2019 set to be a tougher year…
Growth momentum has weakened in the second half of 2018, particularly in European and Asian exporters, who are responding to the end of above potential growth of the last few years, which has moderated final demand growth. Tariffs, restrictions and tighter financing costs have reinforced this trend, making final harder to forecast and encouraging caution on new investment decisions, Meanwhile Fed tightening, exit from quantitative tightening and boost in available US Treasurys, have begun to increase debt service costs across a range of sectors and geographies.
Slowing final demand growth globally is not a surprise, and has been a part of our themes for the last year, but the trade disputes and restrictions have reinforced some caution from buyers and supply chains. The drivers of this slowing of growth include a) the disconnect between policy stance in the U.S,. and other major economies across fiscal and monetary policy b) the lack of structural measures to boost final demand growth, c) removal of the “sugar rush” of monetary policy support as quantitative tightening takes hold. The U.S. and Chinese central banks have been particularly focused on continuing with business as usual, with overall policy stances only partly supportive. In both cases, a relative disconnect between fiscal and monetary policy complicates the messaging, and exacerbates some of the FX pressure.
I’m off to the annual meetings of the World Bank and IMF this week, a good chance to take the pulse on global market consensus and the worries of policy makers. Global trade risks and their impact on an already decelerating global economy are likely to top the worry list – with the impact of tariffs, policy uncertainty on value chains in focus along with questions of policy and macro divergence, all of which have left many less optimistic than in the spring. Given the recent escalation of U.S. – China trade tensions, and signs of slackening in global export growth, the focus is likely to be on the downside risks to global growth, the divergence between U.S. economic activity and that of most of rest of the world.
I wrote earlier about some elements of the consensus macro view and some risks to those views (and my own). A key part of tracking consensus (and identifying out of the consensus views), is keeping track of the questions investors and others are asking each other. I'll plan to gather some of these on an ongoing basis through the year to track the evolution of concerns and identify what consensus might be missing.
Key dilemmas remain mostly focused on policy choices and whether any policies might upend the macro resilience and market performance. Could this resilience fade? What would be the trigger? As typical queries are most prevalent on U.S. and Chinese policy, geostrategic issues, especially in the Middle East and North East Asia.
Global growth: is this the best we can get? What does that mean for asset returns? Will this pace of global growth be sufficient to create enough jobs in populous EM/Frontier countries o will it exacerbate political stresses and reinforce price pressures?
Impact of US fiscal policy: questions include the impact of the policies on U.S. and global demand, including the relative performance across sectors, across regions (especially in areas like New York, New Jersey and California) most vulnerable to the non-deductability of state tax, the impact on external balance and U.S. capital account? When would we worry about US debt finance ability?
Monetary policy transition (in terms of leaders and policy stance): Will the Fed/others overtighten to compensate? What credits are most vulnerable? Will the new board members shift policy? Many countries want to lag the Fed and would appreciate the weaker currency that may result, will they be able to do or will limitations of macro prudential measures call for a different trend?
Trade trends: Will any of the many trade agreements set in motion changes in supply chains? Are countries like Brazil finally opening up? Will measures increase the costs of compliance with different regulations (digital trade, localization , cybersecurity). Other policies (fiscal and monetary) are likely to have more effect but could the questions on the rules defer/front-load investment? Is there a new round of investment protection coming?
Valuation: Are US equities really expensive or are there drivers/buyback trends that justify valuations ? What about knock-on effects? is the credit downgrade cycle over in commodity producers?
China's policy space: Chinese authorities have plenty of tools to use but will doing so cap growth and undermine asset performance? Will Chinese corporate, government and quasi government bonds find buyers at a reasonable price? What will be the drivers of growth beyond 2018? Will Chinese export growth further undermine transpacific trade?
Europe risks? is Brexit irrelevant aside from the UK? Are the European banking systems and sovereigns solid enough? Has there been enough deleveraging? How concerning are signs of overheating in Eastern/Central Europe? Is the convergence story back on? Will Europe shift over to more domestic demand?
What’s going on in Saudi Arabia/the Middle East? Lots of questions about the Aramco IPO, the divergence between economic reforms and political approach. What is the strategy from the Saudi/Abu Dhabi nexus? What is the U.S. strategy in the region? Will the market absorb the planned bond and equity issuance (the latter is likely to increase significantly in 2018)? Will any pegs break in the next two years (watch Oman). Is the GCC completely irrelevant as a body? Will regional SWFs continue to turn inward? What are the new investment rules in the wake of the Saudi anti-corruption measures? Will the Qatar blockade just fade away as the country adjusts (and recent data suggests its a vey slow bleed) and other countries continue to trade with the country (see UK and French economic and military coordination).
Rachel's musings on macroeconomic issues, policy and more.