04-11-2019
The global economy is still weak heading into Q4 but there are a few rays of light. On balance, Chinese activity data show tentative signs of improvement and since China is the epicentre of the global slowdown and often leads the global cycle, it may be a sign that Q4 will be the low point of the global downturn. We expect only a moderate improvement in 2020, though, as companies are likely to stay cautious due to continued uncertainty on the trade war front.
However, recently we have seen positive signs in the trade talks between US and China after the escalation over the summer. The two sides are working on a phase one deal, which is said to include Chinese purchases of agricultural goods, stricter rules on intellectual property protection and a currency pact. It is expected to take a planned US tariff hike in December off the table. The signal so far is that the phase one deal will be signed later this month. Immediately after a phase one deal is signed, the two countries have vowed to move on to phase two. This part will be trickier, as it will include the most difficult issues in the trade negotiations. Nevertheless, we now see a 50% probability that a phase two deal can be signed in the first half of 2020. It will require Trump to compromise to accept China's red lines, but he may opt for this scenario as a trade deal could give him a needed boost to revive the economy and give farmers in swing states some much needed gifts ahead of the November 2020 election. The US economy has been weakening into the fourth quarter with manufacturing being in recession and increasing signs that the softness is spilling into the service sector. Farmers have had the worst crisis in decades due to the halt of Chinese purchases and flooding that hit some regions. We look for the US economy to grow close to trend in 2020 around 1.5-2% but a bigger trade deal could result in a more positive outlook.
In line with our long-held view Brexit has been extended (new Brexit day is 31 January 2020) and a general election is called with the Brits going to the ballots on 12 December. In our view, the election is an EU referendum in disguise. This means we may soon get to the Brexit end game unless the election results in a 'hung' parliament. Overall, the risk of a no-deal Brexit scenario has declined substantially
In Europe economic data are still weak and we expect this to continue in Q4. However, a stimulus-driven recovery in China (albeit slow) should have a positive spill-over effect on Europe, where a decline in exports has been the main culprit. We thus look for a gradual improvement in Europe during 2020, but not a strong recovery. The Brexit outcome will also be an important driver for the outlook.
The global central banks have offered support to the global economy in the past quarters and we look for further cuts by the Federal Reserve . However, a December cut looks less likely now as the labour market is still doing fine and trade tensions have eased. We believe the ECB is done easing, partly due to internal disagreement and fewer downside risks following better data out of China and an improved outlook for the trade war and Brexit.
The stock markets have rallied lately on the back of the rays of light in the global cycle mentioned above and easing political risks. We expect stocks to outperform bonds on a 12-month horizon. We look for bond yields to stay low in the coming months, as labour markets are set to weaken in many countries because employment tends to react with a time lag to economic weakness. We look for the EUR/USD to stay fairly low in the short term but to move moderately higher on a 12-month horizon, as Brexit risks are expected to be reduced further and the euro area economy improves somewhat.
