The global economy is at the crossroads. While the US still remains a bastion of macro stability, the
latest data in Europe, China, and across emerging markets have all showed clear signs of slowing. Will
key economies decelerate but maintain growth, or will they hit nonlinearities and decelerate more
sharply? Can the US remain an island of prosperity despite external weakness, or will it too be dragged
Ultimately we are optimistic about the US, but believe that the downside risks have
risen sharply in Europe. Economic data across the region has softened, raising the odds of a recession.
Domestic financial conditions and fiscal policy are likely to remain supportive this year but the
external situation is worrying for the export driven continent. In China, government spending may end up
dragging on growth this year, but policy makers still have the tools and the space to avoid a sharp
How the global economy ultimately resolves may hinge on a few key uncertainties that
look set to come to a head over the coming weeks. The trade war between the US and China is approaching
the key March 1st deadline, a hard or soft Brexit will happen on March 29 without an extension, and the
US will decide on the Section 232 national security report into autos by February 17 with implications
for European autos and growth. Europe could be tipped into recession with negative developments on these
binary issues. In market terms the Fed’s recent U-turn is a big positive but to see the full
benefits we need to see resolution on the themes above. Overall, while we are attentive to the downside
risks we think equities will rally further, rates have scope to rise, and the dollar will likely weaken
against major currencies.
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