections for the parliament will take place on September 24. The front-runners are the centre-right party (CDU) of Angela Merkel and the centre-left party (SPD) of Martin Schulz. While SPD had a slight advantage along this year, latest polls show that

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CDU has reverted the trend (Bloom Apr17), (Pol Apr17). Following a labor market reform implemented in 2005 during a SPD mandate (Hartz reforms), “long-term unemployment declined from almost 6% of the labour force to only 2%” in the period 2005-2015. However, “the risk of in-work poverty, defined as employed persons receiving less than 60% of the overall equivalised median disposable income, has substantially increased, in particular following the great financial crisis, from 5.5% in 2006 to 9.7% in 2015”. “The return to the pre-Hartz regulations is unlikely to happen. Nevertheless, the attack on the Hartz reforms may allow the SPD to regain part of the working class that felt betrayed by its adoption”. (PNB 2Q17).

Macroeconomic conjuncture

Output

Several indicators show that economic activity is increasing since 4Q16, pushed by developed economies and China. “(...) Manufacturing PMIs and consumer confidence increased noticeably in advanced economies in the last few months of 2016 and early 2017. They also recovered to a more modest extent in emerging market economies.” (WEO

Apr17, p. 4). Unemployment in US is falling (BEA_05_17). Domestic demand and weaker euro are stimulating the economy In Europe (S&P_05_17). China is investing in real estate and infrastructure (WEO Apr17, p. 4). Nevertheless, Brazil is in deep recession, India slowed down and geopolitical conflicts are obstacles for some developing countries. “(…) activity has slowed in India because of the impact of the currency exchange initiative, as well as in Brazil, which has been mired in a deep recession. Activity remained weak in fuel and nonfuel commodity exporters more generally, while geopolitical factors held back growth in parts of the Middle East and Turkey. ” (WEO Apr17, p. 1). The view of a global recovery is in dispute. IMF forecasts in the latest World Economic Outlook (WEO) were derided, in an article of The Economist (TE) that claims over optimism. According to the TE, last April edition of WEO presents “chirpy forecasts from the IMF”. Further, “Since the financial crisis, (…) the IMF has had to revise down its forecasts over time every year since 2010 (…). The fund’s spring forecasts for the coming year have turned out to be over-optimistic in the past three years.” (TE_Apri17). Curiously, the latest WEO showed a group of countries whose growth rates in 2016 were higher than expected. In the criticized WEO edition, the IMF sustained a view that the global economy is gaining momentum by showing unexpected higher growth rates in 2016. See Figure 15.

The outlook sections, later in this document, present forecasts from international organizations (IMF and OECD) and market institutions. There, the reader can assess IMF forecasts in light of alternative sources.

Figure 16 and Figure 17 show actual values or latest IMF estimations of real GDP growth rates in 2016. IMF forecasts made on January 2016 are also included for comparison. In red are the values that are below the forecasts. The same goes for Figure 18 and Figure 19, which are annual inflation rates in 2016, where values in red are above the forecast.

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Figure 15: Output Gaps and Unexpected Growth Rates

(WEO Apr17, p. 11)

Figure 16: Real GDP Growth Rates (%) in 2016 – Advanced Economies

Type of Data

Issued In

US Euro area France Germany Italy Spain UK Japan

Actual / Estimated

April 2017 1.6 1.7 1.2 1.8 0.9 3.2 1.8 1.0

IMF Forecast

January 2016 2.6 1.6 1.3 1.7 1.3 2.7 2.2 1.0

(Sources: WEO data Apr17 and WEO data Jan16)

Figure 17: Real GDP Growth Rates (%) in 2016 – BRICS

Type of Data

Issued in

Brazil Russia India China South Africa

Actual / Estimated

April 2017 -3.6 -0.2 6.8 6.7 0.3

IMF Forecast

January 2016 -3.5 -1.0 7.5 6.3 0.7

(Sources: WEO data Apr17 and WEO data Jan16)

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Inflation

Figure 18: Consumer Price Index (%) in 2016 - Advanced Economies

Type of Data

Issued in

US Euro area France Germany Italy Spain UK Japan

Actual / Estimated

April 2017 2.2 1.4 0.7 1.7 0.5 1.6 1.2 0.3

IMF Forecast

January 2016 1.4 1.1 1.0 1.1 0.8 0.9 1.7 0.6

(Sources: WEO data Apr17 and WEO data Jan16)

Figure 19: Consumer Price Index (%) in 2016 - BRICS

Type of Data

Issued In

Brazil Russia India China South Africa

Actual / Estimated

April 2017 6.3 5.4 4.9 2.1 6.7

IMF Forecast

January 2016 5.5 8.5 7.5 1.8 5.7

(Sources: WEO data Apr17 and WEO data Jan16)

Figure 20: CPI 2016 - Advanced Economies

Monthly observations of annualized data (%)

(OECD May17)

Among advanced economies, oil price increases in 2H16 translated into higher headline inflation whereas core inflation remained almost unchanged. In countries that were experiencing deflation, e.g. Japan and Italy, the Consumer Price Index (CPI) turned positive, whereas CPI in US and Germany were around a target rate of 2 percent (Figure 18). “(…) By contrast, core inflation has increased much less—if at all—and remains well below central bank targets in almost all advanced economies. (…)” (WEO Apr17, p. 6). Since February 2017, prices are retreating (Figure 20). The exception is UK (see a discussion in the subsection UK).

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CPI is falling in the BRICS, with the exception of China, since the second quarter of 2016. Real effective exchange rates of Brazil, Russia and South Africa bottomed in 1Q16, after a continuous depreciation since 2012. Along 2016, REERs gradually appreciated (Figure 14) and helped to bring inflation down. Excluding India and China, recession or weak economic activity (Figure 17) contributed to falling CPI as well (Figure 21). In China, “producer prices have emerged from deflation after four years, reflecting higher raw material prices” and increased investment in infrastructure (WEO data Apr17, p. 6). In India, inflation fell substantially during 2H16-1M17 (Figure 21). The adoption of an inflation target policy (IE_08_16) helps to anchor expectations, a stronger currency (Figure 2), tightening credit conditions (India is in downturn phase of the credit cycle), the economic slowdown (Figure 17) due to the 2016 Indian banknote demonetization - all these factor likely contributed to the inflation decline.

Figure 21: CPI 2016 – BRICS

Monthly observations of annualized data (%)

(OECD May17)

Policy rates

Since fall 2016, the US raised its policy rate twice. Euro area. UK and Japan left the rates unchanged. The FED raised its policy rate by 25 basis points each time, on December 2016 and March 2017. Earlier market expectations in 2016 pointed to at least two hikes of 25 basis points in 2016, but economic performance below than expected slowed the

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pace of monetary policy normalization. Figure 22 shows current nominal interest rates and inflation targets set by central banks from BRICS, US, EU, UK and Japan.4

Figure 22: Central Bank Nominal Policy Rates and Inflation Targets

Rate Date Change YTD1 2016 2015 2014

Inflation Target 2017 %

% yy/mm/dd bp2 center variation

Brazil 11.25 17/04/12 -100 -250 -50 250 175 4.5 1.5

Russia 9.25 17/04/28 -50 -75 -100 -600 1150 4.0

India 6.25 16/10/04 -25 0 -50 -125 25 4.0 2.0

China 4.35 15/10/23 -25 0 0 -125 -40 South Africa 7.00 16/03/17 25 0 75 50 75 3 to 6

US 1.00 17/03/15 25 25 25 25 0 2

Euro area 0.00 16/03/10 -5 0 -5 0 -20 < 2

UK 0.25 16/08/04 -25 0 -25 0 0 2

Japan -0.10 16/01/29 -20 0 -20 0 0 2

1 Accessed on May 14, 2017.

2 Basis points.

(Source: CB News_05_17)

Turning to BRICS, we analyze nominal policy rates in light of actual and expected inflation. Figure 23 shows real policy rates in 2016 and expected ones in 2017.

Figure 23: Central Bank Real Policy Rates - BRICS

Expected

Nominal Policy1

Annual Inflation2 Real Policy Nominal Policy Annual Inflation Real Policy

Rate, end of period, %

December 2016 December 2017

Brazil 13.75 6.3 7.0 38.5

3 7.0 4.3

Russia 10.00 5.4 4.4 n. a. 44.0 n. a.

India 6.25 4.9 1.3 56.0

55.3 0.7

China 4.35 2.1 2.2 n. a. 62.5 n. a.

South Africa 7.00 6.7 0.3 7.0 5.9 1.0

1 CB News_05_17.

2 WEO data Apr17. 3 Expectations as of May 5, Bacen_FR, p. 2

4 BoR_MPR_05_17, p. 26.

5 RBI_MPR_04_17, p. 7. 6 IMF_WEO_data_10_16.

7 SARB_MPC_03_17.

Brazil and Russia are loosening the monetary policy in light of falling inflation. Brazil has the highest policy rate among the BRICS and one of the highest in the world. Since

4 The column ‘Rate’ is the current interest rate. ‘Change’ is the variation, measured in basis points,

occurred in the last alteration. ‘Date’ is the date of last alteration. ‘YTD’ is the variation since the beginning of 2017. ‘2016’, ‘2015’ and ‘2014’ are the variations occurred in these years, measured in basis points. The last column is the inflation target, its center and the allowed variation around it, or its interval.

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2H16, it is cutting the nominal rate, as inflation is falling5. The nominal interest rate lost 3 percentage points between 2H16 and 1Q17. Expectations are that the real rate will fall in 2017, due to further cuts in the nominal rate and higher inflation. Russia is also cutting the nominal rate as inflation is falling. In contrast to Brazil, expectations are that inflation will fall further and will meet the target in 2017. (See Figure 21 -Figure 23).

India is loosening its monetary policy slower than Brazil and Russia. The last change in the nominal rate was a drop in 4Q16 amid falling inflation rates in 2H16-1M17 (Figure 21 - Figure 22). Expectations point to a slight cut in the nominal rate and to higher inflation, leading to a drop in the real policy rate (Figure 23).

