BNY Mellon: Why I believe global slowdown fears are overblown

5 juni 2019

By Shamik Dhar, Chief Economist, BNY Mellon IM

Despite the ongoing trade tensions between the United States and China, the defining feature of our economic outlook is unchanged. Economies are mired in the post-global financial crisis regime of tepid growth, low inflation and low interest rates. Inflation expectations are anchored and there may be more “room to grow” in a number of developed economies than policy-makers think. Meanwhile, the global savings glut depresses the global real interest rate; raising valuations and reducing expected returns on many risky assets, including equities. The “search for yield” continues and the negative or low bond equity correlation remains intact.

Our central scenario has slow but stable growth in the US; a degree of divergence between the US and the rest of the world, particularly Europe; and rising concerns about China. We see no economic Armageddon or inflation problem, and in that situation extreme panic represents a buying opportunity.

Trade concerns will play their part – but they’re not the whole story

Markets are, unsurprisingly focused on trade negotiations between the US and China. Global manufacturing and trade have been slowing sharply for a few months. Trade conflict explains some of that – both directly and indirectly via confidence – but these giant economies have been slowing independently for different reasons.

The main contribution comes from domestic demand, not the impact of tariffs on international trade. Overall, we see global GDP growth in the central scenario of around 3%, with global trade slowing to 3.7% from 3.9%.

The major economies slow – but for different reasons

The US is slowing, due to the impact of 2018 fiscal stimulus fading and financial conditions tightening towards the end of last year. However, household finances remain strong, wage growth is increasing and the unemployment rate is low.

We believe the remainder of 2019 and 2020 will see household consumption becoming the mainstay of US growth again. This keeps the US economy out of recession but causes the trade deficit to widen, exacerbating trade tensions. In this scenario, we see the US economy expanding at around 2% in 2019. The dollar should remain broadly flat against major currencies over the course of the rest of the year caught between two countervailing forces.

US monetary policy should be tighter than in the Eurozone and China. The European Central Bank has bowed to worsening economic conditions and put-off rate increases, leading to pressure on the euro. We therefore see the US dollar (USD) stable to firmer against major currencies, with partial resolution of the tariff war alleviating some of the pressure on the dollar to rise. If China stimulus is successful in stabilizing growth in the second half of the year, we would expect the USD to soften from elevated levels.

China has been slowing too. Monetary policy tightened from 2017 onwards with policymakers focusing on slowing credit growth, in their bid to rebalance the economy towards household consumption. They were partially successful – consumer spending has been the largest contributor to GDP growth but still remains near the lower-end of its range as a share of GDP.

Chinese authorities have been cautious to date, but we expect them to ease further in the central view – cutting the reserve requirement ratio (RRR) and supplying more liquidity to interbank markets. The question is how successful this will be.

This time, in our central scenario, the Chinese authorities are successful but not as much as in 2015-16. We expect the economy to pick up to 6% growth in the second half of 2019 but unofficially the running rate will be below that. This is because the authorities are trying to hit two targets with just one instrument: cut interest rates both to stimulate the economy but also to cajole the commercial banking sector to lend more to private sector enterprises. This attempt to merge monetary policy objectives with financial stability mitigates the power of the stimulus in the central scenario.