Outlook 2019: cyclical downturn or recession?

by Patrick Artus, Chief Economist of Natixis 

We do not expect a recession in the US or the euro area, as there are no real mechanisms that could trigger this kind of downturn. But let's turn our thoughts to what kind of economic policy measures the US and the euro area could implement if there were a recession:

• in the US, the Fed's interest rate cuts would be very small, while in the euro area, the ECB's moves would be non-existent, so there would only be a very small ensuing drop in long-term rates in both areas;
• States would then have to use fiscal policy to shore up economic activity, despite high public debt;
• the central banks would need to revisit Quantitative Easing and monetize public debt to ensure that expansionary fiscal policy combined with high debt do not push up long-term interest rates.

We can see the trap here – it is impossible to significantly cut back interest rates, so this would mean a fresh surge in public debt and liquidity (monetary base) in the event of a recession.

Outlook 2019: should we be worried?

by Jean-François Robin, responsable de la Recherche Global Markets

There is no shortage of risk factors: the US-China trade war is not over, Brexit is bound to have some negative impact on the situation in the UK, Italy seems to be getting back on track but could move center-stage again at the next elections – both European and domestic –, corporate leverage has soared, the central banks continue to normalize their balance sheets, China is suffering a slowdown, etc.

However, in 2019:

• Growth in the US, Europe, China and Japan should be close to potential;
• Sluggish gains in unit wage costs now mean that core inflation is not increasing, which keeps interest rates low and corporate profitability high and rising;
• Banks are much more resilient;
• Financial conditions remain very sound, as rates have risen steadily in the US and will remain very positive in Japan and Europe with no rate hikes before end-2019;
• Demand is set to be propped up in two ways i.e. more expansionary fiscal policy in France, Italy, China in particular, but also still in the US, as well as falling oil prices from levels witnessed in the first half of 2018.

The trade war seems to be easing, at least between China and the US. But 2019 looks set to be a tricky year, with a bit less support again from central banks and a slowing economic cycle. However, there is no threat of a recession either, and we can rule out the risk of overshooting from the central banks with financial conditions still remaining very positive. Political risk well and truly exists, but it was just as bad in 2015, 2016, 2017 and 2018 with Greece, Trump, Brexit, France, trade war, etc.

Vive la France!

France should be one of the few countries in Europe set to see a surge in growth, as unemployment continues to fall (under 9%, in line with pre-crisis figures), fiscal policy is more expansionary after the yellow jacket crisis, commodities prices are falling and bolstering purchasing power and industry, growth is more inclusive than in Germany, the euro is undervalued and interest rates remain low. We expect growth of 1.8%, which is double Germany's rate for once. However, 2020 will be a different story, but we'll come back to that this time next year.

Outlook 2019: cushioning the slowdown

by Alicia Garcia Herrero, Chief Economist for Asia Pacific

Asian economies are to decelerate further in 2019 due to weaker external demand and uncertainty over the US-China trade-war. That said, a relatively less hawkish FED should offer renewed space for Asian central banks, given a mild inflation environment.

Moreover, China's prioritization of growth and clearer policy response in 2019, relative to a halfhearted attempt of stimulus in 2018, is good news for the region. More specifically, we should expect China to pull out all of the stops, with a focus on credit transmission to the private sector, which is the most liquidity starved, although also the most leveraged already. We expect China to successfully cushion its structural deceleration, at least temporarily, and expand by 6.3% in 2019. The piling up of more debt, though, will bring China's potential growth further down as misallocation of savings is bound to continue.

In any event, even with a major stimulus, uncertainty regarding the US-China trade war will continue to be a key risk confronting the Chinese economy. Even if the US and China may arrive at some negotiated result, it will be more likely a truce than the end of strategic competition.

As for the rest of the region, a smoother deceleration by China led by a renewed stimulus, should help other countries in the region cushion their currently fast deceleration. In the medium run, though, we expect Asia's structural growth to slow due to China's decreasing potential GDP and aging in many countries in Asia.