Despite solid growth expectations, downside risks have increased alongside a deterioration in European and Chinese growth forecasts. The U.S. economy remains best positioned to outperform across the majors.
Global growth is expected to come in at a solid 3.5% in 2019, but downside risks have risen.
- U.S. – Growth outlook remains sound despite weaker incoming data. The U.S. economy is in a better relative position to Europe, Japan and China. Leading indicators and labor markets are consistent with robust growth, but markets and survey data reflect elevated uncertainty and downside risks.
- Europe – Growth momentum is slowing. Weak external demand is the primary obstacle, however, domestic indicators including consumer confidence and business investment have rolled over. The labor market remains strong, but a “no deal” Brexit, escalation of the trade conflict with the U.S. over autos or further deterioration in Italy could push the economy closer to recession.
- Japan – Growth is expected to remain weak as data indicates the economy is losing steam. A recent widening of the trade deficit suggests that weaker exports and continuing trade friction remain a drag on GDP growth.
- China – Growth continues to slow. Last year’s credit tightening, the trade war and weak private sector confidence continue to weigh on the outlook, but significant new fiscal and monetary measures may bear fruit in the months ahead.
Global financial conditions are starting to ease as central banks respond to downside risks.
- Fed – Policy stance moved to neutral amid economic uncertainties. Closer to ending hiking cycle and to finishing balance sheet unwind.
- ECB – Focus on providing adequate monetary accommodation via forward guidance and reinvestment. Potential for further credit easing.
- BOE – Policy direction hampered by Brexit uncertainty. Bias toward tightening, but any response would be gradual and limited.
- BOJ – No change in yield curve control targets. Little success in achieving higher inflation.
- PBOC – Increasing likelihood of more monetary easing to offset growth slowdown. Potential for more rate cuts and liquidity injections.
Rates markets have not confirmed the recent equity rally as the prelude to a reflation recovery. To the contrary, the 2s/10s UST spread remains
narrow at ~15 bps while 10-year Bund and JGB yields are mired near multi-year lows. Headline inflation figures have fallen due to lower energy
prices. Subdued inflation expectations offers central banks time to stay patient.
- The USD has been resilient despite a dovish pivot by the Fed. Oil prices have rebounded a little as supply cut worries intensified and gloomy growth forecasts improved. Industrial metals have also found a little support recently as negative growth sentiment has abated and oversupply concerns subside.
- U.S.-China trade tensions remain an overhang on the global growth outlook, as talks look likely to continue past the U.S. March 1st deadline for imposing more tariffs.
- Brexit uncertainty remains high, although the base case remains that parliament will accept May’s deal or the U.K. will seek an extension to the EU’s March 29th deadline. The U.S. is expected to make a decision on auto tariffs in the coming months with implications for growth in
- Europe and Japan. European