At GAM Investments’ Weekly Investment Meeting held on 12 December 2018 the speaker was Mike Biggs, who discussed the broader macro outlook.
Our broad macro view is that growth will slow from where it is, but will remain above trend. There is plenty of fiscal stimulus coming through in the US, where we expect growth to slow to around 2% year-on-year by the end of 2019. The issue with the global macro picture, however, has not been the US, which has been strong, but rather the fact Europe disappointed in the first half of the year, which was compounded by a poor Q3. People are also worried about China, where growth has slowed somewhat and there are also concerns that the trade war will augment this further. Despite this we are positive on the overall macro outlook.
Over the coming weeks we should see some interesting data. We believe much of the disappointment in Europe has been around people’s expectations being too high. The Q3 slowdown can be linked to car production, particularly in Germany. Changes to environmental legislation caused bottlenecks in the production process over the summer, but we should see a rebound in production in Q4. If better growth numbers start to come through, we think people will become more reassured about the euro area. At the same time there is a risk that perhaps demand from the rest of the world is slowing and there could be a more fundamental slowdown. We saw a big rebound in car production in October, after which the November number was softer. However the idea that car production should rebound remains our base case.
European industrial production data for October was released this week, which rose 0.2% following a 0.6% fall the previous month. Even with no further growth in November and December we believe there will still be a slight uptick in European GDP growth from around 0.2% to 0.3% and that Europe’s rebound story is on track.
China reduced new borrowing in the first half of the year, property sales have also slowed and credit growth is coming down, which could turn the credit impulse negative in our view. Concerns over weaker than expected growth in China have also grown in line with the deteriorating trade war situation. Our view is that the trade war has clearly been negative for Chinese growth, but is being partially offset by the government’s use of domestic policy to stimulate growth which we feel could be supportive if continued. While lending has been weak in Q4, we believe the credit impulse is bottoming now and the case for a China growth recovery remains intact. We would like to see further evidence of the impact of this stimulus coming through. If that does happen, then improving growth from China and the euro area, combined with the US dollar stabilising or weakening a little and Treasury yields moving up, would result in a bullish environment for risky assets once again, in our view.
Furthermore, we believe the prospect of a negotiated solution around US trade is increasing. The US has been putting tariffs on Chinese goods, however US imports from China have continued to rise. On the other hand US exports to China have collapsed as China is able to source goods such as soya beans from elsewhere. The impact of the trade war has therefore been to increase the US trade deficit with China.
Going forward, slightly better growth data from Europe and China would mean things start to fall into place from a global point of view, but there are still some obstacles to be overcome. We will continue watching the relevant data closely.
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