CA Indosuez (Switzerland) SA - 2018 Annual Report

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Activity report 2018 CA Indosuez (Switzerland) SA

Chief Economist Indosuez Wealth Management

Paul Wetterwald

A temporary rise in inflation

There were many political uncertainties in 2018 which, for the most part, have not completely disappeared – quite the opposite. As such, intra- European tensions, in particular those linked to Brexit and to Italy's budget, the trade war started by the United States against China and Europe (and, albeit to a lesser extent, against its neighbours, Canada and Mexico) and, more generally, the rise of populist movements, made economic policy increasingly unclear. Uncertainty over general economic policy has reached its highest level in more than twenty years. Ultimately, this has

Our 2018 oil price scenario predicted an average price of USD 65 (for WTI), which proved to be very close to reality. On the other hand, we did not expect to see so much oil price volatility. The increase in oil prices between September 2017 and September 2018 reacted with a degree of lag to the rate of inflation, which briefly flirted with 3% in the United States and exceeded 2% in the Euro Zone. With the sharp decline in oil prices in the autumn of 2018, we expect that a base effect driving consumer price indices (CPI) down will be felt in the next few months. This will impact not only headline inflation but also core inflation (i.e. excluding energy and food prices). In fact, the cost of transport, which is one item included in the calculation of core inflation but not headline inflation, is obviously strongly impacted by energy prices. On the other hand, the significant improvement in the labour market continued. In the Euro Zone, unemployment amounted to 7.9% in November, its lowest since December 2008. In the United States, unemployment in December was 3.8%, a figure that has not been seen since December 1969. This improvement could ultimately lead to a stronger rise in wages and solve the Phillips Curve conundrum by “reviving” the inverse relationship between unemployment rates and wage fluctuations. Slightly less accommodative monetary policies in 2019 Recent monetary policies are not expected to change drastically, given: - the continuation of Fed funds rate hikes and the US central bank's shrinking balance sheet; - the tightening of monetary policy in the Euro Zone with a potential increase in key rates by the European Central Bank (ECB) in late 2019; - the positioning of the Swiss National Bank in reaction to the ECB and not as the first-mover; Unemployment down further

proven to be harmful for investment, both materially and monetarily.

2018: Politics takes revenge on economics

Robust growth achieved in 2018 This phenomenon managed to obscure the fact that last year economic growth was robust just about everywhere. In the developed economies, the surprise came from the United States, where GDP, annualised in real terms, rose by 4.2% and 3.4% in the second and third quarters, respectively, i.e. at a pace well above the long-term potential of the US economy. This has to do with the stronger than expected impact of the tax reform advocated by Donald Trump. Among the emerging market economies, it has to be said that despite the uncertainties surrounding China’s economy, it has been able to maintain a high rate of growth, i.e. 6.4% from Q4 2017 to Q4 2018. This means that China is responsible for more than one-third of world growth. That said, world growth faltered at the end of the year, approaching a pace that we would characterise as more normal. Although we have probably moved beyond peak growth, it is too early to start talking about recession.