Earlier fears of a growth slowdown have given way to a relief rally in markets, but darker economic clouds outside of the U.S. could still roll in. It’s worth looking at what’s on the radar for the global economy to gauge whether a storm is on the horizon.

 

Fears of a global growth slowdown and ongoing uncertainty around the U.S.-China trade caused the equity markets to sell off hard in late 2018. However, optimism around trade developments and the Fed’s abrupt dovish U-turn has pared back investors’ fear of a recession. Markets are off to their best start since 1991. But, it’s the economic clouds beyond US borders that appear to be keeping investors nervous about a global growth storm. Rising geopolitical tensions, soft economic data in Europe and China, and trade uncertainty are underpinning the anxiety, but there are silver linings that should provide some calm before investors need to batten down the hatches.

 

Powell’s patience persists

The fading of U.S. recessionary fears on the back of the Fed’s pivot has injected life into equity markets. Comments from the central bank continue to point to a rate hike pause, and Fed Chair Jerome Powell alluded that the U.S. economy is in a sweet spot. In his semi-annual testimony to Congress, Powell conceded that U.S. economic data has softened; but, excess slack in a strong labor market should keep inflationary pressures “muted.” These conditions have created an environment that is ripe, in his view, for patience towards policy decisions.

 

Navigating crosscurrents

Greater market volatility towards the latter part of 2018 alongside elevated political uncertainty is feeding into the Fed’s caution. Powell further flagged concerns about slowing growth across major foreign economies, advocating that it is a “good time” to watch and wait to gauge how the global outlook evolves. Deteriorating growth prospects have plagued the global economy in recent months, led by slowdowns in Europe and China. Gauges of European economic activity sank to start 2019, signaling that the weakness seen in the latter half of 2018 was persisting. Germany’s export exposure to a weaker external backdrop underpinned its growth slowdown, while Italy slumped into recession to end 2018 and French activity was weighed down by the “Yellow Vest” protests. However, bright spots are emerging. A sizeable improvement and stabilization in German and French services activity in February point to domestic demand recovering. This in turn should be sufficient to prevent the slowdown from worsening despite ongoing weakness amongst the region’s key export markets, notably in Asia. Even on this front, despite China facing medium-term structural issues, a string of recent fiscal and monetary stimulus measures should provide a cyclical lift to the country’s growth. Thus, the risk of further spillover to developed markets should diminish later this year.

 

Risky (geopolitical) business

Risks still remain that the global economic expansion could falter further due to heightened political uncertainty. Ongoing trade negotiations are top of mind with the U.S.-China dispute yet to be resolved. There also remains the threat that the U.S. could announce tariffs on auto imports within 90 days. Meanwhile, the Brexit saga in the U.K. endures and a U.S. debt ceiling will need to be tackled, likely before this autumn. However, signs are emerging that tensions could be easing . The extension of the March 1st trade deadline by the Trump administration—that would have seen tariffs rise sharply on Chinese imports—points to a potential deal in the making. The truce would provide some relief to investors’ global growth worries. Across the pond, the risk of the U.K. leaving the EU without a deal in place declined materially recently. Prime Minister Theresa May conceded on February 26th to opening the door to an extension of the March 29th exit date, allowing for mid-March votes in the U.K. Parliament that could rule out a “no-deal” scenario. Greater clarity on the outcome would help to lift the “fog of Brexit” that the Bank of England warned is weighing on domestic economic activity.

 

Policy to provide a push

On account of the global growth slippage, central banks around the globe have mirrored the cautious stance of the Fed. As a result, financial markets have lowered expectations for tighter policy, in turn alleviating investor fears that the bull run is coming to an end. Clouds are likely to roll in at some point, but for now the widespread backing by central banks should support global growth conditions.

 

Tim