Although the escalating trade war between the U.S. and China appears to be a burden to future global growth, a new report issued by Manulife Investment Management reveals that it won't be the only factor.
In Manulife's biannual Global Intelligence report, which provides the outlook perspectives of the firm's private and public markets investment teams, Frances Donald — the firm's chief economist and head of macroeconomic strategy — said that in addition to the growing trade war, the effectiveness of China's stimulus measures and the U.S. Federal Reserve's review of its monetary policy framework could also be a major factor in determining the global economy for the second half of 2019.
"There's no question that the most important theme over the next six months is going to be trade tensions and geopolitical risk," Ms. Donald said in a video accompanying the report.
Ms. Donald noted that if tensions continue to escalate, "it isn't good news for the U.S.," because it will be a big drag on gross domestic product.
But Ms. Donald and the report note that the trade war isn't the biggest factor. How the Fed will respond is also crucial in determining global growth. Although markets are expecting the Fed to cut interest rates up to three times in the next 18 months, Manulife is expecting the Fed to cut interest rates twice, starting in the fourth quarter, in response to a deteriorating economic outlook.
"Should trade tensions escalate further and the economic consequences of this uncertainty manifest themselves in weaker data over the summer, the probability of earlier rate cuts and/or more than two rate cuts will rise," the report said.
The stimulus measures that China introduced in the past three quarters will also be a major factor going forward, according to the report. Already, these measure are starting to stabilize China's economy. And although this should be a good thing in theory, because previous Chinese stimulus efforts have lifted Chinese demand for industrial goods, which in turn supported global trade activity, there are a few reasons why these new stimulus measures might be less effective at "lifting all boats."
For one, the report said China's fiscal stimulus has been mainly focused on boosting domestic consumption. Plus, individual economies in Asia are dealing with elevated inventories, which wasn't the case in 2015 and 2016. And finally, China hasn't engaged in production cuts that had lifted commodity prices in the past.
"The global economy and markets continue to experience volatility and trend toward risk aversion," said Christopher P. Conkey, president, CEO and global CIO of public markets, in a news release announcing the report. "Despite the uncertainty and a short supply of broad-based growth, we see durable public markets opportunities in the second half of the year including global equities and emerging markets debt.
Mr. Conkey added: "At the same time, we believe investors should consider the potential benefit of longer-term investment disciplines such as liability-driven and sustainable investment strategies to ensure they are positioned in a way that may benefit their portfolios through market cycles."