Global Macro Outlook - July 2019

Key Forecast Trends

Global markets have been encouraged by a truce in the trade war between the US and China and by signs that central banks have abandoned monetary policy normalization and are ready to provide additional policy stimulus.

But the trade truce remains uneasy and the focus has switched to policy effectiveness. We are optimistic that policymakers will deliver sufficient stimulus to stabilize growth in China and that 100 basis points of Fed rate cuts will do the same in the US.

We are more concerned about Europe, which is vulnerable to a further downswing in the global trade cycle and has limited policy flexibility. We expect the ECB to ease policy in the coming months, but doubt that this will do much to lift growth or inflation in the region.

Bond yields have fallen further and remain well below fair-value estimates. Yet it’s difficult to see a near-term catalyst for higher yields, especially in the euro area, which is beginning to take on a distinctly Japanese feel.

Outlook

We expect the global economy to grow by 2.6% this year and next. This soft performance reflects a weak secular backdrop and rising cyclical headwinds.

Risks to this outlook are heavily skewed to the downside. We’re most concerned about open economies with limited policy flexibility. That puts the spotlight firmly on the euro area, which we expect to grow by just 1.0% next year.

The secular backdrop continues to point to higher inflation. But cyclical developments point in the opposite direction, and we expect global inflation to fall to 2.6% in 2019, from 2.8% this year. That’s despite an acceleration to 2.5% in the US.

Central banks are abandoning their plans for policy normalization. We expect the Fed to cut rates by 100 basis points and the ECB to couple more modest rate cuts with additional asset purchases. Policy effectiveness will be key.

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Global Macro Outlook - July 2019

What You Need to Know

Key Forecast Trends

Outlook