Economic and Strategy Viewpoint - December 2018

Forecast update: US recession 2020?

• We have trimmed our forecast for global growth to 2.9% from 3.1%, the third consecutive downgrade. The move is largely driven by downgrades to the eurozone and emerging markets. Growth in the major economies appears to be converging downward as the US slows and others fail to strengthen.
• We still expect trade tensions between the US and China to persist well into next year with higher tariffs creating a more stagflationary environment. When combined with tighter monetary policy and a fading fiscal stimulus we see US growth cooling further into 2020 and the long expansion coming to an end.
• The US Federal Reserve (Fed) is expected to pause in its hiking cycle in June next year and as the economy slows the next move in rates will be down in 2020. Such a path delivers a soft rather than hard landing for the economy. As a result, the US dollar is likely to peak in 2019.

• Our scenario analysis shows the balance of tail risks to be tilted toward stagflation with the highest individual risk going on the deflationary US recession 2020 scenario where the Fed overtightens in 2019. An outcome which would probably see a vacancy for the chair of the Fed.

European forecast update: a return to trend growth

• Another disappointing quarter of growth appears to have been caused by disruptions in the car industry, but also a weaker external environment. 2019 is likely to be another above-trend year of growth, but activity should return to trend by 2020. The European Central Bank is likely to end QE this year, before starting its hiking cycle in 2019.
• Assuming Brexit goes smoothly, the UK should see an improvement in growth in 2019 and 2020. A rise in sterling will help lower inflation, boosting the purchasing power of households, while businesses investment is likely to rebound. The Bank of England is likely to resume interest rate hikes once Brexit risk abates.

Domestic stories can break through the 2020 global gloom

• As we extend the forecast into 2020 for the first time, we are optimistic that for most of the BRIC economies domestic factors can outweigh global problems.
• Our expectations for central banks have seen mostly minor tweaks, though we do expect a more aggressive stance from the People's Bank of China than previously to help offset a darker global picture.

Japan: More volatility in 2019 thanks to VAT

• Weather has made 2018 a volatile year for growth, this theme should continue in 2019 thanks to the likely effect of the VAT hike and growth should moderate in 2020.
• Driven by concerns around prolonged monetary easing, we expect the BoJ to tweak yield curve control again but leave negative rates unchanged until the end of 2020.

Please find the full Viewpoint below.