A growing sense of uncertainty seems to have dominated the global economy in 2018. How do you explain it?
2018 was a fascinating year. In the early months, all global macroeconomic indicators continued to suggest an excellent climate. The eurozone was brimming with confidence. Then the clouds gradually rolled in and dampened the atmosphere. This sudden reversal came about from two main sources of uncertainty.
The first pertains to a shift in the economic climate—when an economic cycle reaches a certain level of maturity, as is the case in the United States where the current cycle has lasted since 2009, we start to wonder how much life it has left. On that side of the Atlantic, unemployment is now so low that companies are struggling to fill vacancies. Thus, the rising fears of inflation beginning in early February. Next—and this was a fundamental turning point at the end of 2018—expectations of slowed growth took the upper hand. Some economies were particularly hard hit. In Germany, for example, companies have grown increasingly concerned about their declining export orders. It is no accident that fears of rampant inflation and slowed growth coexist—this translates as the nervousness of investors at this advanced stage in the cycle.
The second source of uncertainty is exogenous and contextual. In 2018, the threat of a trade war between the United States and China reached a fever pitch. However, it should ultimately produce a positive result. In a global context of slowed growth, the two countries have every reason to reach an agreement in 2019, which would bolster corporate morale and consumer confidence. As far as Brexit is concerned, the March 29 deadline may be pushed back, but only by a few weeks or a month at most. For that reason, it remains difficult to give an opinion about international trade relations. The first half of 2019 should deliver some much needed clarity.
What are the consequences for 2019?
In 2018, we witnessed a global slowdown in growth everywhere except in the United States. In 2019, this trend should continue and become more widespread. In the United States, growth will likely fall from 2.9% to 2.1%. In the eurozone, it should drop from 1.9% to about 1.4%. Though these levels remain perfectly sufficient, any slowdown will lead to anxiety. It’s a vicious circle: uncertainty curtails the risk appetite of investors, as well as corporate profits, salaries and so on. In the United States, companies and financial markets tend to focus on extreme risks instead of the growth consensus. On the other hand, the fears of inflation risk should start to fade. That is what enabled the Federal Reserve to announce its plan to slow the pace of its interest rate hikes. As I indicated, various exogenous sources of uncertainty should start to dissolve throughout the year. However, economic players are slow to change their attitudes, so the start of 2019 will be marked by a lot of questions.
Photo : William De Vijlder
How have the United States Federal Reserve (Fed) and the European Central Bank (ECB) reacted?
To keep from stifling growth, the Fed and the ECB have shown immense prudence. Though the Fed has already raised its interest rate several times, it recently announced its intention to stop its hikes. For his part, Mario Draghi, the president of the European Central Bank, offered a positive assessment of the year, with “broadly balanced risks” and contained inflation. In light of the change in these indicators, the hypothesis of an initial deposit rate hike after summer 2019 remains perfectly justifiable. These two monetary policies may fall out of sync and pursue opposite goals. This change would have a major impact on foreign exchange policy, favoring the euro against the dollar.
How have emerging markets fared amidst the growing uncertainty?
In these markets, the background is much less uniform, with variations unique to each country, such as Turkey, Argentina or Brazil, for example. Globally, fears of the Fed’s rate hikes and a strong dollar have subsided. For several weeks, local currencies have more or less stabilized against the dollar. However, the falling cost of raw materials penalizes those countries that supply intermediate products. Even if we exclude Brazil, Latin America is lagging behind, and this has been the case since 2016. In 2019, the region should continue to underperform. In China, the slowdown will continue, which may lead to new economic policies aimed at supporting growth.
What can we expect in 2019?
We enter 2019 within a context of rising uncertainty contributing to a slowdown in growth. This has produced an atmosphere of great caution due to the attention paid to extreme risks. Despite this fact, if we look closely, growth factors remain strong in the primary markets: a job market in good shape, rising corporate profits, easy access to funding with low real interest rates and high consumer confidence. Ultimately, growth should remain at a satisfactory level.
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