Executive summary

A summary of our outlook for economies and markets.

3 minute read

All hands to the pump: Central banks try to limit the damage from trade wars

Global growth slowed to below three per cent (on an annual basis) in the middle of 2019, the weakest rate of increase since the euro zone crisis of 2012.

That slowdown, which began at the start of 2018, largely reflected a sharp deterioration in global manufacturing and trade. A combination of factors have been at play, including: structural de-leveraging and slowdown in China, past monetary policy tightening in the US, the imposition of and uncertainty around tariff and non-tariff barriers between the US and China and policy changes related to auto emissions in Europe.

There was a further escalation in the trade war between the US and China in August, when President Trump announced a broadening of tariffs to all Chinese goods. Following Chinese retaliation, the proposed tariff rates were then also increased across the board to an average of around 22 per cent.

Weak global growth expected to persist through 2020

That, alongside weaker-than-expected growth outturns in the euro zone, has led us to revise down our global growth expectations through to the end of 2020. We now expect growth to remain below three per cent over the next 18 months. That would represent the weakest sustained period for over a decade.

We expect all major economies to be growing below potential in 2020, with unemployment likely to rise modestly and wage and inflation pressures set to remain muted. Given the uncertainty around how businesses and households will react to the imposition of further tariffs, as well as the use of non-tariff measures, we judge that the risks to growth are to the downside (Figure 1). Indeed, we put the probability of a mild global recession over the next 18 months at around one in three.

Figure 1.  Global growth outlook (y/y)
We expect global growth to remain weak, with risks to the downside
Figure 2.  Global manufacturing and trade
Trade and manufacturing sector already at recessionary levels

Aside from the global recessions of 2001 and 2008/09, growth in global export volumes has fallen to its weakest rate in the last 30 years. That reflects the impact on global supply chains of the key factors noted above.

In particular, the imposition of tariffs from late 2018 accelerated the decline in export volumes globally as uncertainty rose and orders declined. The decline in orders led to a slowdown in industrial production, which is similarly weak (Figure 2).

Figure 2.  Global manufacturing and trade
Trade wars have taken a toll on growth already
Figure 1.  Global growth outlook (y/y)

The impact of the shock to global trade has, unsurprisingly, been felt more strongly in those countries and regions in which trade plays a more important role.

In particular, Japan and other parts of Asia, as well as Europe, have seen a sharper decline in growth as exports have become a material drag.

International trade is a relatively smaller part of the US economy, but it has also seen a modest hit to overall growth via the trade channel. Perhaps more significant, however, has been the slowdown in business investment in the US and elsewhere as uncertainty has impacted spending decisions.

Risks of global recession rest on whether the problems remain contained, or spread to the service sector 

Thus far, the majority of the global slowdown can be attributed to trade and the associated manufacturing industries.

While the manufacturing sector is a relatively small part of most economies – usually between 10-20 per cent – the magnitude of the changes in output can be large relative to other sectors. But if the downturn is contained to manufacturing alone, it is usually insufficient to cause a recession.

Indeed, despite the slowdown, no major economies have experienced any material increase in overall unemployment so far. This reflects continued robust consumption growth, supported by real disposable income gains and solid household balance sheets. That has continued to support service sectors.

Therefore, a key factor in determining whether the current slowdown turns into something more serious, or even recession, would be a broadening in the weakness beyond manufacturing. While the “hard” data has remained solid thus far, “soft” data such as surveys of service sector like the Purchasing Managers’ Indices (PMI) have recently weakened as well, suggesting that the downside risk to growth may be more likely to materialise.

Weaker growth prospects and low inflation have led many central banks to ease policy in recent months. The Federal Reserve reduced rates by 25bps in July and September, and several on the FOMC have indicated that they expect to ease policy further. The short-term US interest rates market currently prices in between another three or four rate cuts over the next year. We expect the Fed will cut rates once more this year and again next year, but given the downside risks do not see a material market mis-pricing.

Central banks once again providing policy stimulus

The European Central Bank (ECB) also eased policy in September, cutting policy rates by 10bps, taking them further into negative territory, re-starting asset purchases and making adjustments to its balance sheet operations to ease bank funding.

The People’s Bank of China (PBoC) has undertaken a range of policy easing measures as well in recent months, as have other central banks, such as the Reserve Bank of Australia and the Reserve Bank of New Zealand.

All of this renewed monetary support has seen global risk-free rates fall sharply, with ten-year sovereign bond yields reaching new lows in many cases (Figure 3).

Figure 3.  Sovereign bond yields
Expectations of further monetary policy easing priced into rates markets
Figure 3.  Sovereign bond yields

While policy rates are at or near all-time lows in many economies, we see scope for further easing if necessary. Many are calling for an increased role for fiscal policy to stimulate economies, but we remain somewhat sceptical about the willingness of those best placed to ease fiscal policy, such as Germany.

Having marked down our economic outlook and become increasingly concerned about the downside risks, it is perhaps unsurprising that we are cautious about the outlook for risk assets, with a neutral allocation to equities (Figure 4).

