World Economy

These are the 'black swans' SocGen thinks you should worry about

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Strategists at Societe Generale have issued a new report detailing their forecasts for the global economy and their list of so-called "black swan" events.

A "black swan" event is a metaphor used by the investment community to describe an event that comes as a surprise, such as the crash of the U.S. housing market in 2008 or the Japanese earthquake of 2011. In the French bank's latest global economic outlook, SocGen said that various issues constituted downside risks to the global growth outlook, including the "drag from U.S. and European policy uncertainty" (still the highest risk according to SocGen), a hard landing in China, a sharp market repricing and consumers opting to save, rather than spend, more.

"Policy uncertainty remains the most significant risk to our outlook," the report, released on Tuesday, said.

"We see two dimensions to this risk. First, there is the slow moving drag that comes from the uncertainty itself holding back notably investment and hiring decisions and structural reform efforts. Second, there is the risk of an adverse outcome triggering financial instability. In the case of Brexit, the former remains significant while the latter proved short-lived on the back of an aggressive response from the BOE (Bank of England)."

Summarizing its global economic outlook, SocGen predicted that the U.S. would grow 2.2 percent in 2017, slightly above a consensus forecast of 2.3 percent. It believed that by end 2017, the Federal Reserve would have hiked the key interest rate to 1.25 percent.

However, SocGen believed that the U.S. could see a downturn in the second half of 2018: "Critical to this view is that we have not assumed any large scale fiscal stimulus."

Top economic risks—and how likely they are:

1. Greater drag from the policy uncertainty headwind: 30%

2. China hard landing risks have eased: 20%

3. Market repricing of central bank tightening and inflation: 20%

4. Consumers opt to save more: 10%

It forecast 1.4 percent growth for the euro area next year, above the consensus for 1.2 percent growth. "Our forecast for the euro area sits slightly above the consensus, but what is notable for both our view and for that matter consensus is the generally more upbeat view on the euro area consumer, which is expected to dig into savings and spend. Moreover, we look for a significant pick-up in residential investment with the revival of the euro area consumer," SocGen noted.

It added that it did not think the European Central Bank would meet its price stability target, despite its efforts to boost inflation: "Short-term, headline inflation could break above 2 percent depending on oil price base effects, but looking to the core, we forecast just 1.5 percent by 2020 leaving the ECB below its price stability target."

For China, it predicted 6 percent growth in 2017, compared to a consensus of 6.3 percent. It also remained below consensus for the other BRIC economies (Brazil, Russia and India).

It also forecast that oil would be priced at $60 a barrel by the end of 2017. The authors added that in comparing its views to the market consensus, "we believe that we are more concerned by downside risks."