Downgrades on growth today weighed on global markets. First, the European Commission slashed growth expectations for 2019 for all the major euro economies. For the EU overall, they are looking for 1.3% growth, versus 1.9% a few months ago. Next up was the Bank of England decision on rates this morning. They left rates unchanged, but downgraded growth for ’19 and ’20. Keep in mind, this all incorporates the reset of expectations on global interest rates that have taken place over the past month (i.e. acommodative and staying that way). So, why the downgrades? It’s all driven by fears of the worst case scenario on Brexit and U.S./China trade negotations. That worst case scenario would be “no deal.” Importantly, if we get these deals, the upgrades will come, quickly. For the moment, though, we’re continuing to see an environment that looks much like 2016. Central banks responded to the crash in oil prices by resetting expectations on monetary policy (easier). And then the growth downgrades followed. By the end of 2016, the U.S. election had swung sentiment from pessimism to optimism, and the growth upgrades came in — the Fed actually raised rates before the year-end. I suspect if the fog of uncertainty clears, we will see the same. But in the meantime, promoting the worst case scenario for growth may get policymakers in Europe motivated to follow the lead of the U.S. with some needed fiscal stimulus. That would be good for European and global growth.
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