A year ago, our outlook had the catchy if slightly unoriginal title "As good as it gets?". That proved about right as the year progressed, culminating in December's panic mood in financial markets. Even now, plenty of folks are using the dreaded "r" word. By contrast, we do not see any signs yet of a sustained global recession. In fact, I would almost be tempted to turn last year's motto on its head. There is a decent chance that the worst, in terms of growth downgrades, may already be behind us. For the world as a whole, we now forecast gross domestic product (GDP) to grow by 3.5% in 2019, compared to 3.6% three months ago. We forecast the same growth rate to be sustained in 2020. This reflects slightly slower momentum in the Eurozone, the United States and China, partly compensated for by stronger growth in some emerging markets, notably India.
Following last year's fiscalstimulus, U.S. growth is moderating. Given how much unemployment has already fallen, we would judge this to be entirely healthy. To be sure, some downside risks have increased. Market turbulence at the end of last year led to a tightening of financial conditions, if only temporarily. Trade frictions continue to prove a drag both directly and indirectly by contributing to global weakness. China has borne the brunt of the trade conflict with the United States so far. The Chinese economy has slowed sharply, as demand for its exports has shrunk. Employment has weakened, diminishing domestic consumer spending. China's government appears determined to soften the blow. We expect some stabilization by the summer, once the fiscal and monetary measures kick in. The flipside is that the fiscal deficit will probably be bigger than initially assumed, now forecasted at 4.2% of GDP in 2019 instead of 3.2%. Similarly, Japan is likely to experience a cyclical slowdown in 2019, due to lower external demand and weaker investments.
As for Europe, a confluence of factors dragged down growth in the second half of 2018. German carmakers' sales were hit by tighter fuel-emission standards. A summer drought left the Rhine unusually shallow, which had knock-on effects on a surprisingly wide range of sectors. In the longer term, both events should give pause for thought, and not just in Germany. As my colleagues from our environmental, social and governance (ESG) team argue (see the CIO View - ESG ), climate-change-related financial opportunities and risks are increasingly critical for understanding company and sector performance. The same, I would venture, will also be true for whole economies. Meanwhile, the Diesel-car saga is a reminder just how painful sudden technological changes can be for existing manufacturers. Within the next few months, however, the main effect should be German growth bouncing back.
Elsewhere in Europe, political uncertainties continue to weigh on sentiment. From Brexit and Italy to trade, these are not new risks but the cumulative effect has already proven noticeable. We have cut our growth forecast for the Eurozone to 1.3% for 2019 and forecast 1.4% for 2020. For the UK, we maintain our 2019 forecast of 1.5% and introduce 1.6% for 2020. This is because we anticipate some recovery after the main Brexit-related uncertainties begin to vanish. In particular, we still expect that a chaotic no-deal Brexit can be avoided. In light of all recent turmoil in Westminster, the probability of the UK remaining a member of the European Union for the foreseeable future has probably gone up, not least with the opposition Labour Party now supporting a second referendum.
This hints at a broader theme worth highlighting at this juncture. As we argue elsewhere (see CIO View - Focus ), the rise in political uncertainty reflects deeper socioeconomic changes. It is not just a temporary aberration. By the same token, though, we may have reached a point where short-term sentiment has already become too negative on the political front. Recently, Brazil's new far-right president, Jair Bolsonaro, has introduced a pension reform that markets welcomed as surprisingly ambitious. On trade and perhaps on Brexit we could see some relief in coming months. And in Italy, last year's election winner, the populist Five-Star movement, has seen its electoral support evaporate, though mainly to the benefit of its rightwing coalition partner Lega.[1]
Rebounding from Diesel scandals
Last year, German car makers were hit hard by Europe's new Diesel emission regulations. Since then, orders have rebounded sharply.
Sources: Bloomberg Finance L.P., Deutsche Bundesbank, German Federal Statistical Office, DWS Investment GmbH as of 2/27/19
* Germany Industrial Manufacture Orders of Motor Vehicles, Trailers & Semi-Trailers
** Germany Industrial Production Manufacture of Vehicles
Politics as a source of market uncertainty
In recent years, U.S. economic-policy uncertainty has gone up significantly. This has had a direct impact on market volatility and financial conditions.
Sources: Bloomberg Finance L.P.; 'Measuring Economic Policy Uncertainty' by Scott Baker, Nicholas Bloom and Steven J. Davis at www.PolicyUncertainty.com; DWS Investment GmbH as of 02/2019
1. https://www.bloomberg.com/opinion/articles/2019-02-26/italy-s-populist-insurgents-five-star-are-collapsing
