We see a synchronized global slowdown ahead in 2019, as the U.S. economy becomes a drag rather than a driver. The U.S. slowdown reflects, in part, an economy that is transitioning into a late phase of the business cycle, the final phase before a downturn.
The global slowdown is likely to be led by the U.S. but should partly be cushioned by more steady growth in Europe and emerging markets, notably China, as we argue in our January 2019 Macro and market perspectives Slowing – but still growing.
Our BlackRock Growth GPS indicator hints at slower G7 growth (see the chart below), yet we expect a further material deceleration due to a number of reasons. These reasons include tighter financial conditions, the elevated uncertainty around current policy plans and an intensifying tech rivalry between the U.S. and China–already hobbling trade dynamics and investment intentions.
Trade activity, business sentiment and investment plans have softened. The boost to U.S. growth from fiscal stimulus should fade this year, though the drag on global growth may be offset by heftier stimulus in China and Europe. Slower growth and modest inflation allow central banks to pause their policy normalization, in our view.
We expect the Federal Reserve will likely hold interest rates steady for a while–probably until the second half of this year. The European Central Bank may not raise rates at all before 2020. China’s policymakers are seeking to boost the economy through a range of channels.
BlackRock’s Financial Conditions Indicator
Our expectation for a synchronized global slowdown is underpinned by our new Financial Conditions Indicator (FCI) for the U.S., the euro-zone and Japan.
Financial conditions suggest there are further material downside risks to our Growth GPS for the G3 economies over the coming quarters. The projected slowdown takes growth back to trend-like levels, and hence is nowhere near levels that would be consistent with a recession. But consensus economic forecasts have been slow to reflect this deterioration.
Our work suggests the U.S. economy was already approaching the late-cycle phase last year. On the current trajectory, it will enter the late-cycle phase during the first half of 2019 as labor market slack and the output gap suggest above normal utilization rates. Historically, late cycle phases of the expansion have lasted roughly six quarters. But individual cycles have differed materially. The late-cycle period ranges from just under a year before the early 1990s recession to nearly five years ahead of the early 2000s recession.
Thus, the key question is how long this late-cycle phase might last. The tipping point that historically pushed an expansion into a recession tends to be a central bank tightening policy too much–either due to hotter inflation or a build-up of financial vulnerabilities.
At this stage, fears about a 2019 recession are overblown, in our view. Financial vulnerabilities are still low and major central banks do not need to respond aggressively to inflation pressures. This gives them flexibility to maintain easy monetary conditions.