• In our view the global outlook has deteriorated. Financial markets hit a pothole in May following an escalation of the US-China trade dispute and the short-lived US threat to raise tariffs on imports from Mexico, although more dovish expectations around central bank policy have helped support share markets.
• NAB has revised down its forecast for the US Fed funds rate; we now expect it will be 50bps lower by the end of 2019 (previously we had expected no change) although the risk is that there will be more cuts rather than fewer.
• The latest data confirm that major AE growth strengthened in Q1. However, this is unlikely to be sustained and we expect growth to ease over the rest of the year. This is mainly due to a fading impact from last year’s US fiscal stimulus, the impact of trade tensions, ongoing Brexit uncertainty and the planned increase in Japan’s Value Added Tax later in the year.
• Emerging market (EM) economies are more trade exposed than the AEs and therefore the increase in trade tensions between the United States and China are a negative. This is particularly so for Asian EMs; while several economies in this region have increased exports to the US these have typically not been enough to offset lower exports to China and elsewhere.
• We have again lowered our global growth forecasts – to 3.2% in 2019 (from 3.3%) and to 3.3% in 2020 (from 3.4%) – due to an expectation that last month’s trade policy events will negatively affect business sentiment and investment for an extended period of time. The forecast revision is also consistent with the message coming from our leading indicator of global activity. There is of course the clear risk that the US will implement additional trade barriers (e.g. extending tariffs to all China imports), although the situation is fluid and, as the US-Mexico agreement showed, it is possible trade worries could ease.

Find out more in the The Forward View – Global June 2019.