December saw a weak ending to a turbulent year. The expectations of less central bank stimulation and lower growth in 2019 make it easy to forget the drivers that could create an upturn.
During the month as a whole, the US S&P 500 Index fell by all of 9.8 per cent measured in USD, while the European Stoxx 600 Index dropped by 5.8 per cent measured in EUR and the Nordic VINX Index ended the month down 2.5 per cent measured in NOK. In Norway, the Oslo Stock Exchange (OSEBX) continued its weak trend with a fall of 7.2 per cent.
Lower growth, not a recession
Following an eventful 2018, global GDP growth is expected to end up at just over 3 per cent. The GDP growth in developed countries is anticipated to be slightly more than 2 per cent, while the growth in emerging economies is forecast to be almost 5 per cent. Throughout 2018, the USA was aided by sharp tax cuts at the same time as Europe, Japan and many emerging economies showed signs of losing their growth momentum. At the beginning of 2019, the USA is expected to follow suit so that we will have a synchronised slowdown in global growth. A slowdown is not the same as a recession with subsequent higher unemployment levels. When there is a slowdown in growth, the growth rate falls to a more "normal" level. That is not necessarily a bad thing. The difficulty during this phase is to balance the monetary policy so that there is not too much or too little stimulation.
A kind of interest-rate pause
In December, the US central bank (Fed) raised the interest rate for the ninth time since 2015. As expected, the Fed lowered the projected interest-rate path slightly – from the previously indicated three interest-rate hikes to two now in 2019. Compared to 2018, when there were four hikes, this is regarded as a kind of interest-rate pause. At the same time, the Fed is expected to continue reducing its balance sheet at the rate of USD 50 billion a month in 2019. Combined with the fact that the European Central Bank stopped printing money at the year-end, this means the markets now bear more of the responsibility for creating growth in the future.
The road ahead ...
During turbulent periods, like the one we saw in the fourth quarter 2018, it is easy to forget the drivers that may create a future upturn. The stabilisation of the eurozone's macro figures may be one such driver. Another may be that the Chinese authorities' stimulation policy is reflected in the growth figures. A trade agreement between China and the USA will also be positive – as will greater investments in US infrastructure. The drop in oil and energy prices improves the buying power of many people and also reduces the inflation outlook. The latter gives the central banks more time to normalise their monetary policy. It will be exciting to see how many of, and how much, these drivers have an effect in 2019.
"It is amazing what you can accomplish if you do not care who gets the credit"
Harry S Truman