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Market watch: A slowdown but still on high levels

All economic indicators now seem to be heading in the same direction: downwards. But it appears to be more of a slowdown than a full recession coming up. We can see this pattern in Sweden as well as global. With a few variations it is a quite similar picture throughout the economies.

 

Just one year ago, everything looked good in the economies of the world, although there have been some political turbulence and uncertainties, like the threatening trade war between USA and China, Brexit and other political worries in Europe. During autumn a wide spread pessimism took hold with recoiling stock markets. Now we can see that the worst fears have not come true as the markets have recovered in the beginning of 2019.

 

Seven signals

But we should not neglect the negative signals we see in the economies:

* financial stress

* Chinese decline

* threatening global trade war

* Brexit

* potential financial crisis in Italy

* growing pessimism

* increasing rates.

 

Pessimistic purchase managers

The world economy is in a delicate position, something that is reflected in the Purchasing Managers Indexes. These are dropping and coming close to index 50, which is considered as the verge of a slowing economy.

 

The most important factor is the psychology of economy. If we believe it will go down, it will. We hold back our consumption and businesses hesitate on investments and hiring people. Falling sentiments is self-fulfilling.

 

USA can use their monetary policy

I believe the US will come out of this slowdown quite good. They can eventually still use the rate to stimulate the economy, unlike Europe where the rates are zero or as in Sweden even negative. In a recession these countries do not have much to work with using the traditional monetary tools. And many countries in Europe have such high government debt that fiscal stimuli aren’t an option.

 

Sweden on the other hand can use its strong public finances to stimulate the economy. The national debt is relatively low, and it seems that the new government will use this opportunity, investing in public infrastructure, schools etcetera.

 

Remember the levels!

An important thing to remember is the level of the economy, and not only focus on the direction. One example is the investments in housing. We can see it is decreasing, which of course is a classical warning of an upcoming recession. On the other hand, we must note and remember that it is happening from the highest level since the 1990s, peaking the second and third quarter 2018.

 

Concerning the central bank rates, again, remember the levels. All big economies are still accelerating, which can be seen when looking at real rates, i.e. net of inflation. None have yet applied any brakes although some are going easier on the accelerator.

 

Having this said, our analysis is that there are still enough positive fundamentals in the economies that hold back a threatening recession and what we are experiencing has more the signs of a slowdown.

 

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Kristofer Ramström, a senior consultant at CORE Process, has 25 years of experience following and analyzing the financial markets. He regularly provides clients with updates and conclusions of the economic status in Sweden and across the world. With his extensive background Kristofer also advice clients in treasury management and systems to achieve their objectives.

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