• 2018 has been a volatile year, however 2019 should be calmer.
• Inversion of the yield curve and inflation in the US are not concerns; the Fed should be well-positioned for several more years of expansion in the US economy.
• Real GDP in China may further slow in 2019; the overall outlook in East Asia will be subject to heightened trade tensions and downside risks to global growth.
• Terminating the ECB’s asset purchase policy may pose a deflation risk, while capital expenditure and hiring plans for UK businesses likely to remain on hold.
Hong Kong, 10 January 2019: Following a year of turmoil marked by ongoing weakness in global bond markets and two significant sell-offs in equity markets, Dr. John Greenwood, Chief Economist of Invesco, expects 2019 to be a significantly calmer year for global markets, with the US economy continuing to expand.
In 2018, there were crises in Venezuela, Argentina and Turkey; ongoing Brexit negotiations; a strong rise in the price of oil; and disruptions created by US President Donald’s Trump’s repeated trade measures — all set against a backdrop of normalizing US interest rates. “Although some of these geopolitical events may be temporarily damaging, it is my view that they will prove to be no more than waves on the surface of the tide which is the record-breaking expansion of the US business cycle.” said Dr. Greenwood.
United States: Longest recorded expansion in financial history in view
Although US monetary policy became less accommodative in 2018, Dr. Greenwood asserts that the Federal Reserve is not adopting a “tightening” but rather a “normalizing” policy. He refers to the mid-course corrections in interest rates that occurred in 1994-95 and 2004-05, both episodes in which the business cycle continued to expand for several years after the completion of normalization, while equity and real estate markets also peaked significantly after the rate hike cycle completed.
Despite the low level of unemployment and Trump’s fiscal stimulus, the course of the US economy will remain broadly consistent with the Fed’s mandate to achieve full employment with 2% inflation, Dr. Greenwood argues. “There is a strong probability that the Fed will be successful in positioning the US economy for several more years of expansion after 2019 or 2020. This would mean that by July 2019, the current expansion would exceed the longest recorded expansion in US financial history — the 10-year expansion of March 1991-March 2001.”
Recently, some market participants have raised concerns over the slight inversion of the US yield curve, which occurred when the yield on the 5-year Treasury bond fell below that of the 3-year bond. Dr. Greenwood argues against the mantra that an inverted yield curve precedes a recession, noting that this indicator is often misleading as there have been numerous inversions with no recession, including July-October 1966 and October 1998. “The tightening of money and credit caused past recessions, but money growth has been stable and low in recent years. An inversion without a squeeze does not necessarily lead to recession,” Dr. Greenwood commented.
The tariffs put in place in 2018 are potentially damaging to trade volumes and will raise the cost of imports for US businesses and consumers, however Dr. Greenwood argues the damage from tariffs should be minor if domestic spending on consumption and investment is maintained.
China and East Asia: Slow export growth continues
China is confronting the challenge of deleveraging while attempting to maintain growth by intermittent easing of monetary policy, such as cutting reserve requirement ratios, relaxing macro-prudential controls on mortgage lending, and easing some money market interest rates. Dr. Greenwood views these moves to ease policy as a modest counter to the key policy priority of reducing leverage.
Regarding China’s GDP growth outlook, Dr. Greenwood predicts that real GDP will likely slow further in 2019. “Although some basic industries have recovered from their slump in 2014-16, housing and nominal fixed asset investment have slowed. In my view, none of this activity is likely to pick up significantly in 2019 unless the State Council’s policy of deleveraging is revised,” said Dr. Greenwood. “On the external side, the impact of Trump’s tariffs has so far had only a minor impact as exporters have rushed to complete shipments ahead of tariffs being imposed or raised. I therefore expect exports to slow, with only single-digit growth of exports in US dollar terms.”
Elsewhere in East Asia, domestic spending has been subdued while export growth has slowed. Dr. Greenwood notes that some smaller, low-cost economies such as Thailand and Vietnam may benefit from some re-allocation of Chinese manufacturing, but the overall outlook will be subject to heightened trade tensions and the downside risks to global growth as predicted by the International Monetary Fund.
In Japan, the economy continues to experience sub-par growth and sub-target inflation. Despite five years of aggressive quantitative and qualitative easing (QQE) by the Bank of Japan, Dr. Greenwood sees little progress made in restoring real GDP growth and particularly inflation to normality. He expects the economy will continue to grow at a modest pace of 1.0-1.5%, due largely to the aging of the population and accompanying shrinking of the workforce.
Europe and UK: Lack of confidence from private market
Investors continue to monitor the potential macro-economic policy change caused by the European Central Bank’s tapering of asset purchases and the associated forward guidance on interest rates next year. Dr. Greenwood notes that eurozone banks are still nursing portfolios of non-performing loans while trying to build up capital, and consequently loan growth has been well below money growth. He believes terminating the ECB’s asset purchase policy while European banks remain in a fragile condition means that the region will be vulnerable to another slowdown in nominal spending and poses the risk of inflation falling back below target.
In the United Kingdom, public debate has been dominated by the details of the negotiations for the country’s withdrawal from the European Union. Although on the surface consumer spending seems quite normal, Dr. Greenwood notes the slowdown of investment pending the emergence of a clear agreement on the post-Brexit trading environment. Until business leaders obtain clarity on their operating environment after March 2019, capital expenditure and hiring plans will remain at least partially on hold.
Appendix - Consensus Forecast Growth in GDP and CPI in Selected Major Economies
|Consensus Economics||2018 Expected||
|RealGDP||CPI Inflation||Real GDP||CPI Inflation|
|US||2.9%||2.5%||2.7% (2.6%)||2.3% (2.0%)|
|Eurozone||2.0%||1.8%||1.7% (1.6%)||1.7% (1.4%)|
|UK||1.3%||2.5%||1.5% (1.5%)||2.2% (2.2%)|
|Japan||1.0%||1.0%||1.1% (0.7%)||1.1% (0.5%)|
|Australia||3.2%||2.0%||2.8% (2.8%)||2.2% (2.1%)|
|Canada||2.1%||2.3%||2.0% (2.3%)||2.1% (1.8%)|
|China||6.6%||2.2%||6.3% (6.3%)||2.4% (1.4%)|
|India||7.4%||4.5%||7.5% (6.3%)||4.8% (4.3%)|
Source: Consensus Economics, Survey Date: 10 December 2018, and Invesco as of 4 January 2019.
* Forecasts are not reliable indicators of future performance.
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