From boom to cruising speed
Yesterday, we published our biannual The Big Picture, containing our updated macro forecasts for the global economy (see The Big Picture 6 From boom to cruising speed , 7 June). Following a strong end to 2017, we see clear signs that the business cycle is losing momentum. While global growth might be decelerating, we do not expect it to turn into a marked downturn over the next few years - rather, we believe growth in the world economy should go from boom to cruising speed in line with its potential. We expect global growth to come in at 3.8% this year, declining to 3.7% in 2019 and 3.6% in 2020.
The risks to our forecasts are skewed on the downside, from an escalation of trade tension into a full-blown trade war and a renewed Italian debt crisis. Unfortunately, the positive developments in the US-China trade conflict did not last long and the risk of renewed escalation over coming weeks has increased, as US President Trump has announced he will impose tariffs on USD50bn imports from China despite China having agreed to buy more US goods to bring down the trade balance (see US-China Trade Talks 6 Why things are getting tricky , 4 June. In Italy, markets are still waiting for indications of whether or not the new Five Star-League government will back down on some of its promises.
Higher volatility but fundamentals support equities
Last year was quite extraordinary, as growth rose across regions and risks diminished. Increasing economic growth, very high optimism among businesses and consumers and record-low volatility (as measured by the VIX index) were a good cocktail for equities, which rose steadily over the year. This year, with slower economic growth and more risks stemming from the political situation in Italy and the US-China trade conflict, it is not a big surprise that volatility has increased. However, as economic growth remains above potential and earnings growth is solid, we still expect equities to move higher but the ride is going to be bumpier than in 2017 . Then again, it was 2017 that was extraordinary and we have just returned to a more 'normal' situation.
To read the entire report Please click on the pdf File Below: