US policy uncertainty and China pose the greatest risks for growth next year, say analysts at one big bank.

The current U.S. economic expansion, started in 2009, is the third longest on record. While it is expected to have enough steam to cross February 2018 and become the second longest one, it would need far more to carry on for nearly two years – until May 2019 – and become the longest recorded expansion ever.

Is that even a reasonable prospect?

Societe Generale believes it is but key to it is President Donald Trump’s promised tax cut. Without it, the French bank asserts, growth in the U.S. economy could slow down as early as the second half of 2018.

“The election of Donald Trump in the U.S. boosted hopes of deregulation, tax reform and fiscal expansion. Hopes, however, have faded since the election and the latest developments with the investigation into the Trump campaign’s Russia ties mean that even our own below consensus outlook now comes with greater downside risks,” SocGen said in it semi-annual Global Economic Outlook newsletter last week. The bank estimates a 30% risk the Trump tax cut will not materialize.

Before the election, the bank had forecast a cyclical downturn for the U.S. economy in the second half of 2018.

Even with the tax cut, which is estimated to provide a 0.3 percentage point boost to GDP, SocGen expects the growth spurt will not last much beyond May 2019. The bank has forecast a slowdown starting in the second half of 2019 – 1.2% growth versus Bloomberg’s consensus view of 2.2%.

SocGen also put forth the broader view that sustained world growth hinges on policies, especially as China slowly loses momentum.

“Gloomy geopolitics and heightened policy uncertainty stand in sharp contrast to the real economic data which have been generally upbeat over recent months,” the bank observed. “Confidence is high and growth is running above trend in most of the major economies. The question now is whether this is as good as it gets? In a nutshell, our answer is yes and this is a picture confirmed by a number of key indicators that appear to be topping out as we discuss below.”

Specifically on China the analysts a SocGen join a chorus of bears noting:

Concerns about China’s over-reliance on leverage expansion have (once again) encouraged policymakers to tighten policy/

The analysts expect tightening to hurt Chinese real estate, they state:

Tightening measures are already this causing slower credit expansion and, given that credit tends to lead GDP growth by around three quarters, we expect to see softer momentum ahead. Already, nominal growth is slowing and, although real growth numbers should remain firm for now, here too we look for a slowdown heading into 2018.

Still, the bank doesn’t expect an abrupt slowdown, believing the global economy has enough strength to stay on the current plateau over the 2017-2018 horizon.

“For Europe, there is still a busy electoral agenda ahead. Nonetheless, with the French presidential election now safely concluded, we have lowered the risk of a drag from European policy uncertainty shock from 30% to 25% risk to our Black swan relating to this risk factor. Our main concerns at this stage are about Italy and an ugly Brexit.”

policy uncertainty China tax cuts

SocGen also counts on some upside surprises – probably three. One is fiscal accommodation, with potential in both the U.S. and Europe. Two, higher investment by corporations than expected. SocGen’s baseline discounts “enough reforms in the euro area to offset demographics headwinds over the coming decade, but this will only come slowly and there is scope for disappointment.” The third is fast-track reform in Europe. It remains a “hope,” but the bank set a low probability on this – just 5%.

However, China remains the key. As the analysts note:

China stands out as the most over-indebted economy.  … our baseline scenario is that China will reduce this gap, but only very slowly. A further increase would increase financial stability risks to dangerous levels and further increase the risk of an abrupt and deeply painful bursting of the debt bubble.

All eyes on China.

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