Growth edges up

We see an inflection point in global economic growth as easier financial conditions start filtering through. The growth mix is shifting as the modest pickup is likely to be led by manufacturing, business spending and interest rate-sensitive sectors such as housing.

Implication: We maintain a moderate pro-risk stance and see potential for cyclical assets such as Japanese and emerging market (EM) assets to outperform tactically.

Growth disconnect
BlackRock G3 FCI and Growth GPS, 2010-2020

• The unusual late-cycle, dovish pivot by central banks has led to a dramatic easing in financial conditions. The impact of such easing on the real economy typically comes with a lag — but has been particularly delayed this time due to the protectionist push. This is illustrated by the
  Growth disconnect chart in the gap between our Growth GPS (yellow line) and where we would expect growth estimates implied by financial conditions to be (orange line).
• We believe the incentives for the U.S. and China to hit pause on their trade conflict are strong in 2020, although there could be turbulence along the way. Trade pressures moving sideways should allow global trade activity some breathing space.
• We also see a shift in the mix of global growth. The uptick is likely to be led by the manufacturing sector (notably cars, capital goods and semi-conductors), as well as interest rate-sensitive sectors such as housing and, to a lesser extent, business investment.

Bottom line: We expect a modest global growth pickup in the first half of 2020. This limits recession risk and is a favorable backdrop for risk assets, in our view.

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