Growth is slowing but policy mix remains supportive
The global economy faces headwinds, but there are robust tailwinds too. While growth is undoubtedly decelerating, this equilibrium could last for years. Indeed, a tick back into expansion next year cannot be ruled out. Most importantly, slowing growth with no recession on the horizon provides a favourable backdrop for risky assets.
Crosscurrents at work
August has seen a sharp revival in trade tensions between China and the United States, with the announcement of further tariffs covering nearly all goods each country imports from one another. By extension, this trade war escalation brings into sharper relief a synchronised global economic slowdown. Germany, an exporting powerhouse, may be close to recession, with business confidence at lows last seen in 2012. In the US, the Markit manufacturing purchasing managers index fell below the critical 50-level, which separates expansion from contraction, for the first time since the financial crisis; new orders and export sales were especially hit. Furthermore, the yield on 10-year US government bonds fell below that of two-year issues – this has often been a prelude to recession, although central bank buying may have caused distortions. The Chinese economy also continues to be in the eye of the storm, with GDP growth this year expected to be the slowest in three decades.
The sun behind the clouds
Nonetheless, there is strong support for the global economy too. First, central banks appear to have renewed pledges to support growth. The Bank of Japan is actively buying bonds and other assets. The European Central Bank is running a negative deposit rate and has signalled it will reverse the seven-month hiatus on its asset purchase program in September. The US Federal Reserve called an end to a string of nine rate increases, cutting its base rate late in July and is likely to do so again. The Bank of England may well cut rates too, in November, with growth slowing due to Brexit uncertainty.
Second, fiscal stimulus is also expected across key global economies. Perennial budget surpluses in Germany and a relatively low debt-to-GDP ratio (~60%) allows for fiscal stimulus, which the chancellor has alluded will come “depending on the situation”. The US president has stated he is actively considering payroll tax cuts, which by some estimates could increase disposable incomes by $250 billion. Furthermore, while there is severe political deadlock, one area with bipartisan support is infrastructure spending. China too is likely to ramp up its infrastructure spending, in addition to tax cuts and reduced social security contributions by corporates.
Third, consumer activity – by far the dominant contributor to advanced economies’ growth – remains well anchored. Latest figures from the US show annual earnings up by 1.3% after adjusting for inflation. Similar figures for the UK and the Eurozone show growth at 1.8% and 1.1%, respectively. This brightening wage picture coincides with reduced household leverage in the US, leaving plenty of room for further consumption.
Past performance should not be seen as an indication of future performance. Investments may be subject to market fluctuations, and the price and value of investments and the income derived from them can go down as well as up. Your capital may be at risk and you may not get back the amount you invest.