Big Week, Smaller Numbers

Last week offered a limitless buffet of economic updates for those who cannot resist offers of all-you-can-eat! The Fed released minutes, the ECB held a meeting, the IMF came out with new projections, and for dessert large U.S. banks were grilled by Congress. The options were overwhelming!

But what to eat? Our pick of the news were IMF projections cooked up with a wide array of ingredients. The major points of their outlook are: after strong growth in 2017 and early 2018, economic growth slowed in the second half of 2018. After a few quarters of weakness, growth is set to stabilize by 2H19. However, despite the better news, most risks are still tilted to the downside.

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Global economic activity decelerated notably in the second half of last year due to well-known events. China slowed after enacting regulatory tightening to rein in their shadow banking system in conjunction with an increase in trade tensions with the United States, the euro area lost speed as consumer and business confidence weakened, car production in Germany turned down and Italian sovereign spreads widened. Overall financial conditions tightening as markets sold off at the end of 2018. Because of these events, the IMF reduced 2019 global growth forecasts to 3.3%, with advanced economies down to a smaller 1.8%.

The just released IMF global economic forecasts now indicate the possibility for a small increase in global growth in 2020. This improvement is correlated with the Fed’s pause on rate hikes, China offering some stimulus, improvements in global financial markets sentiment, and the anticipated stabilization in Europe as China (a major export market for Europe) turns the corner. Still, growth will not be uniform with advanced economies still weakening into 2020 and global economic improvements coming from emerging markets and developing economies.

Despite the expectation for global economic stability and some modest growth, the warning of risks to the downside and still slower growth in advanced economies does not make you want to save room for dessert. The litany of risks prompting caution include a further escalation of trade tensions, a sharp deterioration in market sentiment like in the 4th quarter, a reassessment of the Fed’s pause due to the reemergence of inflation, a no-deal Brexit and continued political discord due to rising inequality and the rise of populism.

Maybe it’s best to just skip dessert.

Sources: IMF, Bloomberg