The year began with a synchronized global recovery. Most economies benefited from a buoyant environment. As a result, the risk of inflation and monetary policy mistake dominated investors' fears at the start of the year. Since the spring, clouds have accumulated on a global scale. The second half began under less happy auspices, with a less buoyant business climate and many risk hotspots.
On the one hand, growth in the Eurozone was weaker than expected in H1 (after a strong second half of 2017, however). On the other hand, large emerging economies have seen their macrofinancial situation deteriorate with the USD appreciation, which puts countries with an elevated private-sector debt denominated in USD into difficulty. Argentina and Turkey are in crisis today. These are idiosyncratic shocks that have no reason to spread. However, many emerging economies were distrusted by investors during the summer (sometimes without reason).
In addition, Donald Trump's protectionist threats have multiplied. The proximity of the mid-term elections (6 November) incitates Donald Trump to implement his electoral promises on trade. Europe has been relatively spared for the moment. But in view of Donald Trump's recent statements, one cannot rule out taxation on auto imports. That said, for now, China is the most exposed to the protectionist measures.
To the trade-war risk are added risks of very different nature:
- US sanctions on Iran that tend to drive up the oil price.
- The fiscal slippage in Italy. Relations are tense in the coalition government on the strategy to follow and the size of the budget deficit. A clarification is expected in the coming weeks.
- Brexit negotiations are stalling and governments (in the UK and in the rest of the EU) are openly preparing contingency plans in case of no agreement on 31 March 2019 (Hard Brexit).
- The Turkish financial crisis may get even worse (we anticipate a recession in Turkey in the coming quarters).
The multiplication of risks increases global uncertainty. If we continue to anticipate further global expansion, it is at a slightly slower pace in the Eurozone, China and on average in emerging countries. The US economy, for its part, remains supported by fiscal policy, the effect of which is expected to weaken in 2019. The risks to global growth are clearly on the downside over the next 18 months. As for the upside risk to inflation, without having disappeared, it has weakened (except of course in countries where the currency has fallen). Keep in mind that inflation is a lagging indicator of activity; an inflationary surprise would be short-lived if, as we believe, the world economy slows down.