Trade Dispute and Brexit are Driving the Outlook

Economic outlook should gradually improve in the second half

Global economic growth continued to suffer in the first half of 2019 due to the trade dispute and the uncertainty surrounding Brexit. By contrast, the prices of economically sensitive assets such as stocks or high yield bonds have performed quite well so far in 2019. This divergence is primarily attributable to the shift in Fed and ECB communication over recent months. The trade war between the US and China remains the most important factor for the economic outlook. As both sides are under pressure, we expect a rapprochement in the second half of this year. As a result of this we expect that the global economy will follow the favorable stock market trend and that the outlook for global growth will gradually improve in the second half of 2019.

Brexit to dampen economic growth in the euro zone in 2019 and 2020

In addition, we expect that the Brexit issue will determine the outlook for economic growth in the Eurozone until the end of October. In light of political developments in the UK (resignation of Theresa May in June) we expect a Hard Brexit on 31 October. As a result of this shock we expect slightly negative growth in the Eurozone in Q4 2019, followed by a gradual recovery beginning in Q1 2020. Regardless of this, based on leading economic indicators the Eurozone economy has so far maintained a stable growth trend in Q2 2019 (expected GDP growth of +0.4% q/q).

Decline in Eurozone inflation expected in 2019

We are forecasting a decline in the headline inflation rate to +1.4%, particularly due to a falling inflation contribution from the energy component in 2019. In contrast, we expect a moderate increase in the core inflation rate compared to 2018 as a result of further progress in the labor market as well as strengthening wage growth.

US economy set to cool down in 2019

US economic growth will slow down this year compared to last year. Interest rate markets in particular were recently quite jittery and seem to be seeing clear indications of a beginning downturn and are consequently pricing in a central bank response. However, we believe that the US economy will level out at a sustainable growth rate. Ultimately the assessment of future developments depends greatly on expectations regarding the trade dispute with China. We expect tensions to ease, as this should be in line with US political interests as well.

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