China is not actively intervening through its policy rate. The last change in the nominal rate was a cut on October 2015. Inflation rose during 2Q16-1M17 and sharply drop in 2M17-3M17 (Figure 21). IMF expects slightly higher inflation in 2017 (Figure 23).

In South Africa, the real policy rate is expected to rise. The last change in the nominal rate was a hike on March 2016. The inflation rate rose during 2H16, but fell in 1Q17 (Figure 21). Expectations are that inflation will fall further, thus raising the real policy rate (Figure 23).

Long-term policy rates have increased in developed countries. “(…) As of end-March, nominal yields on 10-year U.S. Treasury bonds had increased by some 85 basis points compared with August and 55 basis points compared with just before the U.S. election. Long-term rates increased sharply in the United Kingdom as well, reflecting spillovers from higher U.S. rates and expectations of a less accommodative monetary policy stance going forward, given rising inflation pressure. The increase in core euro area long-term yields after August was more moderate—about 40 basis points in Germany—but Italian yields rose more sharply (about 120 basis points), reflecting elevated political and banking sector uncertainties. (..)” (WEO Apr17, p. 7).

2016 Indian banknote demonetization

A substitution of bank notes was apparently poorly executed and had adverse real economic impacts. With the goal of curbing illicit activities, on November 8 Indian government suddenly announced that 86 percent of bank notes in circulation would no longer be valid, starting from that midnight (Forbes_01_17). The measured caused several disruptions in the daily life (even deaths related to the event), disrupting the economy and leading international analysts to cut down the 2016 GDP forecasts (Wiki_India_17_05).

5 In 2016, the inflation rate was 6.3 percent, above the center of the inflation target of 4.5, but within the

band limits of 2.5-6.5 (BACEN_IT_17_05). Monthly rates in 1Q17are converging to the center of the inflation

target. Nevertheless, actual market expectations point to an annual inflation rate of 7 percent in 2017 (Erro! onte de referência não encontrada.).

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Advanced Economies Outlook

Several analysts are pointing to a gradual, modest but broad economic recovery, pushed by advanced economies and China. International organizations besides the IMF, central banks and market institutions revised upwards their growth forecasts6. The underlying assumptions for developed economies are cyclical recovery in US and Europe, deregulation, expansionary fiscal policy and investments in infrastructure in US. Figure 24 gathers the forecasts of real growth rates for advanced economies in 2017. The numbers in parenthesis are the changes relative to the last forecast. Red indicates a downwards revision.

Figure 24: Forecasts of Real GDP Growth Rates in 2017 - Advanced Economies

Annual rates (%)

Institution US Euro area France Germany Italy Spain UK Japan

IMF 2.3 ( 0.1) 1.7 ( 0.2) 1.4 (0.1) 1.6 (0.2) 0.8 (0.1) 2.6 (0.4) 2.0 (1.0) 1.2 (0.6)

OECD 2.4 (0.3) 1.6 (0.1) 1.4 (0.1) 1.8 (0.3) 1.0 (0.2) 2.3 (0) 1.6 (0.6) 1.2 (0.5)

FED 2.1 (0.1) --- --- --- --- --- --- ---

ECB --- 1.8 (0.2) --- --- --- --- --- ---

BoE --- --- --- --- --- --- 1.9 (1.1) ---

Allianz 2.2 (0.1) 1.8 (0.2) 1.4 (0) 1.7 (0.1) 0.9 (0.1) 2.5 (0.3) --- 1.2 (0.5)

BNP Paribas

2.1 (0.5) 1.6 (0.6) 1.3 (0.3) 1.8 (0.7) 0.6 (0.3) 2.6 (1.0) 1.8 (1.1) 1.2 (1.1)

Goldman Sachs

2.3 (0.6) 1.5 (0.2) --- --- ---

--- 1.5 1.0 (0)

J.P. Morgan

2.2 (0) --- --- --- ---

--- ---

Moody's 2.4 1.3 1.3 1.6 0.8 --- 1.0 0.9

PIMCO 2.25 1.8 --- --- --- --- 2.0 1.0

Sources Table 1 Table 2 Table 3 Table 4 Table 5 Table 6 Table 7 Table 8

US

Since 2Q17, agents are lowering expectations regarding Trump’s economic policy. In 4Q16, Goldman Sachs estimated that the US economy is close to full employment and argued that an increase of economic activity would likely conduce to some overheating at the labor market and inflation pressure by the end of 2017. FED would then restrain inflation pressures and meet the inflation target, using probably three interest rate hikes along the year (Goldman Sachs_outlook 2017). By mid-April 2017, expectations were that the tax reform would not come into effect until 2018 at least, but deregulation (or even the lack of additional regulation or tax increases) may boost economic activity in 2017 (Goldman

Sachs_04_17).

In 2Q17, BNP Paribas shared the view that “a fiscal stimulus – a mix of tax cuts and spending increases” “is looking increasingly like an empty promise. The president still has not published his recommendations for budget revenues for the next fiscal year (…),

6 The Statistical Appendix contains 2017-2019 forecasts for real GDP growth rates, unemployment, inflation, public debt and current account balance. There are individual tables for US, Euro area, France, Germany, Italy, Spain, UK, Japan and BRICS.

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there is no trace of an infrastructure investment plan. As to taxation, Mr. Trump seems to have become disinterested…” (BNP Paribas_Eco Perspectives_2Q17).

In light of a “rough outline” of the tax reform presented by the Treasury Secretary and Economic Advisor of Trump at the end of April (BI_04_17), J.P. Morgan’s Chief Global Strategist pondered that “the total cost of the tax proposal would likely be more than fiscal conservatives could swallow”. Thus, given “the sobering experience of the first attempt to repeal and replace the Affordable Care Act, prospects for significant tax-cut-driven fiscal stimulus seem fairly remote” (JP Morgan_05_17).

Nouriel Rubini provides a brief but more detailed and critical analysis of the outline of Trump’s tax reform in NR_PS_04_17.

Preliminary data shows a decline in the GDP growth rate in 1Q17. On the other hand, labor market statistics show that unemployment rates have fallen. According to the Bureau of Economic Analysis (BEA), real GDP grew at an annualized rate of 0.7 percent in 1Q177, while in 4Q16 the annualized rate was 2.1 percent (BEA_05_17). Data from the Bureau of Labor Statistics shows that unemployment rates (persons aged 16+, seasonally adjusted) steadily declined from 4.8 on January to 4.4 percent on April 2017.

The optimism seen in the aftermath of Trump’s election may have no support in the real side of the economy. According to Mohamed A. El-Erian, unlike equity investors who believe they can quickly adjust to market conditions, “(…) companies investing in new plants and equipment, (..) are less likely to change their behavior until announcements begin to be translated into real policies. But the longer they wait, the weaker the stimulus to economic activity and income (…)”. Further, “(…) While there is often some delay when political negotiations and trade-offs are involved (...). By deciding to begin with health-care reform – an inherently complicated and highly divisive issue in US politics – the Trump administration risks losing some of the political goodwill that could be needed to carry out the kinds of fiscal reform that markets are expecting.” (PS_El-Erian_03_17).

Adverse expectations in US may have global consequences. Mohamed A. El-Erian argues that “(…) unmet expectations for economic growth and corporate earnings could cause financial-market sentiment to slump, fueling market volatility and driving down asset prices. (…)”. In this scenario, the global economy may suffer, “(…) especially if these economic challenges prompt the Trump administration to implement protectionist measures.” (PS_El-Erian_03_17).

The way ahead is not necessarily gloomy. However, it is important to foster sustainable growth. Mohamed A. El-Erian: “The US is on relatively strong footing to achieve higher economic growth. Indeed, by animating the economy’s animal spirits, the Trump administration has laid the groundwork for the private sector to do a lot of the heavy lifting. But there is more to do. (…)” (PS_El-Erian_03_17).

7 “The increase in real GDP in the first quarter reflected positive contributions from nonresidential fixed

investment, exports, residential fixed investment, and personal consumption expenditures (PCE), that were offset by negative contributions from private inventory investment, state and local government spending, and federal government spending. Imports, which are a subtraction in the calculation of GDP (…).” (BEA_05_17).

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The Chief Economist at Goldman Sachs puts the issue in perspective, by answering the following question: “Allison Nathan: The Trump administration has talked about achieving GDP growth of 4%. Is that possible? And would that create a more upbeat environment for equities? Jan Hatzius: I think it’s possible for a few quarters, but not over a long period of time. A couple of years of 3% growth is at the top end of what I can imagine, and even that is very optimistic. Today’s demographic environment is totally different from that in past cycles; for most of the post-war period, labor force growth was around 1.5%, whereas now it is 0.5%. That immediately takes 1pp off of any potential growth estimate. Then you have the issue of weak productivity. The last five years or so were likely just a very bad draw in terms of productivity growth, and there could certainly be some improvement from here. But unless that improvement were really significant—and accompanied by a reversal of the demographic slowdown—you still wouldn’t get to 4%. Besides, we’re basically at full employment, so if you did manage to sustain material above-trend growth, the cost would be upward pressure on inflation and thus on rates.” (Goldman Sachs_04_17).

In sum, several analysts estimate that the US is close to, or it is at full employment, which together with low labor productivity and less favorable demographic developments will likely constrain growth prospects in the short and medium terms. Hence, investments in both physical and human capital are necessary in order to enhance potential output. Expected growth rates are below 3 percent (Figure 24) and, even then, some overheating is expected by the end of 2017.

Euro area

Economic performance in the Euro area continues to improve. On a quarterly basis, real GDP grew by 0.5 percent in 4Q16 and in 1Q17 (Eurostats_05_17), which in annual terms is above the forecasted rates for 2017. According to the ECB, “(…)The latest economic indicators, both hard data and survey results, remain buoyant and point to ongoing growth in the first half of 2017, at around the same rate as that observed in the fourth quarter of last year (…)” (ECB_Economic Bulletin_05_17 p. 10). “(…) Employment rose further, by 0.3%, quarter on quarter, in the fourth quarter of 2016, resulting in an annual increase of 1.2%. As a result, employment currently stands 3.4% above the last trough in the second quarter of 2013. However, compared with the pre-crisis peak in the first quarter of 2008, employment is still down by almost half a percent. The unemployment rate in the euro area edged down to 9.5% in February 2017, i.e. 2.6 percentage points below its post-crisis peak in April 2013 (…). This decline was broad-based across age and gender groups (…).” (ECB_Economic Bulletin_05_17 p. 12).

