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Global Economic Outlook

13/06/2019

Societe Generale Cross Asset Research, the bank’s independent financial research department, published its latest quarterly Global Economic Outlook “Trade War Raising Recession Risks”.

In the report, the bank’s economists present their views in five main themes:

  • Living with Trumpian uncertainty and Brexit hiatus
  • Global expansion – resilient this year, but downside risks growing
  • The never-ending US-China trade war
  • The wage-price disconnect
  • Monetary policy back in easing mode

Living with Trumpian uncertainty and Brexit hiatus
Hopes that the two major event uncertainties casting a shadow over the global economy, the US-China trade conflict and Brexit, would be resolved speedily have proven misplaced.
US-China trade negotiations have stalled, triggering yet another serious escalation in tariffs. Worse, by adding in what has become known as a tech war over Huawei and other Chinese technology companies, conflict resolution looks to have become that much more difficult. Also, the ramifications extend far beyond the US and Chinese borders as the conflict sends signals to other countries negotiating with the US over trade, especially the EU and Japan, that the US intends to pursue an uncompromising strategy. And even if agreements can be found, the sudden imposition of tariffs on Mexico, which has only recently agreed a new trade deal with the US, throws into serious doubt the US administration's willingness to stick to its agreements. In short, Trumpian uncertainty is total uncertainty. Meanwhile, although Brexit has yet again been delayed, the risk of a no-deal Brexit has increased.

Global expansion - resilient this year, but downside risks growing
The five largest economies have all gotten off to a strong start to 2019. However, with the exception of the euro area, the pace of growth of the first quarter is highly unlikely to be maintained. Indeed, with key uncertainties set to persist for many more months, downside risks have increased. Meanwhile, the US economic expansion is likely to come to an end in around mid-2020 in our view, as the disappearance of labour market slack leads to a corporate margin squeeze.

The never-ending US-China trade war
The probability of a benign resolution to the US-China trade war has, in our view, declined substantially in recent weeks; we now put it at only 45%. At the same time, the probability of an all-out trade war is, in our assessment, now as high as 25%. The direct impact on GDP would be substantial, in the order of -1% for China, -0.6% for the US, and -0.3% for the global economy. However, confidence effects and negative financial market reactions could amplify the downside impulse.

The wage-price disconnect
Lower unemployment rates in advanced economies have given rise to wage acceleration, but to date there is little to no evidence of this feeding through to price inflation. The obvious place to look for an explanation is labour productivity/unit labour cost data. Somewhat paradoxically, these suggest that a surge in labour productivity in the US has in fact reduced price pressures, whereas in the euro area a slump in productivity growth has boosted underlying inflation pressures.

Monetary policy back in easing mode
What we called the Great Retreat of advanced economies' central banks from pursuing a normalisation of monetary policy has given rise to a renewed monetary easing trend, centred for now on the Asia-Pacific region. As regards Fed policy, we are in the near term hawkish compared to current market pricing, not expecting any rate cuts this year, but a total of 100bp of cuts in 2020 as the US economy slips into recession.

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About Societe Generale Cross-Asset Research
Societe Generale Cross-Asset Research is composed of more than 200 Analysts, Strategists, Economists and Quant, combining their expertise into ‘Research-based’ and innovative solutions suited to client’ needs: fundamental studies and expert views, investment ideas and long-term strategies, trade ideas and tactical baskets, thematic and systematic indices, quant solutions. On top of its established UK and Western European base, Societe Generale Cross-Asset Research benefits from a global coverage thanks to its presence in the US and in Asia (Hong Kong, Singapore, Tokyo and Bangalore) and Societe Generale local networks in Eastern Europe.

Disclaimer
This editorial contains financial analysis which reflects the opinion of the Cross-Asset Research department of Societe Generale at the date of its publication. It does not necessarily reflect the views of the other departments of Societe Generale nor the official opinion of Societe Generale. This interview is dedicated to institutional and professional investors and is not deemed to be seen and used by retail investors for investment purpose. The viewers shall consult their own financial advisers to make their own appraisal.