This monthly publication is intended to give readers a short, concise update on current global macro and market themes as well as the latest business cycle signals.
Global growth fears have intensified lately as economic data out of Europe and China have continued to deteriorate. US indicators for manufacturing and housing have also cooled.
The epicentre of the global slowdown is China , where leading indicators suggest that growth could move even lower in Q1. It is due partly to a sharp decline in credit growth over the past one and a half years on the back of a deleveraging campaign and a crackdown on shadow finance, which has hurt the private sector in particular. Another key factor is the trade war with the US. Chinese export orders have declined and private spending has suffered. As a result, European exports to China have taken a hit. Emerging Markets in general have also felt the weaker Chinese demand. The US economy held up well during 2018, fuelled by fiscal stimulus, but recently some signs of slowing have emerged. In financial markets, we have witnessed a big sell-off in risk assets as fears over slowing growth have increased.
We expect the global economy to get a bit worse in Q1 before getting better. While we believe Q1 is likely to be even softer than Q4 in China, we expect the Chinese cycle to bottom out in Q2. First, following the ceasefire agreement in early December, we have become more optimistic that the US and China will reach a trade deal in late Q1 or Q2. Both sides now seem very keen to make a deal. Second, China has provided a lot of stimulus through monetary policy easing and more infrastructure investments, and further stimulus in the form of major tax cuts has been signalled by the government. With China driving a third of global growth, a turn in the Chinese cycle would provide an improvement in global demand. In the US, we expect industrial indicators to weaken further in early 2019 - partly because a big decline in oil prices will dampen energy investments. Oil prices have fallen from USD85 per barrel to USD57 per barrel over the past three months on weaker demand and worries over a supply glut. However, lower oil prices will also support private consumption and thus work as a tax cut for households.
The crisis between the EU and Italy has calmed down . The Italian government has accepted that it needs to reduce the target for the budget deficit, and Italian bond yields have fallen sharply in response. The Brexit process will be a key event for Europe, especially if the UK and EU fail to come to an agreement on the terms of the exit, which would have a material economic impact on both the UK and the rest of Europe. In our main scenario, we still expect a 'decent' Brexit , i.e. that the deal eventually passes the House of Commons, but uncertainty remains high and the likelihood of other options - including a second referendum and a no deal Brexit - has increased.
The Federal Reserve raised rates in December but reduced the rate path to signal only two hikes in 2019. Due to the market turmoil, the Fed is now signalling a pause, but we expect the hiking path to resume later in 2019 as the global economy recovers. The ECB has now officially ended net purchases under the Quantitative Easing programme. Although it has been challenged by weaker growth and still-low core inflation, the ECB is encouraged by a decent rise in euro area wage inflation this year. We expect a first hike of 20bp from the ECB in December 2019. We look for stock markets to remain volatile in Q1 but to end 2019 higher than current levels.