Figure 4.  Asset allocation summary
Neutral equities, modestly overweight duration and credit 
Figure 3.  Sovereign bond yields

While many equity markets are close to their all-time high, we think they are fragile and susceptible to further downside news on growth. We expect estimates for corporate earnings growth in 2020 will be revised lower, and with valuations already close to long-run averages, see limited scope for a sustained move higher.

We prefer to be neutral on equities and modestly overweight duration and credit

That said, if there was a permanent resolution to the trade war, something we currently put a very low probability on, it could be the catalyst for a re-rating, particularly for value stocks that have performed particularly poorly over the past 12 months.

Our preference is for a modest overweight in duration, with the recent sharp rally sufficiently large for us to pare back our previous overweight view somewhat.

Similarly, we continue to prefer a modest overweight in credit and emerging market debt, with both direct and indirect central bank support expected to mitigate the risks of a default cycle in our central case. We also continue to prefer to be overweight US dollars due to heightened risk aversion.

Want more content like this?

Sign up to receive our House View content.

This feature is currently unnavailable, please try again later.

Thankyou for subscribing.

We have detected that you do not have Javascript enabled on your browser. Please enable it in order to see this feature.

I acknowledge that I qualify as a professional client or institutional/qualified investor. By submitting these details you confirm that you would like to receive the House View email updates from Aviva Investors in addition to any other email subscription you may have with us. You can unsubscribe or tailor your email preferences at any time.

For more information, please visit our Privacy Policy .

Read more of the House View

Key investment themes and risks

The five key themes and risks which our House View team expect to drive financial markets.

Macro forecasts: charts and commentary

Our round-up of major economies; featuring charts and commentary.

Global market outlook and asset allocation

What our House View means for asset allocation and portfolio construction.

Important information

Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (Aviva Investors) as at 30th September 2019. Unless stated otherwise any views and opinions are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Information contained herein has been obtained from sources believed to be reliable, but has not been independently verified by Aviva Investors and is not guaranteed to be accurate. Past performance is not a guide to the future. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested. Nothing in this document, including any references to specific securities, asset classes and financial markets is intended to or should be construed as advice or recommendations of any nature. This document is not a recommendation to sell or purchase any investment. In the UK & Europe this document has been prepared and issued by Aviva Investors Global Services Limited, registered in England No.1151805. Registered Office: St. Helen’s, 1 Undershaft, London, EC3P 3DQ. Authorised and regulated in the UK by the Financial Conduct Authority. Contact us at Aviva Investors Global Services Limited, St. Helen’s, 1 Undershaft, London, EC3P 3DQ. Telephone calls to Aviva Investors may be recorded for training or monitoring purposes.

In Singapore, this document is being circulated by way of an arrangement with Aviva Investors Asia Pte. Limited for distribution to institutional investors only. Please note that Aviva Investors Asia Pte. Limited does not provide any independent research or analysis in the substance or preparation of this document. Recipients of this document are to contact Aviva Investors Asia Pte. Limited in respect of any matters arising from, or in connection with, this document. Aviva Investors Asia Pte. Limited, a company incorporated under the laws of Singapore with registration number 200813519W, holds a valid Capital Markets Services Licence to carry out fund management activities issued under the Securities and Futures Act (Singapore Statute Cap. 289) and Asian Exempt Financial Adviser for the purposes of the Financial Advisers Act (Singapore Statute Cap.110). Registered Office: 1 Raffles Quay, #27-13 South Tower, Singapore 048583. In Australia, this document is being circulated by way of an arrangement with Aviva Investors Pacific Pty Ltd for distribution to wholesale investors only. Please note that Aviva Investors Pacific Pty Ltd does not provide any independent research or analysis in the substance or preparation of this document. Recipients of this document are to contact Aviva Investors Pacific Pty Ltd in respect of any matters arising from, or in connection with, this document. Aviva Investors Pacific Pty Ltd, a company incorporated under the laws of Australia with Australian Business No. 87 153 200 278 and Australian Company No. 153 200 278, holds an Australian Financial Services Licence (AFSL 411458) issued by the Australian Securities and Investments Commission. Business Address: Level 30, Collins Place, 35 Collins Street, Melbourne, Vic 3000. 

The name “Aviva Investors” as used in this presentation refers to the global organisation of affiliated asset management businesses operating under the Aviva Investors name. Each Aviva Investors’ affiliate is a subsidiary of Aviva plc, a publicly traded multinational financial services company headquartered in the United Kingdom. Aviva Investors Canada, Inc. (“AIC”) is located in Toronto and is registered with the Ontario Securities Commission (“OSC”) as a Portfolio Manager, an Exempt Market Dealer, and a Commodity Trading Manager. Aviva Investors Americas LLC is a federally registered investment advisor with the U.S. Securities and Exchange Commission. Aviva Investors Americas is also a commodity trading advisor (“CTA”) and commodity pool operator (“CPO”) registered with the Commodity Futures Trading Commission (“CFTC”), and is a member of the National Futures Association (“NFA”). AIA’s Form ADV Part 2A, which provides background information about the firm and its business practices, is available upon written request to: Compliance Department, 225 West Wacker Drive, Suite 2250, Chicago, IL 60606.

RA19/0801/01072020