Global trade has softened, manufacturing activity has slowed, and political uncertainty is elevated. Although we see further disappointing macro readings in coming months, we nevertheless expect global growth to bottom out around mid-2019 followed by a modest uptick. Our economic outlook is based on five key pillars.
Global trade: the US-led tariff war has slowed global trade with negative spill over effects on manufacturing. The partial resolution we anticipate would improve business confidence and growth prospects.
Chinese policy reaction: China’s slowdown has worsened due to a significant drag on exports. The authorities have recently stepped up their countercyclical policies to shore up growth momentum.
EU political speedbumps: Political risks abound in Europe – no-deal Brexit remains possible at time of writing and weak growth in Italy could lead to fiscal slippage. However, we expect some improvement in the second half.
More proactive fiscal policies: Across regions, fiscal policy is set to be growth supportive, particularly in China.
Dovish central banks: “Normalisation” was last year’s watchword, this year it will be “patience”, Liquidity is set to remain abundant, providing a fillip to risky assets.
What makes us sanguine?
Political risk should be limited Politics should be less of a concern in H2 2019. In particular, we expect the US and China to reach an agreement that would reverse the trade slump and fuel market relief.
A shift in tone and action from central banks Central banks have shifted stance on concerns about the growth outlook. At its March meeting, the Federal Reserve (Fed) intimated members no longer expect a rate hike this year and only one in 2020 - the Fed views its policy stance as neutral and appropriate. In the euro zone, the ECB has decided to launch a new round of funding support for banks to ensure sustained credit growth.
Fiscal stance to the rescue Fiscal policy is also growth supportive. The effects of US tax reform were felt strongly last year, but fiscal policy will also continue to underpin growth this year. Even in the euro zone, where Treaties impose fiscal restraint, additional spending in Germany, France and Italy should provide a moderate boost to activity. China has chosen fiscal stimulus over increased leverage – this year will see lower taxes for households (VAT cuts) and companies (lower employer social contributions), as well as new infrastructure projects.
Robust domestic demand Although industrial output is decelerating across the board, growth remains well supported by domestic demand. In the US, job creation remains buoyant and wages have been rising steadily, while muted inflation has preserved purchasing power. Intellectual property investment is trending sharply higher, lifting overall business spending. Consequently, labour productivity has risen and could accelerate further – this would help mitigate any squeeze on corporate margins or spike in inflation.
Downside risks remain If US-China trade negotiations were to fail or no-deal Brexit to occur, heightened uncertainty would accelerate the slowdown in global trade and growth. Eurozone growth could falter because of structural weakness in peripheral economies, sensitivity to the global business cycle and insufficient policy coordination. While most European countries have less exposure to global demand than Germany, they also have less scope to boost domestic activity given high levels of public or private debt. Any of these factors could trigger headwinds for global financial markets.
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