“My colleagues and I have one overarching goal: to sustain the economic expansion, with a strong job market and stable prices, for the benefit of the American people.”
– Jerome Powell, Fed Chair, June 19, 2019
Investment Managers Securities Analysts
Bermuda & Cayman
Our outlook for global economic growth has weakened slightly, in part reflecting the recent escalation in trade tensions. We agree with Bloomberg consensus estimates for an annualized global growth rate of 3.3 percent in 2019 and 2020. Our view is that the re-escalation of US-China tensions is temporary with both sides working towards an eventual deal. Combined with easy monetary policy in the US and fiscal stimulus in China the global economy should stay on a gradual recovery path. Global manufacturing activity is sluggish, largely due to trade uncertainty and the knock-on effects of declining auto production in Europe. On the flip side, service industries have been resilient, particularly in advanced economies. Should the US and China fail to agree on a deal and they mutually impose tariffs on the full range of imports, Morgan Stanley believes a global recession would be imminent.
Political challenges span the globe. Brexit is becoming a never-ending story and questions are rising as to how committed Italy, the third-biggest economy in the eurozone, really is to the single currency.
Growth expectations for the US have moderated to 2.5 percent for 2019 and 1.8 percent in 2020. The Fed has reached the end of its monetary tightening cycle and we could have an interest rate cut in Second Half 2019. In our view, policy uncertainty from Washington and geopolitical instability are the main factors holding back spending and investments causing economic growth to moderate. Trade tensions between the US and China are flatlining consumer confidence and discouraging purchases of big-ticket items. Although unemployment is at a 50-year low, how much further can it decline? On the back of a fundamentally strong US economy, a resolution to the trade wars cold result in a sharp upswing in global economic growth supported by pent up demand and increased business investing. Any moderation in growth is related to consumer and investor anxiety and not based on economic fundamentals.
Consensus estimates point to a 1.4 percent economic growth rate for Canada in 2019 before picking up to 1.8 percent in 2020. Business and consumer spending rebounded in First Quarter 2019 and the unemployment rate declined to 5.4 percent in May. Further, housing is showing signs of stabilization and monetary policy is accommodative.
Economic momentum is weak in the eurozone and the economy is expected to grow at 1.2 percent in 2019 and 1.3 percent in 2020. Some of the loss of momentum has come from weaker external demand, particularly from China, but also from declines in consumer and business sentiment. The ECB is in a difficult position given the misalignment with tight fiscal policies in the euro-area which need to be loosened by member states in order to boost monetary easing effectiveness. Currently, only a handful of economies, including Germany, has room to increase fiscal spending but the German coalition government seems hesitant to do so. Meanwhile, Spain, Italy, France, and Belgium are set to run sizeable deficits in 2019.
The outlook for the UK economy stands at an annualized rate of 1.3 percent in 2019. Despite all the Brexit uncertainty, the domestic economy has been resilient with the unemployment rate at the lowest since 1975, wage growth improving, and consumer spending holding up.
Pacific Basin /Asia
In Japan, growth is projected at 0.7 percent in 2019 before weakening to 0.4 percent in 2020 as the economy has entered the late-cycle phase of expansion and external demand, particularly from China, has weakened. Japan’s exports fell for a sixth straight month in May as China-bound shipments of semiconductor manufacturing equipment and car parts declined. Additionally, the planned VAT hike in October should weigh on consumer spending in Second Half 2019 and early 2020.
Economic growth in China is expected at 6.2 percent in 2019 before moderating to 6.0 percent in 2020 as per Bloomberg consensus estimates. The fallout from the trade war has dominated the headlines and it is not yet clear how the Xi-Trump trade truce will play out. Chinese imports tumbled in May while exports unexpectedly rose, suggesting weakness in the domestic economy combined with signs that manufacturers are front-loading shipments ahead of threatened new US tariffs. The People’s Bank of China note risks to the economy are rising amid high local-government debt, more bond-market defaults, and banks’ high level of exposure to a shaky real-estate sector.
India’s economy is growing fast but slowing. We agree with consensus estimates for GDP to grow at 7.0 percent in 2019, down from 7.2 percent in our previous publication on weaker than expected momentum in the economy. The lower growth figure is attributed to weaker domestic consumption, slower global growth, and tensions between the US and China. Activity in the manufacturing sector has cooled over the past year and to a lesser extent in the agriculture sector. The Reserve Bank of India has cut interest rates three times to 5.75 percent so far in 2019 to address growth concerns and more cuts are likely
The outlook for growth in Australia has weakened further and stands at an annualized rate of 2.0 percent in 2019, down from 2.5 percent in our March outlook. Downside risks to the economy are strong. The unemployment rate ticked up to 5.2 percent in May and property prices have declined further which could prompt households to rein in consumption.
Low inflation is sweeping through Southeast Asia and the economic recovery has stalled in the wake of the Chinese slowdown. However, forward looking manufacturing surveys signal a rebound is beginning to take hold on the back of Chinese stimulus measures.
In Brazil President Jair Bolsonaro’s government lack votes in Congress to approve his promised budget-tightening social security reform and Bolsonaro is said to be mulling ways to relax the government spending cap which is becoming harder to meet amid weak growth. Consensus estimates for GDP growth have been slashed and stand at 1.0 percent for 2019, down from 2.2 percent in our previous publication.
Mexico’s annualized economic growth is slowing and is now estimated at 1.2 percent for 2019, down from 1.7 percent in our previous Outlook. The US has suspended the tariff threat on Mexico, yet the agreement has no specific targets and leaves open the possibility of other punitive measures by the US. This threat could be a permanent one as long as President Trump is in office.Further, Mexico’s fiscal outlook bears watching. President Andrés Manuel López Obrador came into office pledging increased spending on social programmes. He has delivered many of them, but at a cost and the budget deficit is widening.