The European Central Bank started the ball rolling last month when its president highlighted that lingering geopolitical risks are strengthening the case for supportive action. He commented that further interest rate cuts remain part of their tool kit as well as more quantitative easing. The US Federal Reserve then followed suit by readying the market for a possible interest rate cut of its own in the near future. There is a sense that this would be more of an “insurance” cut aimed at tiding over a period of uncertainty rather than tackling anything specific.
In the short term, it seems that fears of an imminent global recession are overblown. Whilst the pace of growth looks set to fade from 3.3% in 2018, the global economy should continue to grow in 2019 against a supportive backdrop of low inflation and more dovish central banks. However, investors should not ignore that significant economic and geopolitical challenges persist and that there are scenarios where these could combine to tip some economies into recession.
Over the long term, we expect global economic growth to continue despite inevitable cyclical setbacks. This is on account of rising populations, continuing innovation and productivity improvements. In particular, digitisation could soon deliver a significant productivity boom following a period of subdued improvement. Having said this, it seems probable that the pace of global economic growth will slow compared to recent history. This is primarily on account of high levels of global debt and geopolitical trends that are challenging global free trade dynamics. However, fears of long term economic stagnation seem too pessimistic – modest growth is still growth.