There are different estimates of potential output and, consequently, of structural unemployment. BNP Paribas discusses an interesting point, now that the Euro area is recovering: “(…) the OECD put the output gap for the eurozone at -1.9% of potential GDP at the end of 2016, whilst the IMF put the figure at -1.2% and the European Commission had it at -1%.” The European Commission estimates that the structural unemployment rate8 was 7.5 percent in 2008 and is 9 percent now. Further, “(…) If we take the European Commission’s estimate of structural unemployment there are therefore 795,000 ‘missing’ jobs in the eurozone: at unchanged participation rates this represents between two and three quarters of job creation at its current pace. On this

8 “The structural unemployment rate is the level of unemployment recorded when the output gap is closed

(…)” (BNP Paribas_Eco Perspectives_2Q17).

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view, the ECB would be nearing the point where it tightens financial and monetary conditions to head off overheating. On the other hand, if we use the OECD’s estimates instead, the shortfall in jobs is 1.3 million, rising to 3.2 million on the basis of pre-crisis structural unemployment. On these figures, continued monetary support is required.” (BNP

Paribas_Eco Perspectives_2Q17).

In the actual conjuncture, inflation seems to be less of a concern in Europe. If we take core inflation, which abstracts from volatile components as energy prices, core inflation is close to zero. Nevertheless, the exercise made above is interesting in terms of estimating the real damages of the financial crisis, in terms of potential output and structural unemployment. According to the most conservative figure, structural unemployment rose by 1.5 percentage point, in comparison to the figure in 2008.

UK

UK performed beyond expectations in the 2H16, since private demand did not drop until inflation accelerated in 4Q16-1Q17. After the referendum, “(…) Quarterly growth even accelerated to 0.6% in the second half of 2016, up from 0.4% in the first half. (…)”. The depreciation of the sterling (Figure 13) “(…) triggered a surge in import prices: excluding petroleum-based products, the import price index peaked at 9.4% year-on-year in November 2016. (…) This movement was also accompanied by the upturn in oil prices, which places import prices on an annual slope of 10% since October 2016.” In 2017, CPI “(…) rose 2.3% year-on-year in February and March. (…) core consumer price inflation rose from 1.2% year-on-year in May 2016 to 2% in February 2017 (before easing back to 1.8% in March).” (BNP Paribas_Eco Perspectives_2Q17).

In 2017, the reduced aggregate demand will moderately slow the economy. “(…) Smoothed over three months, retail sales growth is close to zero on a year-on-year basis, and it managed to remain in positive territory thanks to food products. Excluding food, the indicator contracted 0.8% in February, the worst performance since spring 2011. The national accounts suggest that household spending will contract at a quarterly rate of 0.8%, and that GDP growth will be limited to 0.1%.” (BNP Paribas_Eco Perspectives_2Q17). According to Goldman Sachs, real growth rate will slow down to 1.5 percent in 2017, as higher inflation will erode household income and constrain consumption (Goldman Sachs_outlook

2017).

Expected policy rates in US, Euro area, UK and Japan

In 2017, FOMC and market expect three additional hikes of the US policy rate. Market expected rates are lower. Figure 25 shows the time serie of policy rates in the US since 1999, the expected rates by the Federal Open Market Committee (FOMC) and by the market, in 2017 and in the long run, as of April 30.

Markets expect gradual normalization of monetary policy in US, slower pace of hikes in UK and very accommodative monetary policies in the Euro area and in Japan, for the period 6M17–6M19. Figure 26 shows expected policy rates in US, Euro area, UK and Japan, as of April 30.

Expectations do not point to substantial interest rate gaps. However, in light of the fiscal expansionist agenda of Trump, there is an interesting claim for international policy coordination. See: PS_12_16.

34

Figure 25: FOMC and Market Expectations of the Federal Funds Rate

(Source: JP Morgan_2Q17_Update, p. 33)

Figure 26: Market Expectations of Policy Rates - US, Euro, UK, JP

(Source: JP Morgan_2Q17_Update, p. 46)

35

Emerging Markets Outlook

The external scenario for EMs is mixed. Uncertainties surrounding US domestic and trade policies are a major concern for EMs and for the rest of the world. Higher demand in US has the potential to boost global economy, while a US protectionist trade policy can do the opposite. Currently, the growing demand for commodities in China is helping EMs excluding China and, actually, it is helping Europe too.9 Better growth prospects in developed economies is likely to have positive spillovers for EMs as they materialize.

A look at export destinations reveals the directly exposure of EMs exports to US. Figure 27 shows exports as a percentage of GDP in 2015, and the main destinations of exports from BRIC, Mexico and Korea. BRIC have other major partners, but US is quite relevant for China and for other EMs directly and indirectly. “Mexico exports 80 per cent of its goods to the US, but those exports contain 40 per cent US content.” (FT_01_17). Trade relationships are more intricate than a first glance suggests.

Figure 27: Exports as % of GDP and main destinations in 2015

(Source: JP Morgan_11_16)

Brazil and India are quite closed to foreign trade. Complementing the data in Figure 27, in 2015 imports amounted to 14.1 percent of Brazilian GDP, while it was 22.3 percent in the case of India. Exports and imports as percentages of GDP are an indication of the degree of openness of economies. The figures for Brazil and India are quite below those observed for other developing and developed countries. See: WB_05_17.

Global trade is currently picking up and the key driver is the higher demand of EMs. “(…) In the first two months of 2017, global imports rose by 4.1% compared to the same

9 Euro area is benefitting from the depreciations of the euro vis-à-vis EM’s currencies (see Figure 2) and

from the pickup in global trade. However, “(…) we don't expect a particularly strong boost to the eurozone economy from foreign trade this year. In our view, growth in the eurozone will mostly be driven by domestic demand, with consumption set to remain the largest contributor. (…)” (S&P_05_17).

36

period a year ago, according to World Trade Monitor estimates (published by the CPB Netherlands Bureau for Economic Policy Analysis). This is a meaningful acceleration from the rate of 1.3% in 2016, and above the average annual growth of 2% between 2012 and 2016.” The key driver for higher trade “(…) has been surging import demand in emerging markets, due to stronger activity and appreciating currencies.” (S&P_05_17).

We would like to explore trade relationships in depth. Given the lack of space, we briefly consider two aspects of China and US affairs without the pretention of exhausting the subject.

We start from the fallacy that the US runs current account deficits due to unfair trade policies of other countries, especially from China. An elementary identity from National Accounts is useful to elucidate that current account deficits stem from the difference between national savings and domestic investments by definition. In the US case, Jeffrey D. Sachs recalls: “(…) The US national saving rate – the sum of private saving plus government saving (…) has declined markedly during the past 30 years. (…)”. “(…) The lion’s share of the problem is at the federal level. Every president since Ronald Reagan has promised ‘middle-class tax cuts’ and other tax breaks, undermining revenues and leaving the federal budget in chronic deficit. Democratic presidents favor the supposed Keynesian ‘stimulus’ of tax cuts, while Republicans champion their alleged ‘supply-side’ effects.” (PS_04_17). It is important to understand that rising “(…) import barriers would pull workers and capital into import-competing sectors and away from export sectors, roughly leaving the US trade balance unchanged while lowering national income and average living standards. The trade deficit could fall if the import barriers were in the form of trade taxes that lowered the budget deficit (thereby raising government saving) but that effect would work through the budget, not through trade policy per se.” (PS_04_17).

As Trump retreats from international trade agreements, China expands and consolidate its global interests. In the view of the economist Lívio Ribeiro, expert in China and researcher at the IBRE-FGV (the Brazilian Institute of Economics from the Getúlio Vargas Foundation), the weakening or unfeasibility of international trade agreements, due to US withdrawal, will help China to consolidate its global strategy. For instance, Ribeiro provides the case of the Trans-Pacific Partnership (TPP), a trade agreement that involved twelve countries at the Pacific, including US but excluding China (ESP_11_16, in

Portuguese). Trump had announced he would withdraw US from the agreement and later he did, on January 2017 (Wiki_TransPacific). Ribeiro claims that China’s strategy is based on the creation and deepening of vertical production chains, mostly in Asia, where on the top of the chain is China. This strategy takes form, for instance, in the “Silk Road Economic Belt” that together with the “Maritime Silk Road” forms the “One Belt, One Road initiative” – “a Chinese government economic development framework for primarily integrating trade and investment in Eurasia” (Wiki_Silk). Another example provided by Ribeiro is in Latin America. According to him, Trump is weakening the exports sector of Mexico, which is a China’s competitor in manufactures. In addition, Trump’s aversion to trade agreements and a retreat from Latin America opens the space for China, who is already prospecting the project of the “Ferrovia Transoceânica”, or the “Trans-Amazonian Railway” – a “megaproject that will link the Atlantic and Pacific Oceans via the Amazon Forest”, through the link between Brazil and Peru (Wiki_TransOceanic).

We turn now to the individual prospects of the BRICS.

37

Growth forecasts were revised downwards. Nevertheless, expectations imply better performance in comparison to 2016. Growth prospects for Brazil and India received most of the downwards reviews (Figure 28). Nevertheless, Brazil and Russia are expected to come out of a recession, which is being quite deep in Brazil. India and China will keep their impressive growth pace, while South Africa is expected to improve modestly.10

Figure 28: Forecasts of Real GDP Growth Rates in 2017 – BRICS

Annual rates (%)

Institution Brazil Russia India China South Africa

IMF 0.2 (0.3) 1.4 (0.3) 7.2 (0.4) 6.6 (0.4) 0.8 (0)

OECD 0.0 (0.3) 0.8 (0.3) 7.3 (0.2) 6.5 (0.3) 1.1 (0.3)

Allianz 1.0 (0.2) 1.5 (0) 7.2 (0.2) 6.3 (0.3) ---

BNP Paribas

1.0 (1.0) 1.2 (1.0) 7.3 (1.0) 6.2 (0.1) 1.3 (0)

Moody's 0.9 1.0 7.1 6.3 1.1

PIMCO 1.0 1.25 7.5 6.25 ---

Sources Table 9 Table 10 Table 11 Table 12 Table 13

Brazil

After a sharp GDP contraction in 2016, expected real GDP growth is positive, inflation and policy interest rates are falling, and public spending is forcefully contained. Real GDP contracted by 3.6 percent in 2016 (Figure 17). The country seemed to have reached the bottom, as growth forecasts turned positive in 2017 (Figure 28). Inflation is falling (Figure 21) and it is allowing cuts in the nominal policy rate (Figure 22). The real policy rate is expected to fall by two percentage points in 2017 (Figure 23). The first cut in the nominal rate took place in October 2016, after four years of hikes. With lower expected real interest rates, investments may increase. Public spending was forcefully restrained by a law, approved on December 2016, which freezes public spending in real terms for twenty years, after public deficit soared during the former impeached government.

