Downgrades to global growth estimates for 2019 and 2020 were headline statistics when the International Monetary Fund (IMF) released their most recent World Economic Outlook. The Outlook warned that the trade war had generated a ‘precarious’ economic situation. The IMF predict that in 2019, global growth would be 3%, its slowest rate since the financial crisis, and a 0.3% downgrade from April 2019 estimates. Trade barriers and geopolitical tensions combine to weigh on growth expectations.
Improvement is expected in 2020, with estimated growth of 3.4%. This forecast is heavily dependent on recoveries in stressed economies and advancements in global weak spots such as Brazil, Mexico and Russia.
Trade was one of the central elements of weak third quarter growth across Europe. Eurozone economic growth was 0.2%, matching the previous quarter, and slightly above expectations. Among the 19-country bloc’s largest economies, Germany narrowly avoided recession, while GDP growth rates were unchanged in Spain (0.4%), France (0.3%) and Italy (0.1%). The German economy grew 0.1% in Q3, after contracting in the previous three months.
With falling inflation and domestic confidence impacted by trade concerns, the European Central Bank (ECB) pledged support to the economy by way of a rate cut and approval of a stimulus package. The ECB cut its deposit rate to a record low of -0.5% and restarted bond purchases in November, stating: ‘The Governing Council expects (bond purchases) to run for as long as necessary to reinforce the accommodative impact of its policy rates, and to end shortly before it starts raising the key ECB interest rates’. The Eurozone is expected to expand 1.2% in 2019, rising to 1.4% in 2020.
Manufacturing production contracted and service sector activity moderated in Q3. Household spending remained robust due to a solid labour market and the wealth effect from the strong franc. Merchandise exports strengthened despite the currency appreciation. In Q4, the economy is well positioned to improve, as the downturn in the manufacturing sector softened in October. Economic growth is expected to gradually pick up in 2020, as the tight labour market and rising disposable incomes continue to fuel consumer spending.
The UK economy avoided recession by growing 0.3% in Q3 2019, recovering from a 0.2% contraction in Q2, but missed expectations of a 0.4% expansion. The service and construction sectors were positive contributors to growth.
Data from ONS indicates that the UK economy grew at its slowest annual rate in nearly a decade in Q3 2019. A statistician at the ONS said GDP grew “steadily” in the third quarter, largely as a result of strong growth in July (0.3%), which boosted the quarter.
In Britain’s first December general election in nearly 100 years, the Conservative Party won a very comfortable majority. Boris Johnson’s gamble paid off, to record the party’s best election performance since the 1980s. In the run up to the election, the markets had a few jitters, with investor sentiment reacting to various polls and surveys. As the markets opened following the results on 13 December, the FTSE 100 and the domestically focused FTSE 250 experienced strong gains and sterling surged. Clarity is now needed on the future relationship between the UK and the EU. The clock is ticking – the 31 January Brexit deadline is on the horizon.
In the US, the IMF expects a slowdown in growth from 2.4% in 2019 to 2.1% in the election year of 2020 — well below President Trump’s pledge to maintain expansion in excess of 3%. The Federal Reserve cut rates in October, by 25 basis points to a range of 1.5% to 1.75%, the third cut in four months. Jerome Powell, the Fed Chairman, implied the bank would hold off on further cuts, commenting: “We feel that policy is well-positioned“. With growth moderating, President Trump continues to pin responsibility on the Fed, calling on the bank to aggressively cut rates.
According to the IMF, trade tariffs have cooled investment and business confidence, leaving global trade stagnant. This has forced central banks to cut interest rates to support growth. The IMF expressed that there is an urgent need to cease hostilities and restore confidence to the global outlook.
There was a surge in share prices in mid-December after the US and China announced that both sides had agreed the text of a ‘Phase One’ trade deal. The agreement halted US tariffs on Chinese imports that were due to commence on 15 December. US equity markets reached record highs on trade optimism and a fresh wave of merger and acquisition activity.
Asia and emerging market equities
The IMF expects the Chinese economy, to experience a gradual slowdown in growth, from its 2019 rate of 6.1%, to 5.5% by 2024. The 2019 forecast was cut by 0.2% from April 2019 estimates. Trade issues will continue to have a significant influence on the direction of Asian and Emerging Markets. Some Emerging Markets are showing economic promise as they continue to push through reforms, despite recent softening in growth. Weaker global growth has led to a dispersion in valuations between stocks and markets, giving rise to opportunities. The Bank of Japan continue to leave monetary policy unchanged.
Gold is currently trading at around $1,475 a troy ounce. Brent crude is currently trading at around $65 a barrel. Oil prices have held firm recently, on the understanding that Saudi Arabia was willing to extend the current production quota into 2020. At their most recent meeting in December, OPEC (Organization of the Petroleum Exporting Countries) and its allies agreed to deepen output cuts by 500,000 barrels per day in early 2020.
The estimated pickup in 2020 reflects projected improvements in the economic performance in several markets, developed and emerging. Trade protectionism, Brexit uncertainty and geopolitical tensions remain primary downside risks to the global economic outlook. Major events will always affect markets. It can be challenging to look through the noise; however, it is essential to consider longer-term timescales instead of focusing too intently on short-term events. It’s always important to maintain investment focus to navigate any challenges ahead. Financial advice is key. Please don’t hesitate to get in touch with any questions or concerns you may have, we’re here to help.
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