Over the last 18 months there’s been a lot of concern about the slowdown in the global economy, particularly with regards to Europe, China and the US.
Trade tensions persist, interest rates across key markets are at rock bottom and government debt levels are high. And last month, the IMF downgraded its growth forecast for 2019 to 3 per cent, the slowest pace since the 2008-09 financial crisis – from which many economies are yet to completely recover. That downgrade rattled markets some investors.
However, it’s not all bad news and I believe we can be somewhat positive about the world’s economic future over the year ahead. There are five signs that the economic cycle may be starting to trend upwards again in the year ahead.
1. Rising bond yields
Bond yields declined sharply over the last 18 months, but have started to show a rising trend in recent months, both in Australia and overseas. Bond markets could be responding to an anticipated global economic recovery – potentially sparked by significant monetary policy easing this year and the lessening of fears that trade wars would cause a global recession.
2. Un-inverting US yield curves
Yield curves in the US, which were heavily negative across various maturities, have started to become positive again and steepened over October-November. Concern about inverted yield curves signalling a US recession peaked a few months ago and is starting to ease, and the brevity of the inversion shows it may have been a false indicator similar to 1996 and 1998.
3. Rising share markets outside the US
Equity markets beyond just the US, are beginning to look healthier. Europe and Japan, in particular, are showing signs of a turnaround, with the pan-European STOXX 600 equity index reaching four-year highs in recent weeks. These two markets are often a good sign of global growth outside the US as their economies have more cyclical sectors like manufacturing than the more services oriented US economy.
4. US dollar may have peaked
The US dollar tends to rise whenever there’s global uncertainty and fall when global confidence returns. Recently, there’s been signs the US dollar is starting to trend down again, signalling a positive outlook for global markets. If so this would be positive for emerging markets given the problems a rising US dollar can cause for their US dollar denominated debt.
5. Purchasing Managers’ Indices trying to stabilise
Business conditions PMIs, particularly in Europe, the US, and China recently, may be stabilising, with private surveys produced by Markit starting to show signs of bottoming out. In the US, data shows signs that manufacturing has steadied from the downturn earlier this year, while in Europe the manufacturing PMI hardly changed in November. The services index improved slightly across Europe as well, and despite slight decreases in the US and China, this suggests business sentiment is stabilising.
All these indicators suggest that monetary easing may be starting to have the desired impact on economic growth.
Much still depends on continuing geopolitical risks – the US-China trade deal and the US election next year are big ones to watch along with risks around Hong Kong and Brexit.
Yet we’re not seeing the same type of conditions for a deeper slide into global recession as we saw prior to the 2008-09 financial crisis such as overspending, surging inflation and excessive monetary tightening.
If global growth does turn up next year it would be good news for investors, because a renewed rise in global economic growth will boost profit growth and ultimately underpin further gains in share markets.
Subscribe below to SMSF News to receive my latest articlesShane Oliver, Head of Investment Strategy & Economics and Chief Economist
While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.