Investments declined heavily in the last four years and showed a first improvement on February 2017. During the period 4Q13-4Q16, real investment (gross fixed capital formation - GFCF) fell continuously and accumulated a total decline of 28.6 percent compared to 3Q13. In nominal terms and as a percentage of GDP at current prices, investment declined from 16.7 percent in 2015 to 15.6 percent in 2016, which is the lowest level in the historical data serie (IPEA_1Q17, p, 14, official data in Portuguese). On February 2017, the GFCF monthly rate rose for the first time by 4.3 percent, but fell again on March by 2.1 percent. In 1Q17, GFCF accumulated zero growth compared to 4Q16 (Blog_IPEA_05_17, official data in Portuguese).

10 Figure 28 gathers the forecasts of real growth rates for BRICS in 2017. The numbers in parenthesis are the changes relative to the last forecast. Red indicates a downwards revision. For a comparison with the actual growth rates in 2016, see Figure 17.

38

Unemployment is soaring. According to the Brazilian Bureau of Statistics (IBGE), the number of unemployed people has reached 14.2 millions on March 2017, an increase of 27.8 percent relatively to the same period last year. The unemployment rate in 1Q17 is 13.7 percent, an increase of 2.8 percentage points relatively to the same period last year (IBGE_05_17, official data in Portuguese).

A vital structural reform, in the public pension scheme, is on the sight. The interim government formulated two main structural reforms. One involves the social security, pay-as-you-go11, public pension scheme. The proposed reform attempts to reduce distortions, to cut generous benefits and to improve the actuarial balance of the scheme. However, it does not touch the pay-as-you-go component, as a transition to a funded scheme seems unfeasible for now. According to data from the Brazilian Social Insurance, in 2016 the expenses with benefits represented 8.2 percent of the GDP, of which 5.8 percent were covered by contributions, resulting in a deficit of 2.4 percent of the GDP (Prev_01_17, official data in Portuguese). The deficit is structural and it is expected to increase as population ages. The old-age dependency ratio is expected to more than triple in Brazil by 2050.12 The reform is in discussion in the Brazilian Congress.

The other important reform concerns the labor market. The labor market reform aims to reduce regulation and to bring more flexibility. A first reform step allows for and regulates the practice of “outsourcing”. It came into force on March 2017. The other step, which concerns deregulation and provides additional negotiation freedom to employers and employees, had approval from the House of Representatives on April 2017, and it needs the approval of the Senate.

The deflagration of a new and serious political crisis is threating the fragile economic recovery. On May 18 (about a week ago from closing this report), a corruption scandal involving the interim President, Michel Temer, and several other politicians has shaken the financial market and the entire country. On the same day, stock markets plunged by more than 10 percent and negotiations were interrupted for the first time since 2008. The real-dollar nominal exchange rate rose by 9 percent. The country, who is witnessing an unprecedented anti-corruption investigation/judicial process known as “Lava Jato”, initiated in 2014 (see: Wiki_Operation Car Wash), is surprised by the dimensions of the new scandal.13 The briberies come from a single Brazilian enterprise: JBS, which grew into an international conglomerate in the last thirteen years, after receiving several privileges and

11

“‘Pay-as-you-go’ means that workers’ current contributions pay for pensioners’ current benefits” See: (WB_Pension Prime). This form of financing can become unsustainable as the share of workers to pensioners diminishes. Several countries shifted from pay-as-you-go to funded schemes in light of current demographic transitions, which are characterized by lower fertility rates and higher longevity. In a funded scheme, workers make a provision in a pension fund for their future retirement. In order to shift from pay-as-you-go to funding, it is necessary to pay for all existent liabilities of the pay-as-you-go scheme. 12

See, in a nutshell, the version presented on December 2016s of the proposed social security reform, in an OECD document: OECD_04_17. See also a recent study by the IMF about the fiscal problem posed by the scheme: IMF_03_17. 13

Apart from involving the interim President, the delators of the scheme (owners and executives of the conglomerate JBS) claim that they have bribed 1,829 political candidates from 28 political parties and managed to elect 167 federal deputies, 28 senators and 16 state governors (local news in Portuguese: G1_05_17).

39

about R$11 billion in subsidized loans from the state-developing bank (BNDES), according to what has emerged from the investigations so far.

Currently, market is working with several scenarios, in an attempt to impose some normality. Negotiations for solving the crisis are in course. According to local news, from the market perspective, the interim President faces serious obstacles in terms of governability and should renounce. The best scenario is one that puts a term to the current impasse as quickly it is possible, preserves the current economic team at the government and continues the process of reforms, fostering sustainable growth and paving the way for new Presidential elections by the end of 2018.

Russia

The country is clearly emerging from a two-year recession, according to an array of indicators. Agents revised upwards the growth expectations for Russia (Figure 28), as macroeconomic fundamentals are improving. A more favorable external environment, with rising commodity prices, oil in particular (Figure 8), the continuous appreciation of the currency since 1Q16 (Figure 14), the consolidations of public finance (BNP Paribas_Eco

Perspectives_2Q17) - they are helping inflation to fall (Figure 21) and are propitiating easier monetary policy (Figure 23).

India

India’s outlook is strong. The country is expected to growth at a rate above 7 percent (Figure 28), in contrast to 6.8 percent in 2016 (Figure 17), without accelerating inflation. (Compare expected inflation rates in Table 11, with the actual rate of 4.9 percent in 2016). The potential output is high due to favorable demographic conditions (growing working age population).

An important tax reform is about to be implemented in 2017. Recent measures already implemented are improving the institutional setup and business environment. A landmark tax reform will eliminate tax differences between states and likely will boost trade inside the country. It is expected to be implemented on July 2017 (Bloom_03_17). In 2016, the adoption of an inflation target policy likely help to anchor expectations. Institutional measures (e.g. the removal of ceilings for foreign direct investment) and policy steps oriented to easy-to-do business (GS_04_16) are already in course.

China

Chinese policy continues to pursue a way between growth in the short run and the need to rebalance in the medium term. According to Goldman Sachs, China will continue to slowdown the economy, but will reach the growth target of 6.5 percent for 2017, through a supportive policy that makes use of infrastructure investments. They expect the Chinese currency to depreciate to 7.3 versus the dollar by the end of 2017. Shadow banking activities could cause liquidity problems and increase defaults in the future (Goldman Sachs_outlook 2017). “(…) Figures released on April 17 showed China’s economy accelerated for a second-straight quarter as investment picked up, retail sales rebounded and factory output strengthened amid robust credit growth and further strength in property markets.” (Bloom_04_17).

40

Statistical Appendix

Table 1: US - Forecasts

2017 2018 2019 Source Accessed (mm/yy)

Real GDP growth rate (%)

IMF 2.3

2.2

2.5

2.1

2.1

IMF_WEO_data_04_17

IMF_WEO_data_10_16

05/17

10/16

OECD 2.4

2.1

2.8

OECD Interim Economic Outlook_03_17

OECD Interim Economic Outlook_09_16

05/17

09/16

FED1

2.1

2.0

2.1

2.0

1.9

FOMC_Economic projections_03_17

FOMC_Economic projections_09_16

05/17

09/16

Allianz 2.2

2.1

2.4

Allianz_forecasts US_02_17

Allianz_forecasts US_09_16

05/17

09/16

BNP Paribas

2.1

1.6

2.6

BNP Paribas_Eco Week_05_19_17

BNP Paribas_Eco Week_09_23_16

05/17

09/16

Goldman Sachs

2.25

1.7

Goldman Sachs_outlook 2017

Goldman Sachs_outlook 2016

05/17

03/16

J.P. Morgan

2.2

2.2

JP Morgan_Guide to the Markets_2Q17_03_17

JP Morgan_Guide to the Markets_1Q16_12_15

05/17

03/16

Moody's 2.4

2 to 3

2.5

Moodys_Outlook 02_23_17

Moodys_Global Macro Outlook 2016-17_02_18_16

05/17

03/16

PIMCO 2.25 Pimco_Putting Markets in Perspective_03_17 05/16

Unemployment rate (%)

IMF 4.7

4.8

4.6

4.7

4.4

IMF_WEO_data_04_17

IMF_WEO_data_10_16

05/17

10/16

OECD 4.7

4.7

4.5

OECD Economic Outlook_11_16

OECD Economic Outlook_06_16

05/17

09/16

FED1

4.5

4.6

4.5

4.5

4.5

FOMC_Economic projections_03_17

FOMC_Economic projections_09_16

05/17

09/16

Allianz 4.6

4.7

4.6

Allianz_forecasts US_02_17

Allianz_forecasts US_09_16

05/17

09/16

BNP Paribas

4.6

5.1

4.2

BNP Paribas_Eco Perspectives_2Q17

BNP Paribas_Eco Perspectives_3Q16

05/17

09/16

Moody's 4.6

4 to 5

4.6

Moodys_Outlook 02_23_17

Moodys_Global Macro Outlook 2016-17_02_18_16

05/17

03/16

Inflation rate - end of period consumer prices (%)

