Global Economic Outlook - US-led slowdown
Over the past few weeks, there has been a substantial reduction in at least two of the major risks faced by the global economy: a no-deal Brexit and escalation of the US-China trade dispute.
Risks sharply reduced, but US-led slowdown coming
For the markets this is a major change, but growth forecasts are not likely to be affected much. Despite lesser downside risks, we still predict a short and shallow recession in the US, probably around the middle quarters of 2020, driven by an intensifying corporate profit squeeze. This should clearly depress global growth, but only Germany, Switzerland and Mexico are expected to follow the US into recession. We then expect a synchronised upswing in 2021.
Trade war at a turning point - hopefully
After some 18 months of escalating US protectionist measures, it appears a turning point has been reached. What seems reasonably clear is that the US will not impose additional tariffs on automobiles - much to the relief of the EU, Japan, South Korea and others. Less certain is whether the US and China can clinch their so-called phase-one deal - we think the chances are good (50%), but we have been here before. Somehow both sides have proven themselves to be very bad at closing deals. Meanwhile, there is growing evidence that global trade has hit bottom, although we do not expect a solid rebound given lingering trade uncertainties and our forecast of a US recession.
Uncertainty-investment link not clear everywhere
There is a widely shared narrative that “pervasive uncertainty” is leading firms to shelve or at least delay investment projects. This makes sense, but we note that the evidence across economies is quite diverse: clear weakness can be observed in the US and the UK, but in the euro area, Japan and, to a lesser extent also in China, investment has to date remained quite resilient. That said, leading indicators suggest that there may well be more weakness ahead.
Central banks on a break - but not for long
After a wave of rate cuts, and some additional easing by other means, we expect most central banks to take a break for now (with few exceptions, such as RBI). In total, the 22 central banks we follow have eased policy by 900bp to date (18 November). That amounts to a reasonable easing in the global monetary policy stance, and a period of stock-taking is likely. However, as US growth slides, we expect the Fed to start cutting rates again in the spring and reduce the Fed funds rate by another 100bp. Most central banks around the globe will probably join in, but with scope for policy expansion narrow or practically non-existent in the euro area, Japan, and many other economies, the focus will remain on fiscal policy. But with few exceptions (UK, South Korea), fiscal policy expansions are likely to be timid and late. Even in Germany we expect only a modest fiscal easing.
In addition to the above themes, our latest quarterly Global Economic Outlook report covers a number of asset classes as well as individual country outlooks.
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