12 June 2018
Last year’s synchronised upswing in growth represented a rare patch of smooth sailing for the global economy, following years of turbulence in the wake of the financial crisis. Moving into 2018 the expectation was that growth would remain upbeat, despite a number of potential risks forming on the horizon. Halfway through the year and it seems fair to say that some of these feared headwinds have been picking up pace. For example, the US dollar has started to appreciate noticeably against a range of developed and emerging currencies since the middle of April, with this tightening dollar liquidity strong enough to generate stress in some of the more vulnerable emerging markets. Meanwhile, trade tensions have been clearly building between the US and its trade partners, as illustrated by the fraught G7 meetings over the weekend. Populist politics has not just been an issue in the US, with the Italian election delivering a government which threatens to violate the Eurozone fiscal compact, resuscitating fears over Italian and Eurozone institutional stability. Finally, oil prices, which increased amid improving demand last year, have tested new highs this year on concerns over supply disruptions.
The good news is that while these headwinds have all been building, they are not as yet strong enough to provide a serious dent in the global growth story. Indeed, even after taking into account some disruptions to activity at the start of the year, we have only nudged down our forecasts for headline growth over 2018. However, these developments have probably shifted the tone and composition around global growth a little more. In isolation, all of the risks highlighted have the potential to be much more disruptive and even bring the cycle to an end should they crystallise fully. Moreover, the combination of a rising dollar, higher oil prices, localised political uncertainty and trade spats are all likely to make growth more uneven across economies and sectors. This fading synchronisation would also imply increasing divergence on the monetary policy front. The upshot is that while the cycle is still chugging along, the outlook has become a good deal bumpier. This should underline the importance of differentiation between markets and asset classes.