IMF 2.3

2.6

2.7

2.7

2.6

IMF_WEO_data_04_17

IMF_WEO_data_10_16

10/16

OECD 1.9 2.2 OECD Economic Outlook_11_16 05/17

41

2.0 OECD Economic Outlook_06_16 09/16

FED1, 2

1.9

1.9

2.0

2.0

2.0

FOMC_Economic projections_03_17

FOMC_Economic projections_09_16

05/17

09/16

Allianz 2.2

2.2

2.5

Allianz_forecasts US_02_17

Allianz_forecasts US_09_16

05/17

09/16

BNP Paribas

2.4

2.1

2.6

BNP Paribas_Eco Week_05_19_17

BNP Paribas_Eco Week_09_23_16

05/17

09/16

Moody's 2.5 2.1 Moodys_Outlook 02_23_17 05/17

PIMCO 2.25 Pimco_Putting Markets in Perspective_03_17 05/17

General Government Gross Debt (% of GDP)

IMF 108.3

108.4

108.9

107.9

110.6

IMF_WEO_data_04_17

IMF_WEO_data_10_16

05/17

10/16

OECD 116.9

114.2

117.5

OECD Economic Outlook_11_16

OECD Economic Outlook_06_16

05/17

09/16

BNP Paribas

72.7

72.5

74.9

BNP Paribas_Eco Perspectives_2Q17

BNP Paribas_Eco Perspectives_3Q16

05/17

09/16

Current Account Balance (% of GDP)

IMF -2.7

-2.7

-3.3

-2.8

-3.5

IMF_WEO_data_04_17

IMF_WEO_data_10_16

05/17

10/16

OECD -2.6

-2.5

-2.9

OECD Economic Outlook_11_16

OECD Economic Outlook_06_16

05/17

09/16

Allianz -3.1

-3.1

-3.6

Allianz_forecasts US_02_17

Allianz_forecasts US_09_16

05/17

09/16

BNP Paribas

-2.4

-2.7

-2.4

BNP Paribas_Eco Week_05_19_17

BNP Paribas_Eco Week_09_23_16

05/17

09/16

1 Median.

2 PCE (Personal Consumption Expenditures) inflation.

Table 2: Euro area - Forecasts

2017 2018 2019 Source Accessed (mm/yy)

Real GDP growth rate (%)

IMF 1.7

1.5

1.6

1.6

1.6

IMF_WEO_data_04_17

IMF_WEO_data_10_16

05/17

10/16

OECD 1.6

1.5

1.6

OECD Interim Economic Outlook_03_17

OECD Interim Economic Outlook_09_16

05/17

09/16

ECB 1.8

1.6

1.7

1.6

1.6

ECB_Macroeconomic projections_03_17

ECB_Macroeconomic projections_09_16

05/17

09/16

Allianz 1.8

1.6

1.6

Allianz_forecasts_Euro area_02_17

Allianz_forecasts_Euro area_09_16

05/17

09/16

42

BNP Paribas

1.6

1.0

1.6

BNP Paribas_Eco Week_05_19_17

BNP Paribas_Eco Week_09_23_16

05/17

09/16

Goldman Sachs

1.5

1.7

Goldman Sachs_outlook 2017

Goldman Sachs_outlook 2016

05/17

03/16

Moody's 1.3

1 to 2

1.4 Moodys_Outlook 02_23_17

Moodys_Global Macro Outlook 2016-17_02_18_16

05/17

03/16

PIMCO 1.8 Pimco_Putting Markets in Perspective_03_17 03/16

Unemployment rate (%)

IMF 9.4

9.7

9.1

9.3

8.8

IMF_WEO_data_04_17

IMF_WEO_data_10_16

05/17

10/16

OECD 9.5

9.8

9.2

OECD Economic Outlook_11_16

OECD Economic Outlook_06_16

05/17

09/16

ECB 9.4

9.9

8.9

9.6

8.4

ECB_Macroeconomic projections_03_17

ECB_Macroeconomic projections_09_16

05/17

09/16

Allianz1

9.5

9.6

9.3

Allianz_forecasts_Euro area_02_17

Allianz_forecasts_Euro area_09_16

05/17

09/16

BNP Paribas

9.4

9.8

9.1

BNP Paribas_Eco Perspectives_2Q17

BNP Paribas_Eco Perspectives_3Q16

05/17

09/16

Inflation rate - end of period consumer prices (%)

IMF 1.5

1

1.5

1.3

1.7

IMF_WEO_data_04_17

IMF_WEO_data_10_16

05/17

10/16

OECD2 1.2 OECD Economic Outlook_06_16 09/16

ECB2

1.7

1.2

1.6

1.6

1.7

ECB_Macroeconomic projections_03_17

ECB_Macroeconomic projections_09_16

05/17

09/16

Allianz 1.7

1.6

1.7

Allianz_forecasts_Euro area_02_17

Allianz_forecasts_Euro area_09_16

05/17

09/16

BNP Paribas

1.8

1.1

1.3

BNP Paribas_Eco Week_05_19_17

BNP Paribas_Eco Week_09_23_16

05/17

09/16

PIMCO 1.5 Pimco_Putting Markets in Perspective_03_17 05/16

General Government Gross Debt (% of GDP)

IMF 90.1

91

88.6

89.7

86.6

IMF_WEO_data_04_17

IMF_WEO_data_10_16

05/17

10/16

OECD 108.3

91.3

107.1

OECD Economic Outlook_11_16

OECD Economic Outlook_06_16

05/17

09/16

ECB 88.0

88.4

86.4

87

84.5

ECB_Macroeconomic projections_03_17

ECB_Macroeconomic projections_09_16

05/17

09/16

BNP Paribas

88.5

88.9

87.3

BNP Paribas_Eco Perspectives_2Q17

BNP Paribas_Eco Perspectives_3Q16

05/17

09/16

43

Current Account Balance (% of GDP)

IMF 3.0

3.1

3.0

2.9

3.0

IMF_WEO_data_04_17

IMF_WEO_data_10_16

05/17

10/16

OECD 4.0

3.6 4.0

OECD Economic Outlook_11_16

OECD Economic Outlook_06_16

05/17

09/16

ECB 3.1

3.4

3.2

3.3 3.3

ECB_Macroeconomic projections_03_17

ECB_Macroeconomic projections_09_16

05/17

09/16

Allianz 2.9

2.6

2.5

Allianz_forecasts_Euro area_02_17

Allianz_forecasts_Euro area_09_16

05/17

09/16

BNP Paribas

3.0

2.7

3.1

BNP Paribas_Eco Week_05_19_17

BNP Paribas_Eco Week_09_23_16

05/17

09/16

1 According to the EU definition.

2 HICP (Harmonised Index of Consumer Prices) inflation rate.

Table 3: France - Forecasts

2017 2018 2019 Source Accessed (mm/yy)

Real GDP growth rate (%)

IMF 1.4

1.3

1.7

1.6

1.7

IMF_WEO_data_04_17

IMF_WEO_data_10_16

05/17

10/16

OECD 1.4

1.3

1.4

OECD Interim Economic Outlook_03_17

OECD Interim Economic Outlook_09_16

05/17

09/16

Allianz 1.4

1.4

1.5

Allianz_forecasts Global GDP_02_17

Allianz_forecasts Global GDP_09_16

05/17

09/16

BNP Paribas

1.3

1.0

1.5

BNP Paribas_Eco Week_05_19_17

BNP Paribas_Eco Week_09_23_16

05/17

09/16

Goldman Sachs

Goldman Sachs_outlook 2016 03/16

Moody's 1.3

0.5 to 1.5

1.4

Moodys_Outlook 02_23_17

Moodys_Global Macro Outlook 2016-17_02_18_16

05/17

03/16

Unemployment rate (%)

IMF 9.6

9.6

9.3

9.3

9.0

IMF_WEO_data_04_17

IMF_WEO_data_10_16

05/17

10/16

OECD 9.7

9.7

9.6

OECD Economic Outlook_11_16

OECD Economic Outlook_06_16

05/17

09/16

BNP Paribas

9.7

10.0

9.4

BNP Paribas_Eco Perspectives_2Q17

BNP Paribas_Eco Perspectives_3Q16

05/17

09/16

Moody's 9.8

9 to 10 9.6

Moodys_Outlook 02_23_17

Moodys_Global Macro Outlook 2016-17_02_18_16

05/17

03/16

44

Inflation rate - end of period consumer prices (%)

IMF 1.4

1

1.3

1.1

1.7

IMF_WEO_data_04_17

IMF_WEO_data_10_16

05/17

10/16

OECD 0.8 OECD Economic Outlook_06_16 09/16

BNP Paribas

1.4

1.1

1.0

BNP Paribas_Eco Week_05_19_17

BNP Paribas_Eco Week_09_23_16

05/17

09/16

Moody's 1.0 1.6 Moodys_Outlook 02_23_17

General Government Gross Debt (% of GDP)

IMF 97.4

97.8

97.4

97.9

96.6

IMF_WEO_data_04_17

IMF_WEO_data_10_16

05/17

10/16

OECD 124.1

97.4

125

OECD Economic Outlook_11_16

OECD Economic Outlook_06_16

05/17

09/16

BNP Paribas

96.1

96.6

95.1

BNP Paribas_Eco Perspectives_2Q17

BNP Paribas_Eco Perspectives_3Q16

05/17

09/16

Current Account Balance (% of GDP)

IMF -0.9

-0.4

-0.5

-0.3

0.0

IMF_WEO_data_04_17

IMF_WEO_data_10_16

05/17

10/16

OECD -0.9

-0.8

-1.0

OECD Economic Outlook_11_16

OECD Economic Outlook_06_16

05/17

09/16

BNP Paribas

-0.9

-0.4

-1.1

BNP Paribas_Eco Week_05_19_17

BNP Paribas_Eco Week_09_23_16

05/17

09/16

1 Harmonized index of consumer prices.

Table 4: Germany - Forecasts

2017 2018 2019 Source Accessed (mm/yy)

Real GDP growth rate (%)

