Degroof Petercam AM: Macro Economic Update

Global growth currently hovers around 2.5% with confidence indicators pointing to still slower economic gains in the near future. Manufacturing continues to feel the burn with new orders contracting at the fasted pace in almost seven years. Confidence in the services sector, while still holding up at decent levels, is also coming down. Moreover, labour markets looks set to lose steam.

International trade weakness is dragging on and the outlook for investment has weakened significantly. Despite the trade truce announced just after the G20 summit in Osaka, trade uncertainty looks set to continue. Indeed, a US-China deal still remains a distant prospect. It’s reminiscent of the G20 meeting at the end of last year in Buenos Aires when the two sides agreed to a truce and deferred an imminent major tariff escalation. That opened up a pathway for more negotiation, but ultimately offered markets little clarity on how or when a final resolution would be achieved. What’s more, in the end the tariff rate on Chinese imports worth $200bn was lifted from 10% to 25%. So, as things stand, there’s still a real chance that the remaining batch of US imports from China worth $300bn will become subject to tariffs later this year. As a result, the slide in business confidence is unlikely to be reversed.

The combination of modest economic activity, (geo)political uncertainty (including trade tensions, congressional dysfunction in the US, Brexit and worries about Italy in Europe) and below target core inflation implies that central banks are absolutely in no hurry to tighten monetary conditions. On the contrary, both their tone of voice and policy has turned significantly more dovish in recent months. It now is close to certain that they will soon engage in more stimulus. In any case, financial markets are already widely anticipating this.

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