Global business cycle moving lower
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We see clear signs that the global business cycle has peaked in early 2018 in line with our expectations outlined in Five Macro Themes for 2018, 3 January 2018.
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Our MacroScope models point to a further deceleration over the coming quarters. The recent uncertainty over a potential trade war is likely to reinforce this picture.
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Monetary tightening, higher yields, lower real wage growth, more uncertainty – and in the case of the euro area a stronger currency – are all factors pushing production growth a notch lower in the rest of 2018, in our view.
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While the cycle is softening, we still expect growth levels to stay above potential growth in 2018 and 2019. US fiscal easing will temper any deceleration in 2019.
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Nevertheless, declining PMI levels across regions tends to cause some anxiety about the strength of the recovery, giving less support to risk assets and putting a cap on bond yields. In a forthcoming piece, we will look at the financial implications of a decelerating business cycle.
The global industrial cycle
After a strong synchronised upturn in the global industrial cycle since early 2016, we see increasing signs that the cycle has peaked and that growth is decelerating. The euro surprise index has fallen sharply (see next page), our MacroScope business cycle models have weakened for three months now and we have witnessed declining upward momentum in global metal prices. All signs of a weakening cycle. We look for further deceleration in the coming quarters due to (a) globally tighter monetary conditions and higher bond yields across regions, (b) lower real wage growth (due to the rise in inflation) and (c) an increased focus on deleveraging in China that has yet to feed through to growth. The rising tensions in the US-China trade dispute may also lead some companies to postpone investments.
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