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Global Economic Outlook - US-led slowdown

20/11/2019

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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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.