The global economy is slowing markedly and rapidly. Not a day goes by that you see headlines about some major country or continent manifesting more and more indicators of a tired economy. From Japan to China, the UK to the rest of Europe, growth is slowing or already in recession as in the case of Italy. This is despite a decade long spree of zero bound interest rate policies by the G4 central banks namely the Federal Reserve, Bank of Japan, European Central Bank and the Bank of England.
An article in Barron’s paints the picture quite aptly:
From the euro zone to Oceania, estimates of gross domestic product were ratcheted down this week, sending interest rates lower around the globe. Rather than being bullish for risky assets like stocks and corporate bonds, the retreat in borrowing costs ought to serve as a warning about sputtering global growth.
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The European Commission lowered its estimate of 2019 GDP growth for the euro zone by nearly a third, to 1.3% from 1.9%. Italy is already in recession, while German growth is faltering as its export-dependent economy is being hampered by a slowing China, which in turn is a result of increased trade frictions and its domestic deceleration. Elsewhere, Australia’s central bank lowered its outlook for growth, while India’s central bank cut interest rates in a surprise move.
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Amid these signs of sputtering growth, the U.S. Treasury 10-year yield dropped to a 13-month low of 2.63% while short-term borrowing costs eased, in effect undoing half of the Federal Reserve’s December 25-basis-point interest-rate hike.
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The Fed shifted last month to a “patient” stance regarding future rate increases and greater potential flexibility about shrinking its balance sheet. While that attitude adjustment bolstered bullishness in the equity markets, Peter Boockvar, chief investment officer at Bleakley Advisory Group, observed that the decline in global bond yields in reaction to slower growth should remind investors why the Fed altered its stance in the first place.
“The U.S. economy still appears to be sailing on serenely while the rest of the world economy sinks like a stone,” write the forecasters at Capital Economics. America remains a relatively closed and service-oriented economy, but the advisory firm suggests that eventually what’s happening overseas won’t stay there. That suggests the Fed’s patience is prudent, it concludes. But that may not be sufficient to spur gains in risky assets beyond the rebound seen since December’s debacle.