Sluggish global growth outlook slows Davos

Last week was dominated by Davos, predictions of degraded global growth and Brexit, but in the end, there was good news as the closure of the US government came to an end.

The market already foresaw the possibility that the Fed would end the tightening of its balance sheet earlier than expected. The news of the government's ending of the Trump government's closure should therefore boost confidence early this week.

Last week, however, had a difficult start, as the IMF downgraded its global growth forecast this year in the latest update of its World Economic Outlook (WEO). The Fund is now forecasting global growth of 3.5% in 2018, down 0.2 points from October's WEO.

Revisions were lower in developed (mainly European) and emerging markets. Even though it is still a solid growth rate, even though it is the lowest of the past three years, the IMF has raised a significant increase in downside risks, notably an increase in trade tensions, a tightening of financial conditions, Brexit and a prolonged closure of the US government. Mena's growth forecast has also been revised down by 0.3 percentage points to 2.4% in 2019, with Saudi Arabia's gross domestic product forecast reduced to 1.8%, compared to 2.4% previously.

Even though it is still a solid growth rate, even though it is the weakest in three years, the IMF has raised a significant increase in downside risks.

Tim Fox, Emirates NBD

This followed similar downward revisions from the Organization for Economic Co-operation and Development and the World Bank and the news that China's economy had grown by 6.4%. One year on the other in the fourth quarter of 2018. This was the lowest growth rate recorded since the beginning of the year. financial crisis, paving the way for a world economic forum in Davos, on the theme of "globalization".

It is therefore not surprising that the atmosphere of the event is muffled, that world leaders are missing and that key issues are avoided. The policy has changed so much in recent years that US Secretary of State Mike Pompeo was able to organize the event on a video link to not follow this change.

And basically the soundtrack remained resolutely dark. The badessment of the current economic situation by German investors deteriorated sharply in January; the current situation index ZEW, an indicator of the economic climate, is down from 45.3 to 27.6 in December.

The Ifo index of the German business climate in January also fell to its lowest level since February 2016, while the German manufacturing index PMI reached its lowest level in 50 months, proving once again that growth the largest economy in the euro area stagnated. Japan's manufacturing PMI also fell from 52.6 in January to 50, ending the longest expansionary movement of the decade and new export orders fell at the fastest pace since July 2016.

Faced with all this, the European Central Bank had no choice but to give up its optimism that the risks were "globally balanced", ECB President Mario Draghi, now recognizing that the incoming data has were lower than expected and the risks are down.

Fortunately, there was a positive point at the end of the week with the announcement of the reopening of the US government. Although President Trump has agreed to temporarily finance the government only until mid-February, it is unlikely that the closure will be restored, as the president has given up insisting that full funding of the border wall be included. In the United States, growth fears related to the first quarter should now ease, allowing forecasters to start revising their estimates. Markets already had rumors that the Fed was considering a swift end to its downsizing program, the Wall Street newspaper indicating that the tariff policy is pending for the moment, the subject could be discussed more actively at the meeting of the Federal Open Market Committee this week. The news of an advance on this other thorny issue should therefore be welcomed next week.

It is unlikely that Brexit, the other major insoluble problem with an impact on the markets, finds such a rapid solution. Theresa May's Plan B is due to be voted on by Parliament this week and is unlikely to be pbaded. However, the amendments to the draft law are likely to boost Brexit's "power" beyond the 30 March deadline set in Article 50 if an agreement is not reached before the end of the year. next month. In the context of the entire Brexit saga to date, a delay may be the best thing markets can hope for at this stage.

Tim Fox is Chief Economist and Head of Research at Emirates NBD