The outlook for global growth remains worrisome as global leading indicators continued to wallow in contraction territory in July. As momentum fades, the forecast for global growth was revised lower with consensus forecasts now at 3.2% in 2019.
The global growth forecast for 2019 has steadily declined over the past year as downside risks have escalated.
- U.S. – While 2Q19 growth came in better than expected, consensus estimates for 3Q19 growth continue to be revised lower. The health of the consumer continues to be the strength of the economy as the labor market remains strong and spending has held up well. Housing has shown recent signs of stability as mortgage rates move lower. However, global growth weakness seems to be having a negative spillover effect on trade and investment. Still, on a relative basis, the U.S. economy remains better positioned than the Eurozone, Japan and China.
- Europe – Growth momentum slowed during 2Q19 with GDP rising .2% Q/Q following .4% Q/Q growth in 1Q19. Higher global trade uncertainty and a lengthy downturn in the manufacturing sector, especially the German auto sector, continues to weigh on the growth outlook. Positive growth is supported by the services sector and a resilient labor market. The economic growth outlook for the EZ and UK continues to be clouded by Brexit, which is increasingly pointing toward no deal.
- Japan – 2Q19 growth of 1.8% was surprisingly strong, fueled by private consumption, business investment and government spending. Yet, the ongoing trade tensions, which are already a drag on net exports, continue to weigh on the growth outlook.
- China – Activity data took another leg down in July, coming in weaker than expected. Credit growth was also below estimates in July, indicating growth may decelerate further and expectations for further monetary policy are likely to rise.
Global central banks are in the early stages of a coordinated policy easing to combat downside economic risks.
- Fed – Signals from the FOMC point toward a rate cut at the September meeting, however, the market wants a more aggressive move.
- ECB – Policy makers continue to suggest a September rate cut and additional stimulus is forthcoming to address the economic downturn.
- BOE – Policy makers remain cautious about adjusting monetary policy settings before the Brexit issue is resolved.
- BOJ – While recent guidance confirms a pledge to easy monetary policy, much will depend on the exchange rate and strength of the yen.
- PBOC – Likely to keep a bias toward looser policy and targeted easing to support the economy and confront the growth slowdown.
After a 25 bps cut at the July FOMC meeting, rates markets are pricing in another 25 bps cut in September, although markets seem to be eager for a bolder move. The Fed Funds/10Y curve remains inverted by 53 bps, while the 2s/10s UST spread briefly inverted in August. A prolonged, deeper inversion is typically associated with higher recession risk. The current Fed Funds rate is the highest in developed markets behind the Italian 30-year yield. Inflation measures continue to be restrained worldwide, providing global central banks a green light to pursue dovish policy.
Tighter U.S. monetary policy has led to a stronger USD and weaker USD credit growth, which have combined to weigh on global growth. This has put pressure on the Fed to ease policy enough to steepen the yield curve and weaken the USD. The proliferation of negative yields has acted as a catalyst to increase the price of gold. The inability of oil prices to rally in the face of rising Iranian tensions and cuts from OPEC may be hinting that oversupply concerns and growth worries may be more dominant factors presently.
- Escalating trade war between the U.S. and China; threat of tariffs on other countries
- No deal Brexit risk has risen as an agreement remains elusive
- Tensions between the U.S. and Iran are increasing
- Wild Cards: North Korea; Venezuela; Argentina; new Russia sanctions: global supply chain disruption