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Weekly thoughts: Will it be a Happy New Year?

In stark contrast to the past several years, we start 2019 with a lot to worry about: stock markets ended last year in turmoil; the world economy is definitely slowing; monetary policy has been tightening, notably in the United States; and the US-China trade war threatens to get much worse. On top of all this, politics in both Europe and the US has rarely been this unpredictable.

It makes for a pretty noxious brew and explains why some eminent economists have turned very gloomy indeed. Larry Summers, the Harvard professor and former US Treasury secretary, warned this week that we should prepare for a likely recession. He points not only to financial signals, like the inverted yield curve in US bonds, but also real economic indicators, particularly from China.

It is true that Chinese growth has indeed started to slow and potentially quite sharply, as signalled by our own proprietary surveys - which point particularly to weakness in the housing market and hence consumer sentiment. Europe and Germany are also signalling weaker exports and industrial growth and even US businesses - which have been riding high on the stimulus from tax cuts, high equity prices and reduced regulation - are reporting a marked drop in optimism.

There is a big difference, however, between a mild cyclical slowdown and a full-blown recession and according to Martin Wolf, the FT's Chief Economics Commentator, we are heading for the former not the latter. The recovery from the 2007-8 financial crisis is getting rather long in the tooth, after all, and growth in 2017 and last year was well above trend growth rates, so a slowdown should surprise nobody.

So far, conventional forecasters -- though admittedly often rather slow in adjusting their numbers -- are expecting only a mild deceleration in global growth. The OECD, for example, sees it moderating from 3.7% in 2018 to around 3.5% this year and next. For Asia, the region with which we are primarily concerned, the IMF still expects economic expansion of 6.3% this year, only a touch lower than the 6.5% of the past two years.

Inflation remains subdued in most parts of the world even as excess capacity and unemployment have fallen sharply. Credit quality remains generally high and interest rates are still close to historic lows. All of this should underpin household spending. Meanwhile, the past few days have even raised hopes that the US-China trade dispute can be solved or at least contained. In China itself, there are also signs that the government is - cautiously - switching from focusing on debt reduction to promoting stimulus again. One indicator is the recent announcement of $125 billion worth of new rail track to be built this year. 

In sum, it is right to be cautious as we start this year and, in the long term, the global economy faces extremely serious challenges, led by the debt overhang that remains from the crisis years. However, the outlook for 2019 at this point is for nothing worse than a mild slowdown, so we hope that you, our clients, approach this year with confidence and we wish you every success!

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