Key Forecast Trends

• With 2019 approaching, the global economy is facing a less favorable mix of growth and inflation. Moreover, downside risks continue to cloud the outlook for Europe and China. If these risks materialize, recession awaits.
• Even if tail risks are avoided, the trade war between the US and China remains a major concern. The standoff has the potential to create a permanent adverse shift in the global growth/inflation trade-off, especially if it's a harbinger of a broader schism between China and the West.
• This drama is playing out with global debt levels elevated and central bank balance sheets starting to shrink. If growth slows more quickly than expected, investors will rightly question what's left in the monetary-policy toolbox.
• For markets, there are three important pieces to the puzzle: the global macro cycle, global liquidity and the threat from rising populism. Together, these factors point to another volatile and challenging year for global risk assets.

Outlook

Expectations for global nominal GDP growth have not changed much in recent months at close to 6.0%, but the mix has become less favorable, with lower real growth offset by higher inflation.

Our 2019 global growth forecast remains at 2.9% this month, but there were two noteworthy downgrades last month: we lowered the euro area to 1.4% from 1.6%, largely because of weaker Italian growth, and China to 6.2% from 6.3%, owing to concerns about the magnitude and timing of the much-needed policy response.

Compared to consensus estimates, we are still a bit more pessimistic on the euro area (1.4% versus 1.6%) and the US (2.3% versus 2.6%), in line on China (6.2%) and more optimistic on Japan (1.3% versus 1.0%).