New year, new outlook

Richard Yetsenga

Chief Economist, ANZ

Happy New Year: 2019 is shaping up to be less stressful than 2018.

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Growth is still on a moderating track but some of the recent stress points are likely to continue to diminish. Moreover, the effects of some of those that remain are likely to be felt over much longer time frames than markets have priced.

"Popular commentary is over-playing the short-term impact of trade wars”

So in sum, global growth may be moderating but it is resilient. The slowdown from the 4.0 per cent peak seen in 2017 and 2018 is likely to continue into 2020 with growth of 3.7 per cent. Major economies such as China and the US are likely to be the major factors but India and Europe are also likely to slow.

Among the smaller economies, Australia and New Zealand are likely to be part of the samet trend, while some Asian economies have already recorded slower growth - and hence are less vulnerable.

Chief among the factors on which a longer perspective is required is the short-term impact of trade wars. Our judgement is popular commentary is over-playing trade wars, even if de-integration among some of the world’s major economies is likely to be a secular trend.

True, the US has imposed tariffs on $US250 billion (in annual terms) of Chinese exports but China exports a total of $US2.5 trillion each year. So even if some slowdown in Chinese export growth is expected, it just doesn’t seem probable that US tariffs on China are going to substantially weaken Chinese exports at an aggregate level.

In fact, economies not directly involved in the trade dispute to any meaningful degree, such as South Korea and Taiwan, saw export growth slow from 2017’s circa-20 per cent peak to mid-single digit rates in the first half of 2018.

Periods of substantially negative Asian export growth are rare and typically reflect major global economic dislocations.

Trends to watch in 2019

The Fed is on track to pause around neutral.
Labour markets in advanced economies are giving consumers resilience.
Trade wars are entrenched but markets have over-played their short-term impact.
Data in China need to show some stabilisation to validate the early shift to stronger risk appetite.

In line with ANZ Research’s view growth is slowing - in an orderly way - Asian markets have priced a very substantial slowdown in regional growth.

As such, it is no longer sufficient to simply argue Asian growth is slowing. The slowdown needs to be sharper than market pricing which, on ANZ Research’s metrics, would also need to be steeper than the slowdown seen during 2015’s global trade recession. That seems unlikely, with global growth continuing at around 3.75 per cent. Asia is also likely to get some support from the relaxation in China’s policy stance over the past few quarters.

In addition, one of the key drivers of wider external deficits in Asia has been the rise in oil prices. This in turn has been a driver of asset market weakness.

Oil prices have fallen sharply more recently and are likely to have peaked cyclically. As well, much as the fall in oil prices through 2014 and 2015 drove a fear of deflation among central banks in advanced economies, the headline inflation boosting effects of stronger oil prices through 2017 and 2018 have been a key driver of the tightening steps that have come through.

Such a scenario is likely to encourage more caution from the central banks that have been tightening.

Importantly also, the fall in oil prices could be negative for the US credit market, particularly the energy sector, given that US oil production has risen to a record high. Therefore one of the themes likely to diminish is the idea of US growth exceptionalism, which has also helped drive US asset market outperformance in 2018 at the same time as markets outside the US under performed.

Meanwhile, we expect unemployment to fall further and wage growth to improve in most advanced economies; suggesting the global economy will be able to deal with the stresses coming its way.

Richard Yetsenga is Chief Economist at ANZ

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.