Global economy more stable than stock markets

It thus appears that the stock markets are preempting this economic development. It now seems that the DAX, Dow Jones, and co. are running out of steam. Is there currently a threat of a global economic collapse or recession? Realistically, these concerns are arguably unfounded. A glance at the hard economic data confirms this. Investors should be aware of these five facts:

1. The US economy is buzzing

The United States economy is the largest in the world – and therefore frequently the pacemaker for other industrialized countries and emerging markets. At the moment, the US economy is the strongest it has been in a long time. In the third quarter of 2018, it was 3.5 percent up on the third quarter of the previous year.^[1].This rise in US GDP was considerably more than expected by analysts. It followed an even stronger increase in the previous three months. In the second quarter of 2018, US GDP rose by a whole 4.2 percent.

Consumers buoy the US economy

In the third quarter of 2018, the main driver behind the strong growth was once again rising expenditure on the part of US consumers. This is no surprise as sentiment remains high in light of the extremely low unemployment rate. The consumer confidence index continues to hover near its all-time high. In September, the US unemployment rate fell to just 3.7 percent.^[2]

2. Stabilization in China

China, the world’s second-largest economy, has increasingly proven to be a global economic engine in recent decades, with annual growth rates of more than 10 percent a frequent occurrence. Now, China’s economic growth is not quite as rapid anymore, but its economy is still growing far faster than in other industrialized countries. In September, Chinese GDP was 6.5 percent higher than in September 2017, according to official figures.^[3]. The trade dispute with the USA has not thus far impacted the Chinese economy as much as market observers feared it would. This is also highlighted by the continued rise in Chinese companies’ exports, the further increase in Chinese industrial output, and higher investments by companies.

Chinese government stimulates economy

The Chinese government is continuing to support economic growth. In October 2018, for example, the minimum reserve requirements for banks were lowered further, and income tax is set to be cut next year.

Despite these positive aspects, the economic situation in China is not as comfortable as it used to be. In light of this, the capital market experts at DWS assume that growth in China will fall to 6.0 percent in the coming year (2018 forecast: 6.5 percent).^[4]

3. Global trade at a high level

In light of the impending trade war between the United States and China, observers also fear that global trade will be negatively impacted. Economists at the IMF believe that it will rise by only 0.6 percentage points this year, and by 0.5 percentage points next year. On balance, however, global trade will still remain in positive territory.

IMF does not expect a slump in global trade

Even the skeptical IMF assumes that global trade will rise by 4 percent in 2019.^[5] Thus far, there is little sign of a drop in trade. Exports from key exporting nations such as China, Japan, or Germany are continuing to rise, and imports into the USA have recently increased faster than ever before. ^[6]. The Baltic Exchange Dry Index also remains at an extremely high level.^[7]. The index measures freight rates in shipping and is considered a key trade indicator. “Next year, the trade disputes will probably only have a limited impact on GDP and inflation on both sides of the Pacific,” explain the economic experts at DWS in their latest analysis.

4. Rising corporate profits

There is a real sense of nervousness on the stock markets; however, the upper echelons of management still remain relatively calm, it appears. After all, corporate profits are continuing to rise. By the end of October 2018, around half the listed companies in Europe and the United States had announced their third-quarter profits, reported analysts from Barclays in London. More than half of these posted higher profits than forecast by equity analysts. Only a small proportion of public limited companies revised their profit forecasts down.

This trend was especially notable in the United States, where four out of five companies exceeded analysts’ expectations, calculated the capital market experts at DWS. On average, quarterly profits were more than 20 percent above prior-year levels. If this trend continues, it would be the first time since 2010 that profits have grown by more than 20 percent in three consecutive quarters. In 2019, corporate profits in the USA are set to continue rising. According to estimates by the capital market experts at DWS, however, this increase will only be in the mid-single-digit range. This is nevertheless likely to still support share prices.^[8]

5. Cautious central banks

Fears over rising interest rates and rising yields on US government bonds were arguably the trigger for the latest stock market turbulence. However, nobody is sure as to whether we will actually see a sharp increase in interest rates. While the major central banks in the USA, Europe, and Japan have stuck to their goal of at some point bringing their ultra-expansive monetary policy to an end, they have thus far been extremely cautious in doing so. In a speech given at the end of October at the Peterson Institute for International Economics in Washington, D.C., Richard Clarida, Vice-Chairman of the Board of Governors of the US Federal Reserve, explained that only “gradual interest rate hikes” are necessary and gave assurances that the Fed’s policy will remain “supportive.^[9].

Interest rate hikes in Europe taking time to materialize

In Europe, most money market players only expect an interest rate hike at the end of 2019. This is indicated by futures contracts for interbank interest rates, the interest rates at which commercial banks borrow time deposits.^[10].Against this backdrop, there appears to be little risk that central banks will stifle this upturn by raising rates.