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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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