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Special report: Outlook 2019

Convergence puts global economic growth in holding pattern

Allianz Global Investors’ Neil Dwane

Outlook for Europe, Asia is better than U.S. expectations

Investors can expect a slight slowing in global growth and increased convergence between regions as their calendars flip into 2019.

Money management executives and economists largely see this year as one where the U.S. experiences slower — although still fairly strong — growth, while Europe and Asia potentially pick up from a benign 2018.

The International Monetary Fund's latest World Economic Outlook, published in October, forecasted global growth for 2018 at 3.7%. For the U.S., real GDP growth was 3% and Asia ex-Japan was 5.8% in the year ended Sept. 30.

"2017 was a year of synchronized growth, 2018 has been a year of divergence where the U.S. has outperformed (and) I think 2019 will be a year where we get some convergence of growth — a bit less in the U.S. and somewhat better in Europe," said David Riley, chief investment strategist at BlueBay Asset Management LLP in London. He also thinks emerging markets will do better relative to their performance in 2018.

"The bar for outperformance relative to expectation is high for the U.S. and low for Europe — so broadly speaking, I think assets in Europe and to some extent emerging markets can do somewhat better" in 2019 vs. 2018, Mr. Riley said.

Silvia Dall'Angelo, London-based senior economist at Hermes Investment Management, also cited early indications from economic surveys and forward-looking indicators as showing a growth slowdown is on the way.

"Growth divergence between the U.S. and the rest of the world is a source of fragility: historical evidence shows divergence typically is short-lived, lasting one to two years. It is conceivable (we will) see (a) more homogeneous growth picture assert itself" in 2019.

Ms. Dall'Angelo said the big question is whether the U.S. will slow down to "more contained growth rates, or the rest of the world will accelerate to stronger growth rates that the U.S. is experiencing."

'Not as glorious'

Eric Lascelles, chief economist for RBC Global Asset Management Inc. in Toronto, said he expects the global economy to move more slowly this year than last. He said there are "enough challenges on the financial conditions front, dimming fiscal stimulus and rising populism that seems to me (it is) safe to expect slower growth. It is not outright bad but not as glorious as the last several years have been," he said.

Regarding the U.S., Mr. Lascelles said that to date the market "has been the shining bellwether that has defied an economic downtrend — (it is) an intriguing element of the story. On one hand, my sense is the U.S. has some favorable characteristics that stay in place, for example deregulation, but it may have further to fall."

Global growth convergence is one of the main theme for this year for Goldman Sachs Asset Management, said Shoqat Bunglawala, head of the portfolio solutions group for Europe, the Middle East and Africa and Asia-Pacific, based in London. The firm expects U.S. growth to begin to moderate and eurozone and emerging markets growth to pick up the pace.

Pulling the U.S. back down to moderate growth are the "fading benefits from accommodative fiscal policy and a tight labor market," Mr. Bunglawala added, while Europe and emerging markets being further behind the U.S.'s economic cycle means GSAM expects "2019 to be a more positive year for these economies."

Neil Dwane, global strategist and portfolio manager at Allianz Global Investors in London, expects the first half of this year to "be pretty dull" with economies beginning to lose momentum given uncertainties around the U.K.'s exit from the European Union and issues around trade.

In the second half, he thinks the "sugar high from President Trump's tax cuts will also begin to wear off. What's really interesting at the moment is none of us can see a recession, but it's not obvious (by the end of next year) what is going to keep the global economy growing when we potentially have U.S. interest rates (1 percentage point) higher," Mr. Dwane said.

And Pierre-Henri Flamand, chief investment officer at Man GLG based in London, thinks 2019 "might be the year of reckoning."

"Last year, we said everything is going to go down and not be fun — so far 89% of assets are down in U.S. dollars, so we feel good about our prediction," he said. "Last year, we said the market would be very tough; this year I think it's getting more likely that we will get closer and closer to what may be the final outcome."

Monetary policy decisions by the U.S. Federal Reserve will be a major factor for the global economy next year.

"In 2019, we face a fork in the road — often the turning point in cycles," said Andrew Milligan, global head of strategy at Aberdeen Standard Investments in Edinburgh. One "major risk is the Fed is just too aggressive" when it comes to raising interest rates, he warned.

Fragile China

While money managers generally expect a growth slowdown in the U.S. and better growth in the rest of the world, a question mark still hangs over China.

"On the challenging side (for the global economy), there are plenty," said Joseph V. Amato, president and chief investment officer – equity, in New York at Neuberger Berman Group LLC. "Global growth is slowing outside the U.S., so you've got slowing in Europe and China. China is probably the more worrisome (in that if) China bottoms out, how do their attempts at stimulus impact the underlying economic trends in China? Is it going to help stem the tide of slowing growth? China is a big question mark as we think about 2019."

Charles K. Bobrinskoy, vice chairman, head of investment group at Ariel Investments LLC in Chicago, said China "is the real wild card. We have been concerned for a while that the Chinese (government) was propping up the Chinese economy, building cities and buildings that weren't occupied, and we worry a little bit it could come home to roost next year, particularly if trade tensions rise with the U.S., which we think is a real possibility."

AllianzGI's Mr. Dwane added: "If China didn't have Trump and trade on its hands, China would be OK, but the way I would think about China is it will still grow at the infamous 6%, although it will feel like 3% because the deleveraging and rebalancing is going to take time."

Man GLG's Mr. Flamand said the Chinese economy is "not in great shape and this is affecting Europe, which is a side event compared to how important the growth of the Chinese economy is to the world. Companies we talk to and data we see continues to be bearish on China, despite some attempt to stimulate the economy with cheaper credit. I believe growth in China is the only factor that really matters — for (emerging markets), oil and Europe. It is one of the major things to look at next year; is it responding to stimulus?"