Growth has slowed across the major economies even though forward expectations remain respectable. The recent equity market rally coincided with the dovish central bank tilt, but downside risks remain and signals from rates markets are still cautious.
Although downside risks have risen, global GDP is still expected to grow at a reasonable 3.4% pace in 2019.
- U.S. – Growth outlook still seems reasonable, albeit at a slower pace. Despite weaker economic data, the U.S. remains in a better relative position to Europe, Japan and China. Leading indicators and unemployment/wage data are consistent with solid growth, but bond markets and some survey data signal caution.
- Europe – Growth momentum has slowed further. Weak external demand is still a key threat, but worse than expected data from Germany could signal further caution. The resilience of domestic demand will be a key factor in avoiding recession. An escalation of the trade conflict with the U.S. over auto tariffs; further deterioration in Italy or an unruly Brexit could push the economy closer to recession.
- Japan – Growth is likely to remain weak as leading indicators point toward further softness. The outlook remains muddied by the prospects of weakening global growth and the lingering threat of U.S. protectionism to Japan’s auto industry.
- 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.
A synchronized dovish tilt by global central banks to ease financial conditions in order to offset downside risks.
- Fed – No rate hikes in 2019 per the latest dots and balance sheet unwind to end in September. Significant pivot for modest growth change.
- ECB – Marked down 2019 growth forecast sharply. Providing additional credit easing as risks remain tilted to the downside.
- BOE – Policy direction remains unclear due to Brexit uncertainty. Bias toward tightening, but any response would be gradual and limited.
- BOJ – No change in yield curve control targets or other policy settings. Still chasing their elusive inflation target.
- PBOC – Increasing likelihood of more monetary easing to offset growth slowdown in complement with fiscal stimulus.
Rates markets continue at odds with the 2019 equity rally. The 2s/10s UST spread continues to fall and hovers near levels last seen amid the December turbulence while 10-year Bund and JGB yields are in negative territory. Inflation expectations remain subdued, buying central banks time to stay patient.
The dovish pivot by the Fed has yet to push the USD materially weaker. Oil prices continue to rebound, perhaps suggesting global demand is better than it looks. Industrial metals have found modest support lately, a hopeful indicator that policy stimulus may be gaining traction.
- U.S.-China trade tensions remain an overhang on the global growth outlook. A U.S.-China trade summit seems to be moving further out on the calendar.
- 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 parliamentary elections in the spring could raise headline risks as populist parties rally support.
- Wild Cards: Fresh Russian sanctions; Israeli elections; Venezuela