Global growth has not only plateaued in 2018, it has also become more uneven across regions this year. We’re seeing increasing economic divergence and differentiation between and within asset classes, both of which are typical of an aging expansion.
Our latest Cyclical Outlook, “Growing, But Slowing,” highlights the macro trends and market developments that underpin our outlook for 2019: slower growth, but likely no recession.
A few of the “rude awakenings” that we discussed in our longer-term Secular Outlook in May have already manifested in the last several months, including the intensification of the China-U.S. trade dispute, the brewing conflict between the EU and the populist Italian government, the recent turmoil in emerging markets, and the periods of volatility in global equities – all of which underscore our secular emphasis on caution and liquidity.
These recent political and market developments are relevant for the cyclical outlook because they have tightened global financial conditions and increased political and economic uncertainties, which are all likely to damp corporate and consumer “animal spirits” around the world.
Baseline outlook for 2019
Against this backdrop and with the fiscal stimulus in the U.S. starting to fade next year, our cyclical baseline sees this year’s economic divergence – with U.S. growth accelerating but the rest of the world slowing – giving way to a more synchronized deceleration of growth in 2019. In our forecasts, the big three – the U.S., the eurozone and China – should all see lower GDP growth in 2019 than this year: Growing, but slowing.
However, economic activity in the major economies, while slowing, is still likely to keep expanding at an above-trend pace and thus absorb more of any remaining slack in labor markets over our cyclical horizon. In response, we expect the major central banks to continue to remove accommodation gradually.
While we continue to believe that a recession over our secular three- to five-year horizon is quite likely, a recession next year is not our base case, and so we expect to remain in the late-cycle stage for some time. So far, none of the domestic imbalances that typically precede recessions have developed: over-consumption, over-investment, a housing bubble or excessive wage growth.