ECONOMIC & FIXED INCOME COMMENT: "TRADE TENSIONS CONTINUE"
Global growth continues to trend downward for 2019 and will spill over into 2020 as political uncertainty mounts (see Chart 1). For 2019, global GDP has been revised downward from 3.3% to 3.1%. This would mark the weakest pace in a decade and would leave little room for the global economy to absorb any further political and economic shocks. The main culprits continue to be BREXIT and US-China trade negotiations.
As a result, over a dozen central banks have provided further monetary stimulus to offer support to their economies. The two central banks to note during the quarter were the US Federal Reserve Board who cut the Fed Funds Rate a further 25 basis points to 2% while the European Central Bank (ECB) cut their deposit rate further into negative territory and launched a new round of quantitative easing to stimulate the Eurozone. The major concern with regards to central bank interventions is the effectiveness of monetary policy. Governments will need to consider a wider scope of policy options including fiscal stimulus to support their economies.
The main discussion during the third quarter was the concern of a recession signalled by the inversion of both the US and Canadian yield curves (See Chart 2). This occurs when the differential between long term interest rates and short-term interest rates becomes negative and remains negative for prolong period of time. This was not the case as the inversion was very brief. What we can take from this brief inversion is there is solid evidence in both Canada and the US that slower growth and low inflationary pressures will continue going forward.
Focusing on North America, both Canada and the US have had mixed economic data. Please see below.
We do not see a global recession in the next 12-18 months however; there will be several headwinds for the North American economy to withstand domestically and globally (BREXIT, US-China Trade War, etc.). Both Canada and the US economy will expand in 2019 and 2020, albeit at a slower rate. Canada’s GDP is forecasted to grow 1.5% in 2019 and 1.6% in 2020 while US GDP is forecasted to increase 2.3% in 2019 and 1.8% in 2020. To support economic growth, Canada, the US and other advanced economies will have to look past monetary policy (lowering of interest rates). Government spending (fiscal stimulus) will also be required to foster growth.