Stable or Still Cause for Concern? Understanding the Global Economy’s Mixed Signals

The global economy is looking less gloomy than it did only weeks ago. It still may not have the stamina to extend a recovery that’s showing signs of age.

A number of recent developments are stoking optimism. The Federal Reserve hit pause on interest-rate hikes and other central banks delivered stimulus. Trade negotiations between the U.S. and China appear to be inching toward an end to the trade war. And key gauges of factory strength in China and the U.S. strengthened in March, allaying worries those economies were hitting a weak patch.

Investors like what they see. Global stocks have surged nearly 14% this year, according to the MSCI world equities index. The rally has erased much of the fear that gripped markets in December, when stocks plunged almost 8% and analysts speculated the global economy might be on the precipice of a recession.

“We do think that global growth is on track for a soft landing, supported by the positive dynamics of Chinese growth,” said Cui Li, head of macro research at CCB International Holdings Ltd. in Hong Kong.

Still, there’s reason to doubt whether the world economy has the juice to return to the growth rates of recent years. The boost to U.S. growth from Republican tax cuts may already be fading. It’s highly unlikely China will unleash a stimulus package as big as the one it rolled out during the financial crisis. A manufacturing slump has prompted the European Central Bank to consider measures to shield banks from the effects of negative interest rates. Germany’s manufacturing sector has been hammered by a slowdown in global demand. Japan’s anemic economy is bracing for a sales-tax hike in October.

International Monetary Fund Managing Director Christine Lagarde warned last week that the world economy is in a “precarious” position. “We had this synchronized acceleration of growth a couple years ago,” Lagarde said. “Now it’s synchronized deceleration.”

What Bloomberg’s Economists Say

The world economy is poised to exit from a period of panicked uncertainty. The next period of panicked uncertainty is probably not too far away. To us, the short-term risks to the outlook look manageable. With structural strains not going away, and little policy space to offset a downturn, optimism should be tempered with caution,Tom Orlik, Bloomberg chief economist

The IMF will release its latest World Economic Outlook on Tuesday in Washington, as finance ministers and central bankers prepare to gather for the fund’s semi-annual meetings. Lagarde said the world economy has lost momentum since late January, when the IMF cut its outlook for the second time in three months. At the time, the fund projected global growth will hit 3.5% this year, the slowest pace in three years.

“This isn’t a V-shaped bounce-back. We’re not going off and up into above-trend growth,” said Paul Donovan, chief economist at UBS Group AG. “It’s a stabilization.”

Growth will probably reach at best 3.5% this year, down from about 3.8% in 2018, said Donovan. Much will depend on the timing of any deal between the U.S. and China, as well as the outcome of Britain’s negotiations to exit the European Union, he added.

Many of the risks that were clouding global growth have cleared, Gabriel Sterne, head of global macro research at Oxford Economics in London, wrote in a recent research note.

“It may be premature to declare the onset of happy days for the global economy, but our trawl through the various drivers of weakness over the last year or so suggests the worst is behind us,” said Sterne.

Still, the bigger picture shows “weakening trend growth,” and several negative risks remain, including the threat that trade wars “could blow up into something very nasty,” he said.

President Donald Trump is considering whether to impose tariffs on foreign cars, a move that the auto industry is warning could cripple a sector already facing a slowdown.

A host of risks around the world are prompting investors and businesses to park their money on the sidelines, said Tom Donohue, president of the U.S. Chamber of Commerce.

“All of a sudden a lot of people that were putting money in and out of markets and investing in technology, they’re holding on to their cash. They want to know what’s going to happen with Brexit. They want to know what’s going to happen with Venezuela,” Donohue said last week in Washington.