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Expect a 'sharp deterioration' in global growth but no recession

Publication Date: 20 Mar 2019 - By Gaurav Sharma (Associate Editor ReachX) By Gaurav Sharma (Associate Editor ReachX)
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Macro Multi Asset Global

The year 2019 is going to be a tough one economically, although a global recession does not appear to be on the horizon, according a leading rating agency.

In a note to clients on Wednesday (20 March), Fitch Ratings wrote that it had “aggressively cut” its economic forecast for the current year as “global growth prospects have deteriorated significantly.”

“The eurozone growth outlook has weakened particularly sharply since December 2018, evidence of a slowdown in China has become much clearer and activity in other emerging markets (EM) has decelerated, led by abrupt macroeconomic adjustments in Turkey and Argentina in the aftermath of last summer's currency crises,” Fitch warned in its latest Global Economic Outlook (GEO) seen by ReachX

The rating agency said this has occurred against the backdrop of world trade growth weakening steadily through 2018. “The US-China trade war may have suppressed and distorted trade flows, but more fundamentally, weaker EM domestic demand has been a key contributor to the trade slowdown.”

As a consequence, Fitch has cut its global growth forecasts for 2019 and 2020 to 2.8% from 3.1% and 2.8% from 2.9%, respectively. “The 0.4pp decline in growth we are now expecting between 2018 and 2019 would be the biggest year to year decline in global growth since 2012. Furthermore, out of 20 countries covered in the GEO, we have lowered our 2019 growth forecasts for 15 of them.”

Brian Coulton, Chief Economist at Fitch Ratings, said after such a widespread deterioration in the numbers, it's not easy to pinpoint the ultimate source of the shock. “But we believe the evidence points to weaker EM demand being a key driver of the downturn in global industrial production and world trade. Weaker EM demand in turn reflects the earlier deleveraging drive in China and the fall-out from last summer's forex volatility in other EMs. 

“The tightening in dollar liquidity we saw last year as the US Federal Reserve raised rates has clearly had some adverse global growth implications, even if the US economy itself has been pretty resilient.”

However, Coulton’s team do not see the onset of a global recession despite the sharply deteriorating growth picture. 

The US economy is still growing above trend, low unemployment and solid household income growth are supporting consumer spending and fiscal policy is being eased. Some of the recent eurozone weakness reflects temporary factors that should start to abate soon.

China has eased policy further both through tax cuts and lowering banks' reserve requirements. The increase in US tariffs on Chinese imports that we had been expecting at the beginning of March has not yet materialised and there are growing hopes that it may be avoided.

"It is possible we are all underestimating the impact of China's economic cycle on global growth dynamics. China's economy is huge now and the slowdown in nominal GDP last year has reverberated widely. But as China's growth indicators have weakened, the policy response has been stepped-up and we think this easing will gain traction in stabilising growth from the middle of this year. China and EM will play a crucial role in the outlook for world trade and GDP growth over the next 18 months," Coulton added.

Furthermore, there has been a sizeable shift in the global monetary policy environment in the last few months. The Fed has signalled a pause from its previous guidance of ongoing rate increases and Fitch now only sees one rate hike this year compared with three hikes pencilled in for 2019 in last assessment.

The European Central Bank (ECB) has also responded quite swiftly to the growth surprise and now seems unlikely to raise interest rates before the end of 2020. "We now think that the ECB will restart net asset purchases later in 2019. With the Fed also indicating in recent months that its balance sheet run-down is likely to stop at the end of 2019, this adds up to a much more generous outlook for global liquidity through 2019 than previously expected.”

Fitch says the move will take pressure off EM central banks to tighten policy and perpetuate an environment of low market interest rates. “We have lowered our interest rate forecast for several large EMs. Easier global liquidity risks distorting the allocation of capital over the medium term but in the near term it will support the US housing sector and reduce pressure on corporate, sovereign and EM borrowers who have taken on sizeable additional debts in recent years.”

Since Fitch’s December's assessment, the largest 2019 forecast revisions are for Turkey (-1.7pp), Italy (-1pp), Australia (-0.7pp), Switzerland (-0.7pp), and Germany (-0.6pp), while the eurozone as a whole has seen a 0.7pp cut. 

Disclosure:

I have no positions in any of the securities referenced in the contribution

I do not use any non-public, material information in this contribution

To the best of my knowledge, the views expressed in this contribution comply with UK law

I agree with the terms and conditions of ReachX

This contribution is for informational purpose and does not constitute investment advice nor is it an offer to sell or buy, nor is it a recommendation for any security.

Gaurav Sharma (Associate Editor ReachX)

 

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