The sharp slowdown of the global economy is losing momentum

After a long period with disappointing economic indicators we see budding signs of optimism in large parts of the world and we mainly stick to our expectations for global economic growth. But uncertainty remains high and even though central banks to a large extent have put the normalisation of monetary policy on the backburner, the US yield curve indicates a persistent risk of a slowdown in the largest economy in the world. To a varying extent this will also affect the Nor­dic economies, especially Sweden and Finland.

There are tentative signs that the sharp slowdown of the global economy is losing momentum. This is especially evident in Asia where green shoots are visible, while the trend in the US remains stable and Eu­rope is still struggling with headwinds from recession-like conditions in the manufac­turing sector. In other words, the regional trends vary and it is still too early to conclude that an actual reversal of global eco­nomic trends is imminent. Our new fore­casts are therefore based on a largely un­changed view on the world economy com­pared with January. Hence, we expect growth in 2019 and 2020 to be lower than last year, but still remain at a decent level by historical standards.

In light of the favourable conditions in the form of an expansionary economic policy and very strong labour markets in most parts of the world, the global slowdown is not least attributable to political factors.

The liberal world order in place since the end of World War II remains strongly chal­lenged by new political currents. Globalisa­tion has reached a standstill, Brexit has shaken the foundation of Europe, the US president inveighs against multilateral in­stitutions and trade wars have hit the world economy hard. This gives rise to uncertainty and restraint with respect to future investment decisions.

The economic slowdown

The economic slowdown coupled with sustained low inflation has caused the Euro­pean Central Bank to adopt a highly cau­tious stance and much suggests that the central bank’s ultra-loose monetary policy will be maintained for several years to come.

The Federal Reserve has also shifted to a dovish stance, putting the normalisation of monetary policy on hold despite solid growth in the US economy, which has ben­efited from the (almost) longest upswing in history

The clear messages from the central banks and overall positive stock market sentiment year to date have led to easier financial conditions for businesses. This, coupled with the rising net wealth, underpins hopes for a reversal of global economic trends. However, uncertainty remains high.

A global trade war

The trade conflict between the US and China has escalated further recently, and there is a significant risk that the US might also impose tariffs on European goods, which could hit for instance the key Ger­man car industry hard. Also, there is a latent risk that the US upswing will be brought to a halt when the effects of the expansionary tax policy wane and not least if sentiment in the stock markets turns sour again.

The current uncertainty is also reflected in the slope of the yield curve, which has pre­viously been a good, although not perfect, indicator of economic activity. And the cur­rent slope of the yield curve suggests that the US economy will slide into recession within the coming nine months.

The significance of the US to the world economy and consequently also the Nordic economies should not be underestimated. We believe that the Nordic economies, which already follow very different paths, will be hit in different ways by a possible downturn of the US economy. Companies in Sweden and Finland are more sensitive to changes in the global business cycle and consequently more exposed to a downturn than companies in Norway and Denmark.

So, even if the green shoots give grounds for optimism, we basically remain in a situ­ation where we have to wait and see what happens before we draw any concrete conclusions about the economic outlook for the coming years.

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