As usual in recent months, macro data are difficult to interpret. Keeping track of the large amount of daily data and building a macro thesis is like constructing a puzzle that is constantly changing its physiognomy. If this is normally difficult, the last few months have been particularly challenging, with key data offering contradictory signals, strong revisions and several exceptional elements. Market behaviour adds further doubt to a complex macro picture, leaving the burden of proof on the continuity of the cycle in the second half of the year.
Despite all this confusion, we do not expect a substantial improvement in the pace of growth. At Fidentiis Gestión - Global Strategy, we expect stabilisation in 2Q19 below potential, which will give way to stagnation, where recession risks increase, with global growth around 3% for 2019 (US 1.5%, AE 0.7%, China 6.1%).
The key to the turnaround in the global economy lies in the weakness of the manufacturing sector. The expected recovery of activity in 1Q19 has not occurred and continued to deteriorate. China, for the first time in many years, downgraded expected growth to 61 Q3Q-6.51 Q3Q, the low end of the target range. In the Eurozone, the revision was more aggressive, down from 21GDP3Q to around 11GDP3Q. In the US, despite weak 1Q19 data, growth estimates remain around 2.31GDP3Q.
The central banks' turnaround will allow growth to stabilise in 2Q19. The Fed's change in bias at the beginning of the year was decisive in reversing the contraction in financial conditions at the end of the year and pushed the rest of the central banks to a new round of stimulus. Markets have discounted the end of the rate hike cycle in the US and have Japanised yields in Europe. The expectation of a resolution of the trade conflict and the reduced likelihood of a hard Brexit help to dispel political uncertainty. Finally, Chinese stimulus will reverse the weakness of recent quarters.
However, we believe it is difficult to see a sustained improvement towards growth rates close to potential for the following reasons:
We do not see a recovery in the manufacturing sector. Forward components remain negative and anticipate weakness in 2Q19 (new orders, export orders and expectations continue to deteriorate). This will continue to pressure industrial production, investment and employment. The historical pattern is for the manufacturing sector to impact on services.
US, most robust economy and main source of demand will slow down markedly and we see downside risk in growth estimates. Regardless of the more or less positive view on the US cycle, there is no dispute that growth will move from 3.11GDP3Q to slightly above 21GDP3Q according to consensus.
The Chinese government's goal is to stabilise the economy around 6%, not to initiate an acceleration. that will significantly boost global economic growth.
The symptoms of chronic stagnation are again visible.The euphoria of reflation is now forgotten. Negative real rates, falling inflation expectations, stunted productivity, falling investment and anaemic growth are once again validating the thesis of secular stagnation.
The pause in rate hikes and the end of the Fed's QT and the ECB's TLTRO are not additional stimulus measures to boost the economy.The EU's financial crisis, but rather represent a signal of a pause to stabilise financial conditions.
Political risk resolution will remain subject to uncertaintiesThe EU: a China-US trade deal is likely to put the EU in the spotlight, the prolongation of Brexit will continue to delay investment decisions and the European election wave may bring surprises. The absence of geopolitical risks is always the exception, but in a context of low growth their impact is amplified.
A further tightening in financial conditions, even less than in 4Q18, leads to a recession.. Markets discount a pause scenario. mid-cycle o "goldilocks". If the arguments of this thesis (acceleration of European and Chinese growth, and a soft-landing In the event of a further deterioration in the data, we believe that the market reaction will be just as violent as at the end of 2018. The limited fiscal and monetary policy space magnifies this transmission mechanism to the real economy. We will not find large imbalances to justify a recession, but the capricious shift in risk appetite may be a definitive factor.
Jorge Nuño
Fund Manager Fidentiis Global Strategy of Fidentiis Gestión