IMF 1.6

1.4

1.5

1.4

1.4

IMF_WEO_data_04_17

IMF_WEO_data_10_16

05/17

10/16

OECD 1.8

1.5

1.7

OECD Interim Economic Outlook_03_17

OECD Interim Economic Outlook_09_16

05/17

09/16

Allianz 1.7

1.6

1.6

Allianz_forecasts_Germany_05_17

Allianz_forecasts_Germany_09_16

05/17

09/16

BNP Paribas

1.8

1.1

2.0

BNP Paribas_Eco Week_05_19_17

BNP Paribas_Eco Week_09_23_16

05/17

09/16

Moody's 1.6

1 to 2

1.6

Moodys_Outlook 02_23_17

Moodys_Global Macro Outlook 2016-17_02_18_16

05/17

03/16

Unemployment rate (%)

IMF 4.2

4.5

4.2

4.6

4.2

IMF_WEO_data_04_17

IMF_WEO_data_10_16

05/17

10/16

45

OECD 4.2

4.6

4.1

OECD Economic Outlook_11_16

OECD Economic Outlook_06_16

05/17

09/16

Allianz1

3.8

4.3

3.7

Allianz_forecasts_Germany_05_17

Allianz_forecasts_Germany_09_16

05/17

09/16

BNP Paribas

6.1

6.1

6.3

BNP Paribas_Eco Perspectives_2Q17

BNP Paribas_Eco Perspectives_3Q16

05/17

09/16

Moody's 4.1

4 to 5

4.1

Moodys_Outlook 02_23_17

Moodys_Global Macro Outlook 2016-17_02_18_16

05/17

03/16

Inflation rate - end of period consumer prices (%)

IMF 1.6

1.6

1.8

1.7

2.0

IMF_WEO_data_04_17

IMF_WEO_data_10_16

05/17

10/16

OECD 1.5 OECD Economic Outlook_06_16 09/16

Allianz 1.8

1.7

1.9 Allianz_forecasts_Germany_05_17

Allianz_forecasts_Germany_09_16

05/17

09/16

BNP Paribas

1.9

1.4

1.7

BNP Paribas_Eco Week_05_19_17

BNP Paribas_Eco Week_09_23_16

05/17

09/16

Moody's Moodys_Outlook 02_23_17

General Government Gross Debt (% of GDP)

IMF 64.7

65.9

62.0

63.6

59.1

IMF_WEO_data_04_17

IMF_WEO_data_10_16

05/17

10/16

OECD 71.7

65.1

68.7

OECD Economic Outlook_11_16

OECD Economic Outlook_06_16

09/16

BNP Paribas

65.3

66.7

62.4

BNP Paribas_Eco Perspectives_2Q17

BNP Paribas_Eco Perspectives_3Q16

05/17

09/16

Current Account Balance (% of GDP)

IMF 8.2

8.0

8.1

7.8

7.7

IMF_WEO_data_04_17

IMF_WEO_data_10_16

05/17

10/16

OECD 8.8

8.7

8.5

OECD Economic Outlook_11_16

OECD Economic Outlook_06_16

05/17

09/16

Allianz 7.6

7.6

6.9

6.9

Allianz_forecasts_Germany_05_17

Allianz_forecasts_Germany_09_16

05/17

09/16

BNP Paribas

8.3

7.5

8.5

BNP Paribas_Eco Week_05_19_17

BNP Paribas_Eco Week_09_23_16

09/16

1 According to the EU definition.

Table 5: Italy - Forecasts

2017 2018 2019 Source Accessed (mm/yy)

Real GDP growth rate (%)

IMF 0.8 0.8 0.8 IMF_WEO_data_04_17 05/17

46

0.9 1.1 IMF_WEO_data_10_16 10/16

OECD 1.0

0.8

1.0

OECD Interim Economic Outlook_03_17

OECD Interim Economic Outlook_09_16

05/17

09/16

Allianz 0.9

1.0

1.0

Allianz_forecasts Global GDP_02_17

Allianz_forecasts Global GDP_09_16

05/17

09/16

BNP Paribas

0.6

0.3

0.6

BNP Paribas_Eco Week_05_19_17

BNP Paribas_Eco Week_09_23_16

05/17

09/16

Goldman Sachs

Goldman Sachs_outlook 2016 03/16

Moody's

0.8

0.5 to 1.5

1.0

Moodys_Outlook 02_23_17

Moodys_Global Macro Outlook 2016-17_02_18_16

05/17

03/16

Unemployment rate (%)

IMF 11.4

11.2

11.0

10.8

10.6

IMF_WEO_data_04_17

IMF_WEO_data_10_16

05/17

10/16

OECD 11.0

10.8

10.7

OECD Economic Outlook_11_16

OECD Economic Outlook_06_16

05/17

09/16

BNP Paribas

11.4

10.9

10.9

BNP Paribas_Eco Perspectives_2Q17

BNP Paribas_Eco Perspectives_3Q16

05/17

09/16

Moody's

11.4

10.5 to 11.5

11.0

Moodys_Outlook 02_23_17

Moodys_Global Macro Outlook 2016-17_02_18_16

05/17

03/16

Inflation rate - end of period consumer prices (%)

IMF 1.4

0.4

1.3

0.8

1.4

IMF_WEO_data_04_17

IMF_WEO_data_10_16

05/17

10/16

OECD 0.9 OECD Economic Outlook_06_16 09/16

BNP Paribas

1.7

0.8

1.0

BNP Paribas_Eco Week_05_19_17

BNP Paribas_Eco Week_09_23_16

05/17

09/16

Moody's 0.7 1.0 Moodys_Outlook 02_23_17

General Government Gross Debt (% of GDP)

IMF 132.8

133.4

131.6

132

129.4

IMF_WEO_data_04_17

IMF_WEO_data_10_16

05/17

10/16

OECD 159.5

131.9 159.3

OECD Economic Outlook_11_16

OECD Economic Outlook_06_16

09/16

BNP Paribas

133.2

133.9

134.1

BNP Paribas_Eco Perspectives_2Q17

BNP Paribas_Eco Week_09_23_16

05/17

09/16

Current Account Balance (% of GDP)

IMF 2.0

1.9

1.8

1.5

1.5

IMF_WEO_data_04_17

IMF_WEO_data_10_16

05/17

10/16

OECD 3.0 3.2 OECD Economic Outlook_11_16 05/17

47

2.2 OECD Economic Outlook_06_16 09/16

BNP Paribas

2.2

2.2

2.1

2.1

BNP Paribas_Eco Week_05_19_17

BNP Paribas_Eco Week_09_23_16

05/17

09/16

Table 6: Spain - Forecasts

2017 2018 2019 Source Accessed (mm/yy)

Real GDP growth rate (%)

IMF 2.6

2.2

2.1

1.9

2.0

IMF_WEO_data_04_17

IMF_WEO_data_10_16

05/17

10/16

OECD 2.3

2.3

2.2

OECD Economic Outlook_11_16

OECD Economic Outlook_06_16

05/17

09/16

Allianz 2.5

2.2

2.2

Allianz_forecasts Global GDP_02_17

Allianz_forecasts Global GDP_09_16

05/17

09/16

BNP Paribas

2.6

1.6

2.0

BNP Paribas_Eco Week_05_19_17

BNP Paribas_Eco Week_09_23_16

05/17

09/16

Goldman Sachs

Goldman Sachs_outlook 2016 03/16

Unemployment rate (%)

IMF 17.7

18

16.6

17

15.8

IMF_WEO_data_04_17

IMF_WEO_data_10_16

05/17

10/16

OECD 17.7

18.4

16.4

OECD Economic Outlook_11_16

OECD Economic Outlook_06_16

05/17

09/16

BNP Paribas

19.1

19.3

18.8

BNP Paribas_Eco Perspectives_2Q17

BNP Paribas_Eco Perspectives_3Q16

05/17

09/16

Inflation rate - end of period consumer prices (%)

IMF 1.3

0.7

1.4

0.9

1.6

IMF_WEO_data_04_17

IMF_WEO_data_10_16

05/17

10/16

OECD 1.0 OECD Economic Outlook_06_16 09/16

BNP Paribas

2.3

1.2

1.5

BNP Paribas_Eco Week_05_19_17

BNP Paribas_Eco Week_09_23_16

05/17

09/16

General Government Gross Debt (% of GDP)

IMF 98.5

100.2

97.9

100

96.8

IMF_WEO_data_04_17

IMF_WEO_data_10_16

05/17

10/16

OECD 119.1

100.1

119.3

OECD Economic Outlook_11_16

OECD Economic Outlook_06_16

09/16

BNP Paribas

99.9

100.5

99.6

BNP Paribas_Eco Perspectives_2Q17

BNP Paribas_Eco Perspectives_3Q16

05/17

09/16

Current Account Balance (% of GDP)

IMF 1.5 1.6 1.6 IMF_WEO_data_04_17 05/17

48

1.7 1.7 IMF_WEO_data_10_16 10/16

OECD 1.8

0.9 1.7

OECD Economic Outlook_11_16

OECD Economic Outlook_06_16

05/17

09/16

BNP Paribas

2.1

1.0

2.1

BNP Paribas_Eco Week_05_19_17

BNP Paribas_Eco Week_09_23_16

05/17

09/16

Table 7: UK - Forecasts

2017 2018 2019 Source Accessed (mm/yy)

Real GDP growth rate (%)

IMF 2.0

1.0

1.5

1.6

1.6

IMF_WEO_data_04_17

IMF_WEO_data_10_16

05/17

10/16

OECD 1.6

1.0

1.0

OECD Interim Economic Outlook_03_17

OECD Interim Economic Outlook_09_16

05/17

09/16

Bank of England

1.9

0.8

1.7

1.8

1.8

BoE_Inflation Report_05_17

BoE_Inflation Report_08_16

05/17

09/16

BNP Paribas

1.8

0.7

1.1

BNP Paribas_Eco Week_05_19_17

BNP Paribas_Eco Week_09_23_16

05/17

09/16

Moody's 1.0

2 to 3

1.0

Moodys_Outlook 02_23_17

Moodys_Global Macro Outlook 2016-17_02_18_16

05/17

03/16

PIMCO 2.0 Pimco_Putting Markets in Perspective_03_17 05/17

Unemployment rate (%)

