In its assessment of the global economy published in mid-April, the IMF (International Monetary Fund) further downgraded its economic growth projections for 2019. Advance a couple of weeks to the release of Q1 growth data and you might be forgiven for thinking the IMF was being unduly pessimistic. However, while the global economy is expanding and even the new IMF projections do not imply a global recession, the risks to the world economy do appear skewed to the downside.
Bearing this in mind, the IMF has armed policymakers with the following advice: “Avoiding policy missteps that could harm economic activity should be the main priority “. Global equity markets had their worst month of the year so far in May. Geopolitical tensions increased as escalating trade tensions drew investors back to safe-haven assets. Concerns heightened that a trade war could weigh on a global economy that’s already slowing.
Europe
The Eurozone economy has grown faster than expected, with Italy escaping from recession and Germany’s economy returning to growth. Statistics showed that the 19-country Euro-bloc expanded 0.4% in Q1; twice the rate of growth recorded in the final quarter of 2018.
This acceleration was largely due to Germany, Europe’s largest economy, which registered a 0.4% expansion compared to zero growth during the previous quarter. Italy helped, recording a Q1 growth rate of 0.2%, ending the country’s short period of technical recession.
European equities largely fell in May. European elections have been a focus. The Eurozone composite Purchasing Managers’ Index (PMI) remains in expansionary territory at 51.6.
Switzerland
Recent data indicates the Swiss economy has been subdued in Q2. Weaker demand from the Eurozone caused the manufacturing PMI to deteriorate in April. Increased demand helped the services PMI surge, while unemployment sits at its joint-lowest level for almost 11 years. A corporate tax overhaul, to ensure Switzerland remains a low tax domicile, was approved in May, which should help support economic growth and competitiveness. It is likely that growth will taper this year, as weakening EU demand weighs on investment and exports. Trade uncertainty and tense bilateral relations with the EU are downside risks. GDP expectations are 1.2% growth this year and 1.5% in 2020.
UK
In Q1, the UK economy expanded more strongly than anticipated, recording a GDP growth rate of 0.5% compared to 0.2% in Q4 2018. The Office for National Statistics did caution that this rise was partly driven by stockpiling as manufacturers rushed to deliver orders ahead of the original 29 March Brexit deadline.
May proved a volatile month in British politics as the Conservative party suffered defeat at the European elections, and Theresa May announced her intention to resign, prompting the start of the Conservative leadership contest and the race to be Britain’s next Prime Minister. The person who is ultimately elected will clearly have a huge impact on how the Brexit process proceeds and is eventually concluded.
Against this backdrop, the value of sterling fell against international currencies, returning the gains made against the euro and US dollar since the start of 2019. The UK equity market provided a negative return during May, the first full month of negative performance seen in 2019. UK equities moved broadly in line with global equity markets, which came under pressure from renewed trade tensions and the fall in the price of Brent Crude. Largely as a consequence of the Brexit effect, some UK equities remain on valuations below historic averages, and at a discount to comparable developed markets. Opportunities exist to buy attractive UK companies on lower valuations.
US
Data released by the Bureau of Economic Analysis showed that the US economy expanded more strongly than expected during Q1; GDP rose at an annualised rate of 3.2%, significantly higher than the 2.5% growth rate predicted in a Dow Jones poll of economists. This represents the US economy’s strongest start to a year since 2015.
However, the sharp escalation in the trade war between the US and China will impact global economic growth prospects. This escalation was signalled by President Trump’s announcement on 10 May that tariffs were to be more than doubled on $200bn of Chinese goods. Beijing responded by announcing that it would be raising tariffs on $60bn of US goods from 1 June.
The rise of protectionism since Donald Trump became US President has cast a shadow over the global economy. Such policies harm sentiment in financial markets, disrupt global supply chains and slow the spread of new technology, as well as affecting consumers by making goods more expensive.
The US equity market delivered its worst May return in seven years; energy stocks fell amid concern over global demand.
Asia and emerging market equities
Asian equity markets ended May lower as trade tensions escalated and concerns surrounding global growth intensified. Divergence in market performance was evident, with China amongst the poorer performers, while Australia and India outperformed. China’s equity market suffered as economic growth was perceived as being under threat from higher tariffs and a weaker technology sector.
In Q1, China reported a 6.4% rise in GDP, compared to the same period a year earlier. This matched the previous quarter’s annualised rate of growth and was slightly ahead of economists’ predictions. The reignition of trade tensions saw Japanese equities surrender gains made during the first four months of 2019.
Commodities
Gold is currently trading at around $1,340 a troy ounce. Investors have favoured safe haven assets, including gold, which broke through resistance at $1,286 as it headed through the $1,300 marker. Brent crude is trading at around $61 a barrel, prices have fallen over 20% since the April peaks, as an unexpected jump in US crude inventories added to worries about faltering demand caused by slower global economic growth.
OPEC and the International Energy Agency monthly oil market reports will be released ahead of a key OPEC meeting in June, which could shed light on the supply and demand dynamic in the oil market.
Looking ahead
The IMF has suggested that if a more severe and protracted economic slowdown does occur, policymakers may be required to adopt coordinated fiscal stimulus measures as well as looser monetary policy.
IMF Chief Economist Gita Gopinath recently commented: “This is a delicate moment for the global economy “. She added “there are many downside risks ” to the forecast and described any potential economic recovery later this year as “precarious “.
Investors with diversified portfolios, who stay in the market, have historically and consistently experienced steadier gains over time. To help navigate market volatility, stick to your plan, diversify your holdings, expect and accept volatility; investment opportunities do exist.
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