All year, ANZ’s chief investment office has held to its forecast that the good times would fade for the global economy (and financial markets) as the year progressed and particularly into 2019.
This is what we have seen unfold and it remains the most likely continuing scenario.
But most recently the world’s outstanding economic performer, the US, has begun to fade also, and this is now creating a stronger possibility that the fading markets could descend into a market sell off due to recession.
Since October there have been indications that the US economy is slowing to match the growth rate of the rest of the world. This is ‘complemented’ by the decline in the oil price. It also looks like the US dollar may have hit its peak.
All these factors mean there’s less inflation pressure in the US economy, and the central bank may pause its rate increases in 2019. That said, we expect that wage pressures may continue to build, placing some pressure on margins and possibly forcing the US Federal Reserve to continue to tighten.
The slowing pace of growth in the US isn’t the only sign of the ‘good times fading’:
- Companies across most regions and sectors have downgraded expectations of their earnings. (This is a central reason for the sharemarket correction.)
- There is a clear, steady loss of global economic momentum, worldwide.
- Tight labour markets pose some risk to inflation, which could force central bank action.
- The slowing of China’s economy in particular poses risks.
Australia is somewhat more positive. The central risk here is falling house prices, which could metastasize risk in the domestic economy, such as increasing consumer caution (e.g. lowering spending). But so far there are few signs of stress from the property price fall. We’d only expect that to happen if it gets much harder for borrowers to access credit possibly due to a sharp tightening in global credit conditions.
Putting all these factors together, the possibility of a global recession in 2020 accompanied by a substantial sharemarket drawdown has increased, although we consider this risk is still moderate and some way from our more constructive base case of good times continuing to fade.