Daily Management Review

What to expect from global economy in 2019?


Investment Bank Julius Baer does not believe in the onset of a recession this year, but recommends investors to closely monitor the situation in China and the problems of the European Union.

The current situation in the world indicates an increase in the risk of a slowdown in the global economy, but the probability of a recession this year remains rather low. At the same time, the results of trade negotiations between the United States and China, as well as implementation by Beijing of measures to support business activity in the country, will be key factors for the further dynamics of both the Chinese and world economies.

Markets are on the rise

The global stock markets, which showed the worst dynamics for this month since the depression in December 2018, began an active recovery in 2019 after receiving positive signals from the US Federal Reserve. Key officials of the US Central Bank said that the regulator is in favor of less active than previously expected tightening of monetary policy against the background of moderate inflationary pressure in the economy.

The Fed claims that it does not have a tight interest rate increase program and is ready to be flexible and to respond quickly to economic conditions to support GDP growth. In addition, Fed officials said that the decision to further reduce assets on the balance of the regulator, the state of which causes concern to investors, will not be automatic.

In this regard, the regulator will be guided by its own goals of maintaining the maximum level of employment and price stability. Nevertheless, markets still have to make sure that the Fed will adhere to a softer policy and will not return to harsh rhetoric in the event of significant market growth.

Strategists of Julius Baer took advantage of the significant growth in markets from the lows recorded on December 24, 2018, and left a number of assets included in the NASDAQ 100 index. The funds received are still held in cash and will be reinvested under favorable market conditions.

Global risks

Now the global economy is dominated by several significant factors of uncertainty that adversely affect investor sentiment and business activity. In addition to the policies of key regulators, they are associated with the longest suspension of government work in modern US history. Prospects for ending the of the government shutdown remain vague, and the longer it lasts, the stronger the negative consequences for the growth of the American economy will be.

In addition, further actions by the Fed are poorly predictable. Despite the fact that the US central bank announced its readiness to slow down the process of raising interest rates, it may well return to tightening of monetary policy amid rising stock markets. Perhaps this will be a serious mistake and a negative impact on the dynamics of many assets.

The outlook for US-China foreign trade also raises many questions. Both sides expressed optimism about reaching an agreement on duties, but no specific decisions have been announced yet. Setting the situation will have a strong positive effect on investor sentiment.

Finally, the most noticeable factor of uncertainty is associated with the ongoing Brexit. The British Prime Minister Theresa May was not able to enlist support of the parliament according to the Brexit plan agreed with the European Union even after the vote on it was rescheduled from mid-December to mid-January.

Likelihood of the implementation of the “tough” Brexit scenario remains, although it is small. The majority in the British Parliament, as well as the official Brussels, opposes the unregulated "divorce" of the parties, so the most logical step would be to postpone the official date of Brexit. This increases the likelihood of "soft" exit or rejection of it after the second referendum. 

Tardy growth

Projections for the growth of the global economy are deteriorating following the decline in the main leading indicators. The difference in growth rates between different countries remains significant, and the weakest dynamics is recorded in developing economies with the greatest structural problems. At the same time, in the USA, the indicators are kept at a high level: in spite of ever-increasing risks, the US economy continues to grow at a pace that in the near future will outpace the indicators of other industrialized countries.

In the eurozone, where GDP growth overtook all estimates over several quarters, leading indicators point to the likelihood of a slowdown in dynamics to a fundamentally justified level. Against this background, there are more and more calls for the implementation of fiscal measures to support the economy. The European Central Bank (ECB) may respond to the risks of deterioration in the dynamics of the region’s GDP and postpone the first increase in interest rates. However, the regulator is unlikely to abandon the tightening of monetary policy.

source: forbes.com