Insight Multi-Asset Weekly Update: World Bank downgrades 2019 global growth forecast


Adam Kibble

Market and economic review

After last week’s broad-based sell-off, risk assets received a reprieve on growing expectations of de-escalation in US/Mexico trade tensions via a possible postponement to the introduction of tariffs. Commentary from US central bank members signalling a willingness to adjust monetary policy should the outlook for growth and inflation outlook deteriorate from here was also helpful.

Developed equity markets recovered more than their losses from last week led by US and Eurozone equity markets. Developed government bond yields rallied notably in the US to the lowest level this year after weaker-than-expected employment and earnings growth releases at the end of the week. Meanwhile, the yield on 10-year German bunds reached an all-time time low of -0.26bps. Elsewhere, higher-than-expected oil inventory data weighted on returns from energy.

Lacklustre global growth outlook amidst elevated trade uncertainty

Last week’s PMI releases pointed to a lacklustre outlook for global growth with weakness in manufacturing and slowing expansion in the services sector.

Global manufacturing PMI shifted into contraction in May at 49.8 from 50.4 with deterioration in business conditions and new orders declining at the fastest pace since October 2012. Notable changes were steep drops in PMIs for the US and the UK, to their lowest levels since September 2009 and July 2016, respectively. The weakening in US manufacturing PMI reflected falling orders, with export orders falling at the fastest rate for three years. In the UK, the unwinding of inventory build-up ahead of the May 2019 Brexit deadline was a key factor. The outlook for the German manufacturing sector remained firmly in contraction territory with a PMI reading of 44.3, reflecting weak demand dynamics in the auto and machinery sectors. German manufacturing weakness additionally weighed on aggregate eurozone manufacturing activity although service sector data nudged higher.  

At a global level, services PMI remained in expansionary territory at 51.6 but the rate of expansion eased to a 33-month low in May. Against this backdrop, the World Bank this week downgraded their 2019 global growth forecast citing downside risks from a further escalation in trade tensions and weaker-than-expected growth in major economies.

Central banks maintain accommodative monetary policy

This week the European Central Bank (ECB) extended forward guidance on policy rates, committed to maintaining current rates until at least mid-2020 and signalled readiness to ease policy further, if needed. The policy announcements mark the ECB’s continuing efforts to keep monetary policy in the Euro area accommodative whilst inflation, latest estimate of 1.2% pa, remains well below the 2% target. The ECB also cited the potential threat to economic sentiment from the rising threat of protectionism and the vulnerabilities in emerging markets.

Meanwhile, a number of Federal Reserve committee members reiterated a willingness to adjust current US monetary policy if the domestic growth and inflation outlooks look to be undermined. Elsewhere, central banks in Australia and India reduced policy rates on easing inflation and growth outlooks.

In aggregate, near-term global monetary policy is expected to remain accommodative as inflation remains low, growth appears fragile while trade tensions represent an additional source of uncertainty.                               

US employment data points to moderation 

All these factors were evident in the details of the US employment report released towards the end of the week. The report pointed to moderation in the US labour market with weaker-than-expected gains in non-farm payrolls for May of 75,000, with downward revisions to April from 236,000 to 205,000. Inflation pressures remain subdued with average hourly earnings growth of 3.1% year-on-year, below April’s reading of 3.2% and below expectations. 


Following the US Administration’s decision over the weekend to forgo the implementation of tariffs on Mexican imports into the US, focus will shift to industrial production data in the US, Japan, key countries in the eurozone and the UK, which might highlight the impact of slowing PMI dynamics.

Inflation data in the US will be of interest following ECB policy announcements and ahead of the US Federal Reserve meeting over 18-19 June. Within the US, retail sales data and the small businesses optimism survey will provide further indications on the strength of the domestic economy.

Towards the end of the week Chinese investment activity, industrial production and retail sales data may provide early indications on the effectiveness of domestic support measures implemented earlier in the year.  

By Adam Kibble, investment specialist

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