MACRO AND MARKET PERSPECTIVES

Slowing – but still growing

Jan 23, 2019

We see global growth slowing as the expansion enters its final stage. The slowdown comes as the U.S. economy becomes a drag rather than a driver. It is driven by elevated uncertainty around policy plans, the tech rivalry between the U.S. and China and tighter financial conditions. Trade activity, business sentiment and investment plans have softened. The fading U.S. fiscal boost should be offset by heftier stimulus in China and Europe. Slower growth and modest inflation allow central banks to pause policy normalisation, in our view. The risk of a U.S. recession remains limited but climbs over time. We believe financial markets are being overly pessimistic, having already priced in most of this downside risk.

Highlights

  • Recession fears are overblown, in our view. Financial vulnerabilities are low and major central banks do not need to respond aggressively to inflation pressures. This gives them flexibility to maintain easy monetary conditions.
  • The boost from U.S. fiscal stimulus is subsiding, but stimulus measures are ramping up in China and Europe. Historically low long-term interest rates allow governments to expand borrowing. Yet stimulus may now be less effective in stoking demand.
  • Slower growth, modest inflation and tighter financial conditions will likely persuade the Federal Reserve to avoid further interest rate rises until the second half of the year, in our view. We see the European Central Bank waiting on a first rate rise until 2020 and believe China’s policymakers will ease financial conditions in several ways.
  • Risks to growth include tighter financial conditions and rising financial vulnerabilities, increasing the chance of a U.S. downturn. China may struggle to offset the economic fallout from the trade war, while Europe is vulnerable to global trade disruptions and yet another flare-up in the eurozone crisis.

Snapshot

The U.S. slowdown we expect in 2019 comes in the context of an economy that is transitioning into a late phase of the business cycle, the final phase before a downturn. But we think that recession risks in 2019 are limited. The next recession may still be years away – but perhaps just a few, not several. See the orange band in the chart below. We arrive at our assessment of where the U.S. economy is in the business cycle via a statistical technique known as clustering analysis.

Stages of the U.S. business cycle, 1965-2019
Philipp Hildebrand
Vice Chairman, BlackRock
Jean Boivin
Global Head of Research, BlackRock Investment Institute
Jean Boivin, PhD, Managing Director, is Global Head of Research for the Blackrock Investment Institute and is a member of the EMEA Executive Committee.
Elga Bartsch
Head of Economic and Markets Research, BlackRock Investment Institute