The European Commission, Bank of England and Reserve Bank of Australia have all in the past 24 hours significantly revised downwards their GDP growth forecasts for respectively the Eurozone, UK and Australia. The European Commission shaved 0.6pp off its 2019 forecast to a mere 1.3%, far more conservative than the ECB’s already lacklustre December forecast of 1.7% growth this year. The Bank of England slashed its 2019 forecast by a similar magnitude, to a paltry 1.2% from 1.7%. The RBA cut its forecast for Australian GDP growth in the 12 months to June by a full-percentage point, to 2.5%.
The bottom line is that GDP growth in major economies is expected to slow rapidly this year and that global economic growth will most likely remain on a downward trajectory. Unsurprisingly perhaps most major central banks, including the Federal Reserve, the Bank of England and RBA have seemingly for the foreseeable future put on hold any rate hikes. Markets have reacted accordingly, pricing a roughly unchanged Fed policy rate this year and cutting their pricing of BoE rate hikes by Q1 2020 to 14bp (from 20bp), and some banks are now forecasting that the RBA will cut rates over the next 18 months.
Without even taking into account the fact that the Bank of England faces a very opaque few months as a result of Brexit-related uncertainty, the case for a rate hike is far from compelling. Yes the UK labour market has continued to tighten and real wages have started to edge higher and GDP growth was a robust 0.6% qoq in Q3, which on paper would justify the MPC hiking its policy rate from 0.75%. But UK GDP growth likely slowed sharply in Q4, inflationary pressures remain muted with core CPI-inflation stable below 2%, global GDP growth is slowing and the Federal Reserve has given every indication that with wage growth and inflation modest it is in a holding pattern.
The question has now morphed into where will growth be the least weak, where are domestic factors the least damaging to macro fundamentals and which central banks could still conceivably hike rates this year. The US still seems on be on top and the Dollar has managed to appreciate about 0.7% in trade-weighted terms so far this month, with the Euro broadly unchanged. Sterling has shed 0.5% but it is the more risk-sensitive Australian and Kiwi Dollars which have underperformed, weakening 2.1% and 1.5% respectively. The Australian Dollar is also being weighed down by concerns about China’s economy while weak Q4 labour market data in New Zealand have dragged the Kiwi Dollar lower.
