Executive summary

High levels of uncertainty generated by ongoing trade tensions is a continuing drag on global economic growth. The uncertainty is keeping business confidence suppressed, leading to a reluctance to invest.

This is mostly evident in manufacturing where global manufacturing PMIs are in contraction territory, but how serious this is depends on the share of manufacturing in the different economies. Uncertainty will remain for a while yet, and the longer the uncertainty lasts, the deeper the manufacturing recession and the greater the risk the weakness spills over into the broader economy.

In the absence of any other support, monetary policy is being left to pick up the slack. The US Federal Reserve, European Central Bank, Reserve Bank of Australia and the Reserve Bank of New Zealand are all easing policy and likely to continue easing in the near term.

We have been expecting the US economy to slow in 2019 and into 2020 as capacity constraints emerge and the impact of prior fiscal easing wanes. However, while recessionary risks have risen in recent weeks, it is still not our base case. On the upside, we expect the consumer to remain resilient as the labour market remains tight and wage growth continues to grind higher.

We are supportive of recent moves by the Fed to cut interest rates, though we continue to see these cuts as insurance against more extreme economic weakness, rather than the beginning of a sustained easing cycle to stave off imminent recession.

As expected, the US China trade conflict is having a negative impact on the Chinese manufacturing sector and exports. This is weighing on both consumer and business confidence, which is leading to slower household spending and business investment.

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