2018 marked the peak, 2019 the decline?

The hallmark of 2018 in terms of the global economy was the demise of the unusually synchronised economic growth upswing that had characterised 2016 and 2017. And, looking forward into 2019, the outlook for the global economy has only become more clouded as late cycle dynamics take hold. The narrative of the globally synchronised economic upswing had been supported by accommodative central bank policy, low inflation and even lower financial market volatility that characterised 2017. This was challenged in 2018 and will be further eroded in 2019. For investors, this will likely mean a more challenging risk-reward trade-off.

In 2019, we expect economic growth amongst key global economies to become increasingly desynchronised as key global trends, exacerbated by idiosyncratic domestic factors, begin to weigh further. The two key trends being: global central banks, primarily the US Federal Reserve (Fed), continuing to remove accommodative policy settings – raising policy rates and moving from quantitative easing to quantitative tightening; and broader geopolitical tensions, driven by protectionist and/or populist governments. The International Monetary Fund’s (IMF) global economic forecast is 3.7% growth for 2019, unchanged from 2018 (but revised 0.2pp lower in its October forecasts compared with April). Nonetheless, we suspect there’s some downside risk to this assessment – particularly late in the year.

Global: Real GDP growth
IMF looks for stable growth but there are downside risks

Economic-Update-Oct-18-Chart

Source: IFM Investors, IMF World Economic Outlook

We agree that developed economy performance will decelerate in 2019, but this will likely be relatively modest as previous tailwinds turn to headwinds and growth dynamics face late cycle constraints. This is despite monetary policy remaining broadly accommodative, especially outside the US. The IMF forecasts 2.4% real GDP growth in 2018 and 2.1% in 2019, which seems reasonable, especially given the slowdown in many economies we have already observed in both the soft and hard data towards the end of 2018. The pulse of global manufacturing, industrial production and trade has clearly slowed through much of this year. For the majority of larger advanced economies, 2017 was the high watermark for growth, with the US the outlier with its peak in 2018.