IMF 4.9

5.2

5.1

5.4

5.2

IMF_WEO_data_04_17

IMF_WEO_data_10_16

05/17

10/16

Bank of England

4.7

5.4

4.7

5.6

4.6

4.6

BoE_Inflation Report_05_17

BoE_Inflation Report_08_16

05/17

09/16

OECD 5.0

5.2

5.6

OECD Economic Outlook_11_16

OECD Economic Outlook_06_16

05/17

09/16

BNP Paribas

5.0

5.7

5.4

BNP Paribas_Eco Perspectives_2Q17

BNP Paribas_Eco Perspectives_3Q16

05/17

09/16

Moody's

5.2

4.5 to 5.5

5.5

Moodys_Outlook 02_23_17

Moodys_Global Macro Outlook 2016-17_02_18_16

05/17

03/16

Inflation rate - end of period consumer prices (%)

IMF 2.8

2.5

2.6

2.6

2.1

IMF_WEO_data_04_17

IMF_WEO_data_10_16

05/17

10/16

Bank of England

2.7

1.9

2.6

2.4

2.2

BoE_Inflation Report_05_17

BoE_Inflation Report_08_16

05/17

09/16

BNP Paribas

2.7

2.2

2.6

BNP Paribas_Eco Week_05_19_17

BNP Paribas_Eco Week_09_23_16

05/17

09/16

49

Moody's 2.6 2.0 Moodys_Outlook 02_23_17 05/17

PIMCO 2.75 Pimco_Putting Markets in Perspective_03_17 05/17

General Government Gross Debt (% of GDP)

IMF 89.0

89.0

88.7

88.6

87.7

IMF_WEO_data_04_17

IMF_WEO_data_10_16

05/17

10/16

OECD 113.1

89.4

113.4

OECD Economic Outlook_11_16

OECD Economic Outlook_06_16

05/17

09/16

BNP Paribas

87.4

90.1

88.2

BNP Paribas_Eco Perspectives_2Q17

BNP Paribas_Eco Perspectives_3Q16

05/17

09/16

Current Account Balance (% of GDP)

IMF -3.3

-4.3

-2.9

-3.9

-2.6

IMF_WEO_data_04_17

IMF_WEO_data_10_16

05/17

10/16

OECD 1.8

-5.3

1.7

OECD Economic Outlook_11_16

OECD Economic Outlook_06_16

05/17

09/16

BNP Paribas

-4.1

-4.4

-3.2

BNP Paribas_Eco Week_05_19_17

BNP Paribas_Eco Week_09_23_16

05/17

09/16

Table 8: Japan - Forecasts

2017 2018 2019 Source Accessed (mm/yy)

Real GDP growth rate (%)

IMF 1.2

0.6

0.6

0.4

0.8

IMF_WEO_data_04_17

IMF_WEO_data_10_16

05/17

10/16

OECD 1.2

0.7

0.8

OECD Interim Economic Outlook_03_17

OECD Interim Economic Outlook_09_16

05/17

09/16

Allianz 1.2

0.7

0.8

Allianz_forecasts Global GDP_02_17

Allianz_forecasts Global GDP_09_16

05/17

09/16

BNP Paribas

1.2

0.1

0.9

BNP Paribas_Eco Week_05_19_17

BNP Paribas_Eco Week_09_23_16

05/17

09/16

Goldman Sachs

1.0

1.0

Goldman Sachs_outlook 2017

Goldman Sachs_outlook 2016

05/17

03/16

Moody's 0.9

0 to 1

0.5

Moodys_Outlook 02_23_17

Moodys_Global Macro Outlook 2016-17_02_18_16

05/17

03/16

PIMCO 1.0 Pimco_Putting Markets in Perspective_03_17 05/17

Unemployment rate (%)

IMF 3.1

3.2

3.1

3.2

3.1

IMF_WEO_data_04_17

IMF_WEO_data_10_16

05/17

10/16

OECD 3.0

3.1

2.9

OECD Economic Outlook_11_16

OECD Economic Outlook_06_16

05/17

09/16

50

Moody's 3.0

3 to 4

3.0

Moodys_Outlook 02_23_17

Moodys_Global Macro Outlook 2016-17_02_18_16

05/17

03/16

Inflation rate - end of period consumer prices (%)

IMF 0.8

0.6

0.6

0.6

2.0

IMF_WEO_data_04_17

IMF_WEO_data_10_16

05/17

10/16

OECD 0.3

2.1

1.0

OECD Economic Outlook_11_16

OECD Economic Outlook_06_16

05/17

09/16

Allianz 0.9

0.7

1.3

Allianz_forecasts_Medium term outlook_05_17

Allianz_forecasts_Medium term outlook_09_16

05/17

09/16

BNP Paribas

0.6

0.5

1.0

BNP Paribas_Eco Week_05_19_17

BNP Paribas_Eco Week_09_23_16

05/17

09/16

Moody's 0.8 1.0 Moodys_Outlook 02_23_17 05/17

PIMCO 0.5 Pimco_Putting Markets in Perspective_03_17 05/17

General Government Gross Debt (% of GDP)

IMF 239.2

253

239.4

255

237.7

IMF_WEO_data_04_17

IMF_WEO_data_10_16

05/17

10/16

OECD 237.5

234.3

239.7

OECD Economic Outlook_11_16

OECD Economic Outlook_06_16

05/17

09/16

Current Account Balance (% of GDP)

IMF 4.2

3.3

4.3

3.3

4.2

IMF_WEO_data_04_17

IMF_WEO_data_10_16

05/17

10/16

OECD 3.9

3.7

4.1

OECD Economic Outlook_11_16

OECD Economic Outlook_06_16

05/17

09/16

BNP Paribas

4.2

3.2

4.6

BNP Paribas_Eco Week_05_19_17

BNP Paribas_Eco Week_09_23_16

05/17

09/16

1 Public Debt (% GDP), excluding social-security funds.

Table 9: Brazil - Forecasts

2017 2018 2019 Source Accessed (mm/yy)

Real GDP growth rate (%)

IMF

0.2

0.5

1.7

1.5

2.0

IMF_WEO_data_04_17

IMF_WEO_data_10_16

05/17

10/16

OECD 0.0

-0.3

1.5

OECD Interim Economic Outlook_03_17

OECD Interim Economic Outlook_09_16

05/17

09/16

Allianz 1.0

1.2

2.3

Allianz_forecasts_BRICS_01_17

Allianz_forecasts_BRIC_09_16

05/17

09/16

BNP Paribas

1.0

2.0

3.0

BNP Paribas_Eco Week_05_19_17

BNP Paribas_Eco Perspectives_Q4_16

05/17

10/16

51

Moody's 0.9

0 to 1

1.5

Moodys_Outlook 02_23_17

Moodys_Global Macro Outlook 2016-17_02_18_16

05/17

03/16

PIMCO 1.0 Pimco_Putting Markets in Perspective_03_17

Unemployment rate (%)

IMF 12.1

11.5

11.6

11.1

10.9

IMF_WEO_data_04_17

IMF_WEO_data_10_16

05/17

10/16

OECD 12.4 11.5 OECD Economic Outlook_11_16 05/17

Inflation rate - end of period consumer prices (%)

IMF 4.4

5

4.5

5

4.5

IMF_WEO_data_04_17

IMF_WEO_data_10_16

05/17

10/16

OECD 6.0

5.7

5.0

OECD Economic Outlook_11_16

OECD Economic Outlook_06_16

05/17

09/16

Allianz 5.8

6.2

5.3

Allianz_forecasts_BRICS_01_17

Allianz_forecasts_BRIC_09_16

05/17

09/16

BNP Paribas

4.1

5

4.3

BNP Paribas_Eco Week_05_19_17

BNP Paribas_Eco Week_09_23_16

05/17

09/16

Moody's 4.5 4.0 Moodys_Outlook 02_23_17 05/17

PIMCO 4.5 Pimco_Putting Markets in Perspective_03_17 05/17

General Government Gross Debt (% of GDP)

IMF 81.2

82.4

82.7

85.2

83.1

IMF_WEO_data_04_17

IMF_WEO_data_10_16

05/17

10/16

BNP Paribas

78.7

78.4

80.3

BNP Paribas_Eco Perspectives_2Q17

BNP Paribas_EcoEmerging_07_16

05/17

09/16

Current Account Balance (% of GDP)

IMF -1.3

-1.3

-1.7

-1.5

-1.9

IMF_WEO_data_04_17

IMF_WEO_data_10_16

05/17

10/16

OECD -0.9

-0.8

-1.0

OECD Economic Outlook_11_16

OECD Economic Outlook_06_16

05/17

09/16

Allianz -1.0

-1.0

-1.4

Allianz_forecasts_BRICS_01_17

Allianz_forecasts_BRIC_09_16

05/17

09/16

BNP Paribas

-1.4

-1.5

-2.1

BNP Paribas_Eco Week_05_19_17

BNP Paribas_Eco Week_09_23_16

05/17

09/16

Table 10: Russia - Forecasts

2017 2018 2019 Source Accessed (mm/yy)

Real GDP growth rate (%)

IMF 1.4

1.1

1.4

1.2

1.5

IMF_WEO_data_04_17

IMF_WEO_data_10_16

05/17

10/16

OECD 0.8 1.0 OECD Economic Outlook_11_16 05/17

52

0.5 OECD Economic Outlook_06_16 09/16

Allianz 1.5

1.5

2.0

Allianz_forecasts_BRICS_01_17

Allianz_forecasts_BRIC_09_16

05/17

09/16

BNP Paribas

1.2

2.2

2.0

BNP Paribas_Eco Week_05_19_17

BNP Paribas_Eco Perspectives_Q4_16

05/17

10/16

Moody's 1.0

0 to 1

1.5

Moodys_Outlook 02_23_17

Moodys_Global Macro Outlook 2016-17_02_18_16

05/17

03/16

PIMCO 1.25 Pimco_Putting Markets in Perspective_03_17

Unemployment rate (%)

IMF 5.5

5.9

5.5

5.5

5.5

IMF_WEO_data_04_17

IMF_WEO_data_10_16

05/17

10/16

OECD 5.5 5.2 OECD Economic Outlook_11_16 05/17

Inflation rate - end of period consumer prices (%)

