Growth set to slow as fog of uncertainty envelops the global economy

But Intesa Sanpaolo says a recession is unlikely in 2019 despite a growing list of potential problems, from trade disputes to political crises

Andrew Davis


The global economy faces a period of “less growth and more uncertainty” in 2019 as major economies lose momentum and geopolitical risks pile up, according to Gregorio De Felice, Intesa Sanpaolo’s chief economist. However, despite the multiple threats to stability, he believes the global economy will avoid recession this year.

“We face a synchronised slowdown in Europe and Asia,” says De Felice. “If these regions don’t pick up before the US experiences a significant slowdown – which is going to happen sooner or later – the risk of a global recession will increase significantly. Therefore, the key question is when will confidence and economic activity start to strengthen in China and the eurozone.”

He acknowledges that a new round of US-China tariff hikes, a “train-wreck” Brexit or an escalating budget dispute between Italy and the European Commission could tilt the balance towards recession. But De Felice counters this with suggestions that the Chinese economy is showing “very preliminary signs of an upturn” and a forecast of improving eurozone growth.

Eurozone growth forecast to accelerate

“The eurozone deceleration has been going on for a while, but we remain confident it will not turn into a recession. Financial conditions and monetary policy remain ultra- accommodative, and fiscal policy is turning expansionary in France, Germany, Italy and Spain,” notes De Felice.


He adds that slack in the labour market is being used up, which should feed through to wage increases and greater disposable income. “We believe growth could accelerate back towards 0.35 per cent quarter-on-quarter in early spring, resulting in growth of 1.2 per cent for 2019, which is below trend but well short of recession.”


The risks to eurozone growth are mainly linked to the unfolding confrontation between the US and China over trade and tariffs. Eurozone economies are deeply integrated into global manufacturing supply chains, in which so-called intermediate goods – unfinished products and components – cross borders multiple times during the assembly of final products.


If these international supply chains are disrupted by the imposition of tariffs or more stringent customs checks at borders, the results for eurozone companies – and their counterparts in other regions – could be serious.

“Although Brexit is a source of huge uncertainty for Europe, its effect on trade in goods will be ‘manageable’ for the remaining members of the EU, although the impact on services and international financial transactions is more difficult to assess”
Gregorio De Felice, chief economist, Intesa Sanpaolo

No trade war escalation

However, while acknowledging this threat, De Felice says: “Our baseline scenario assumes no further increase in tariffs by the US and no further retaliation.”


He also believes that although Brexit is a source of huge uncertainty for Europe, its effect on trade in goods will be “manageable” for the remaining members of the EU, although the impact on services and international financial transactions is more difficult to assess.


Trade disputes, which had “a very deep negative impact on market sentiment and business confidence”, also pushed commodity prices lower in 2018 than was justified by supply and demand fundamentals, Intesa Sanpaolo argues. Assuming the global economy avoids recession, trade tensions ease and the dollar’s trade-weighted value weakens somewhat, highly cyclical assets such as commodities would receive a boost from improving sentiment and investors will focus again on supply and demand fundamentals.


“As most commodity markets are very tight, if such conditions hold we expect prices will rise accordingly,” says De Felice.

Central bank support continues

Given the major uncertainties in Intesa Sanpaolo’s outlook for 2019, it is little surprise that governments and most central banks outside the US show little inclination to tighten conditions. Fiscal policies are broadly neutral, notes De Felice, and have been loosened a little more than expected in France and Italy.


“Monetary policy will be looser globally than previously expected and generally still supportive,” he adds, suggesting that even in the US, which has tightened policy considerably further than any other major economy, the pace of interest-rate rises will slow from here with two quarter-point rises this year.


Assuming eurozone growth picks up as it expects from Q2, Intesa Sanpaolo believes the European Central Bank (ECB) will leave rates on hold and continue to reinvest the proceeds of its maturing holdings of government and corporate bonds, avoiding any tightening of monetary conditions.


“We expect the first rate hike from the ECB at the end of this year and another step in early 2020,” says De Felice. Intesa Sanpaolo believes the ECB will not start curtailing its reinvestments before early 2021 and suggests a very gradual tightening in policy from this source, lasting about three years. “Markets will be fully prepared,” he says.

Investors stay on high alert

It seems odd, in view of Intesa Sanpaolo’s relatively optimistic view of the economic outlook, that financial markets have fallen so sharply in recent months and remain nervous and volatile. De Felice attributes this to a widespread belief that following a long period of growth, the global economic cycle is in its final stages, making an imminent downturn more likely.


He likens the situation today to 2015, when signs of a slowdown in major economies including China prompted financial markets to expect a global downturn. “But this time,” he adds, “there is a concentration of negative shocks that were not present in 2015. Given the degree of uncertainty, it is not unreasonable for the yield curve to flatten, suggesting an approaching slowdown, and for equity markets to re-price future earnings growth.


“As I mentioned, a recession seems unlikely for now, but the actual outcome depends on many unknowns this time.”

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