Macro: Downside risks, but global economy is resilient

Thursday 30 May 2019

Cross Asset

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Contributing Authors

Didier Borowski
Head of Macroeconomic

Monica Defend
Head of Strategy

Philippe Ithurbide
Global Head of Research

The outlook is somewhat more uncertain than last year due to the rise of protectionism, but we must not sink into an excess of pessimism. The global economy is resilient:

  • The most advanced economies remain supported by domestic demand. The first quarter growth data are clear proof of this: they were better than expected in the United States, the Eurozone and Japan, with respectively 3.2%, 1.6% and 2.1% growth (at annual rates).
  • Emerging economies will continue to grow. Their external markets are weakening, but they are not threatened like last year by either the rise in US interest rates or the dollar appreciation.

That said, the climate of uncertainty is not conducive. The global manufacturing sector is at half mast. The countries most heavily involved in global trade are taking the biggest hit. Against this backdrop, the world economy is slowing this year. We expect about half a point less global growth YoY in 2019, with growth of 3.3%.

In the absence of inflation and given the downside risks, central banks are implicitly committed to maintaining accommodative monetary conditions. So far we have maintained a status quo for our fed funds rate estimate in 2019/2020, in line with our own GDP growth and inflation expectations. We have increased the probability of the downside risk scenario (from 20% to 25%) and recognize that risks have become asymmetric (in line with markets’ expectations).

Some Fed’s member already argue that a simple disappointment on inflation / inflation expectations could justify a cut in the fed funds rate regardless of GDP growth (i.e. even if growth remains close to potential, with no risk of recession). The implicit idea is that the neutral rate (r*) may be a little weaker and that the Fed has gone too far in terms of rate hike last year. James Bullard (President of the Fed of St Louis) – while recognizing that the normalization has been successful and that the “stopping point” is appropriate – recently argued that a cut might also be appropriate if inflation disappoints. We have maintained also a status quo for the ECB. The ECB would not hesitate to mobilize the available tools if the need arises. All of this will help keep interest rates low for governments and corporates, and thus contain the debt burden. For their part, governments will not remain inactive if GDP growth slows further. There is less and less opposition to the mobilization of counter-cyclical fiscal policies in a structurally weak interest rate environment. As the center of gravity of the global economy will continue to shift from West to East, we should not focus our analysis only on short-term. The world of tomorrow will benefit from multiple sources of growth. Global value chains are re-regionalizing or even re-nationalizing, which means that going forward we should benefit from economic cycles that are less dependent on each other at the global level.

Important Information

Unless otherwise stated, all information contained in this document is from Amundi Pioneer Asset Management (“Amundi Pioneer”) and is as of March 30, 2019.

The views expressed regarding market and economic trends are those of the authors and not necessarily Amundi Pioneer, and are subject to change at any time. These views should not be relied upon as investment advice, as securities recommendations, or as an indication of trading on behalf of any Amundi Pioneer product. There is no guarantee that market forecasts discussed will be realized or that these trends will continue. These views are subject to change at any time based on market and other conditions and there can be no assurances that countries, markets or sectors will perform as expected. Investments involve certain risks, including political and currency risks. Investment return and principal value may go down as well as up and could result in the loss of all capital invested.
This material does not constitute an offer to buy or a solicitation to sell any units of any investment fund or any service.

Date of First Use: May 31, 2019.

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