IMF 4.4

4.9

4.0

4

4.0

IMF_WEO_data_04_17

IMF_WEO_data_10_16

05/17

10/16

OECD 5.9

5.3

5.1

OECD Economic Outlook_11_16

OECD Economic Outlook_06_16

05/17

09/16

Allianz1

5.3

6.3

6.0

Allianz_forecasts_BRICS_01_17

Allianz_forecasts_BRIC_09_16

05/17

09/16

BNP Paribas

4.2

5.4

4.3

BNP Paribas_Eco Week_05_19_17

BNP Paribas_Eco Week_09_23_16

05/17

09/16

Moody's 4.3 3.7 Moodys_Outlook 02_23_17

PIMCO 4.5 Pimco_Putting Markets in Perspective_03_17

General Government Gross Debt (% of GDP)

IMF 17.1

17.9

17.3

18.6

17.8

IMF_WEO_data_04_17

IMF_WEO_data_10_16

05/17

10/16

BNP Paribas

2

15.6

18.2

15.2

BNP Paribas_Eco Perspectives_2Q17

BNP Paribas_EcoEmerging_07_16

05/17

09/16

Current Account Balance (% of GDP)

IMF 3.3

3.5

3.5

3.9

3.8

IMF_WEO_data_04_17

IMF_WEO_data_10_16

05/17

10/16

OECD 4.2

4.8

5.2

OECD Economic Outlook_11_16

OECD Economic Outlook_06_16

05/17

09/16

Allianz 1.8

2.9

1.9

Allianz_forecasts_BRICS_01_17

Allianz_forecasts_BRIC_09_16

05/17

09/16

BNP Paribas

3.4

3.5

3.2

BNP Paribas_Eco Week_05_19_17

BNP Paribas_Eco Week_09_23_16

05/17

09/16

1Annual average. 2

Public debt / GDP (%).

53

Table 11: India - Forecasts

2017 2018 2019 Source Accessed (mm/yy)

Real GDP growth rate (%)

IMF

7.2

7.6

7.7

7.7

7.8

IMF_WEO_data_04_17

IMF_WEO_data_10_16

05/17

10/16

OECD 7.3

7.5

7.7

OECD Interim Economic Outlook_03_17

OECD Interim Economic Outlook_09_16

05/17

09/16

Allianz 7.2

7.0

7.0

Allianz_forecasts_BRICS_01_17

Allianz_forecasts_BRIC_09_16

05/17

09/16

BNP Paribas

7.3

8.3

7.8

BNP Paribas_Eco Week_05_19_17

BNP Paribas_Eco Week_09_23_16

05/17

09/16

Moody's 7.1

6.5 to

7.6

Moodys_Outlook 02_23_17

Moodys_Global Macro Outlook 2016-17_02_18_16

05/17

03/16

PIMCO 7.5 Pimco_Putting Markets in Perspective_03_17 05/17

Inflation rate - end of period consumer prices (%)

IMF 4.9

5.3

5.1

5.3

5.0

IMF_WEO_data_04_17

IMF_WEO_data_10_16

05/17

10/16

OECD 5.2

4.6

4.7

OECD Economic Outlook_11_16

OECD Economic Outlook_06_16

05/17

09/16

Allianz 5.3

5.2

5.7

Allianz_forecasts_BRICS_01_17

Allianz_forecasts_BRIC_09_16

05/17

09/16

BNP Paribas

4.9

5

5.2

BNP Paribas_Eco Week_05_19_17

BNP Paribas_Eco Week_09_23_16

09/16

Moody's 5.2

5

5.5

Moodys_Outlook 02_23_17

Moodys_Global Macro Outlook 2016-17_02_18_16

05/17

03/16

PIMCO 4.5 Pimco_Putting Markets in Perspective_03_17 05/17

General Government Gross Debt (% of GDP)

IMF 67.8

67.2

66.1

65.6

64.3

IMF_WEO_data_04_17

IMF_WEO_data_10_16

05/17

10/16

BNP Paribas

47.0 45.9 BNP Paribas_Eco Perspectives_2Q17 05/17

Current Account Balance (% of GDP)

IMF -1.5

-2

-1.5

-2.2

-1.6

IMF_WEO_data_04_17

IMF_WEO_data_10_16

05/17

10/16

OECD -0.9

-1.4

-0.9

OECD Economic Outlook_11_16

OECD Economic Outlook_06_16

05/17

09/16

Allianz -1.1

-0.1

-1.4

Allianz_forecasts_BRICS_01_17

Allianz_forecasts_BRIC_09_16

05/17

09/16

BNP Paribas

-0.8

-1.3

-1.7

BNP Paribas_Eco Week_05_19_17

BNP Paribas_Eco Week_09_23_16

05/17

09/16

54

1 Estimates of the no. of unemployed in the total 15+ population.

Table 12: China - Forecasts

2017 2018 2019 Source Accessed (mm/yy)

Real GDP growth rate (%)

IMF

6.6

6.2

6.2

6.0

6.0

IMF_WEO_data_04_17

IMF_WEO_data_10_16

05/17

10/16

OECD 1

6.5

6.2

6.3

OECD Interim Economic Outlook_03_17

OECD Interim Economic Outlook_09_16

05/17

09/16

Allianz 6.3

6

6.0

Allianz_forecasts_BRICS_01_17

Allianz_forecasts_BRIC_09_16

05/17

09/16

BNP Paribas

6.2

6.3

6.4

BNP Paribas_Eco Week_05_19_17

BNP Paribas_Eco Week_09_23_16

05/17

09/16

Goldman Sachs

6.5

6.4

Goldman Sachs_outlook 2017

Goldman Sachs_outlook 2016

05/17

03/16

Moody's

6.3

5.5 to

6.5

6.0

Moodys_Outlook 02_23_17

Moodys_Global Macro Outlook 2016-17_02_18_16

05/17

03/16

PIMCO 6.25 Pimco_Putting Markets in Perspective_03_17 05/17

Unemployment rate (%)

IMF 4.0

4.0

4.0

4.0

4.0

IMF_WEO_data_04_17

IMF_WEO_data_10_16

05/17

10/16

Inflation rate - end of period consumer prices (%)

IMF 2.5

2.3

2.3

2.4

2.6

IMF_WEO_data_04_17

IMF_WEO_data_10_16

05/17

10/16

OECD 2.2

3

2.9

OECD Economic Outlook_11_16

OECD Economic Outlook_06_16

05/17

09/16

Allianz2

2.3

2.3

3.0

Allianz_forecasts_BRICS_01_17

Allianz_forecasts_BRIC_09_16

05/17

09/16

BNP Paribas

2.7

2.2

2.5

BNP Paribas_Eco Week_05_19_17

BNP Paribas_Eco Week_09_23_16

05/17

09/16

Moody's 2.5 2.7 Moodys_Outlook 02_23_17

PIMCO 2.5 Pimco_Putting Markets in Perspective_03_17 05/17

General Government Gross Debt (% of GDP)

IMF 49.3

49.9

52.0

52.6

54.4

IMF_WEO_data_04_17

IMF_WEO_data_10_16

05/17

1016

BNP Paribas

18.6

21.6

20.8

BNP Paribas_Eco Perspectives_2Q17

BNP Paribas_EcoEmerging_07_16

05/17

09/16

Current Account Balance (% of GDP)

55

IMF 1.3

1.6

1.2

1.4

1.2

IMF_WEO_data_04_17

IMF_WEO_data_10_16

05/17

10/16

OECD 2.4

2.6

2.4

OECD Economic Outlook_11_16

OECD Economic Outlook_06_16

05/17

09/16

Allianz 1.9

2.0

1.4

Allianz_forecasts_BRICS_01_17

Allianz_forecasts_BRIC_09_16

05/17

09/16

BNP Paribas

1.6

1.9

1.4

BNP Paribas_Eco Week_05_19_17

BNP Paribas_Eco Week_09_23_16

05/17

09/16

1 Fiscal year starting in April.

2Annual average.

Table 13: South Africa - Forecasts

2017 2018 2019 Source Accessed (mm/yy)

Real GDP growth rate (%)

IMF

0.8

0.8

1.6

1.6

2.2

IMF_WEO_data_04_17

IMF_WEO_data_10_16

05/17

10/16

OECD 1.1

1.4

1.7

OECD Economic Outlook_11_16

OECD Economic Outlook_06_16

05/17

09/16

BNP Paribas

1.3

1.3

BNP Paribas_SA_4Q17

BNP Paribas_Eco Emerging_4Q16

05/17

10/16

Moody's

1.1

1.5 to 2.5

1.7

Moodys_Outlook 02_23_17

Moodys_Global Macro Outlook 2016-17_02_18_16

05/17

03/16

Unemployment rate (%)

IMF 27.4

27.0

27.7

27.4

27.8

IMF_WEO_data_04_17

IMF_WEO_data_10_16

05/17

10/16

OECD 26.9 26.7 OECD Economic Outlook_11_16 05/17

Inflation rate - end of period consumer prices (%)

IMF 5.9

5.5

5.5

5.5

5.5

IMF_WEO_data_04_17

IMF_WEO_data_10_16

05/17

10/16

OECD 6.1

6.3

5.7

OECD Economic Outlook_11_16

OECD Economic Outlook_06_16

05/17

09/16

BNP Paribas

1

5.3

5.3

BNP Paribas_SA_4Q17

BNP Paribas_Eco Emerging_4Q16

05/17

10/16

Moody's 5.7 5.5 Moodys_Outlook 02_23_17

General Government Gross Debt (% of GDP)

IMF 52.4

53.3

54.0

54.6

54.5

IMF_WEO_data_04_17

IMF_WEO_data_10_16

05/17

10/16

BNP Paribas

51 BNP Paribas_Eco Emerging_4Q16 05/17

Current Account Balance (% of GDP)

56

IMF -3.4

-3.2

-3.6

-3.5

-3.8

IMF_WEO_data_04_17

IMF_WEO_data_10_16

05/17

10/16

OECD -4.2

-4

-4.3

OECD Economic Outlook_11_16

OECD Economic Outlook_06_16

05/17

09/16

BNP Paribas

-4.2

-4.2

BNP Paribas_SA_4Q17

BNP Paribas_Eco Emerging_4Q16

05/17

10/16

1 Year average.