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Guy Monson: regional tail risk is now wagging the global dog

Guy Monson: regional tail risk is now wagging the global dog

Investors will agree that the global economy has enjoyed a buoyant pace of growth in recent years. However, looking to 2019, we can expect a slight easing from this, with numbers moving from 3.7% to around 3.5%.

We see increased downside risks to the world's future economic growth, most notably trade tensions and policy uncertainty. We expect region-specific drivers will shape market outcomes, as global factors that helped drive recent synchronisation are dampened by a pull-back in global trade and a rise in protectionism.

Quantitative tightening (or simply, the unwinding of central bank monetary easing), driven by the US Federal Reserve’s balance sheet reduction, the conclusion of European Central Bank asset purchases, and continued purchases by the Bank of Japan – though at significantly reduced rates – will result in tighter financial conditions across the world.

Looking at specific countries in particular, the US economy is likely to enjoy another year of robust above-trend growth, thanks to the continued, although weakening, boost from tax cuts.

Growth is forecast to be 2.5%, spurred by solid household consumption, low unemployment and rising wages, as well as improving business investment.

In the euro area, while economic momentum has slowed in 2018 – largely owing to idiosyncratic factors such as exceptionally poor weather in Q1 and delays to car production in Q3 after new EU-wide emission testing mechanisms rolled out – we expect that 2019 growth will remain resilient in the face of slowing trade.

In addition, we expect that political risks are likely to dominate, including the risk of a disorderly Brexit, Germany’s political succession and a new leadership team at the realm of European institutions, including the European Commission, the European Central Bank, European Council and the European Parliament.

In China, the pace of growth is expected to slow further, as policy easing from the government will fail to fully offset weakness emanating from the government’s financial deleveraging agenda, environmental restrictions and, of course, US-China trade tensions.

Nonetheless, we believe that policy stimulus will start supporting the economy from early 2019. In particular, infrastructure investment, which accounts for about a quarter of fixed asset investment, is expected to pick up at the beginning of the year. 

So, when looking at the global economy holistically, the outlook for 2019 suggests that growth will continue to moderate next year, as it has this year, from the recent strong pace we've enjoyed.

Investors should look to rising challenges from politics and policy, including rising trade tensions, in order to prepare their portfolios for any volatile markets that may be encountered in the coming year.  

Guy Monson is chief investment officer and senior partner at Sarasin

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