A Growth Recovery Looming Ahead

Elga explains why we see a growth pickup looming on the horizon. Hint: Watch the transmission of financial conditions.

An expected dovish pivot by central banks has materialized. Now what? Financial conditions in key developed economies have become more accommodative as a result, even though the lift to the broader economy has yet to kick in. We see policy easing helping sustain the economic expansion–and the likelihood of a growth pickup over the next six to 12 months. This supports our moderate pro-risk stance. Yet it could be a bumpy ride due to the persistent uncertainty from protectionist policies.

Growth expectations for key developed economies have faltered since 2018, as indicated by our BlackRock Growth GPS for G3 economies (the U.S., Japan and euro area). Financial conditions have eased in recent months in these economies thanks to policy easing, according to our Financial Conditions Indicator (FCI). The historical relationship between our FCI and GPS points to potential for a growth pickup in the coming six months. Some pockets of the economy that are more sensitive to interest rates appear to be slowly responding to easier financial conditions: In the U.S., the housing market appears to have turned a corner and auto sales have held up. In the euro area, machinery investment rebounded. But easier financial conditions have yet to support a broader economic recovery.