But as the year progresses, we are taking down that hypothesis, brick by brick.
While the policy pivot by the Federal Reserve (Fed) and, for that matter, every other central bank in the world, will likely prove to be the death knell for the recession hypothesis, we can look to China for the true evidence that this global expansion will continue.
What Happens in China Drives the Global Economy
Let me explain: Because U.S. flows dominate the global capital markets, the Fed may be the ultimate driver of global market sentiment, but not the global real economy. Compared with the U.S. economy, which is far more internally driven, the global real economy is driven more by the happenings in the Chinese economy.
If you don’t believe me, go back and look at the last time in the current cycle when we were at a similar precipice.
If we look at the Chinese data in 2015-2016, it is clear that Chinese credit easing in late 2015 and 2016 created what we now fondly remember as the Synchronized Global Growth story of 2017.
No doubt, U.S. stimulative policies helped extend that growth spurt, but the initial catalyst was expansive Chinese policymaking.
A similar story is playing out today.
In 2018, the Chinese economy was slowing. At the same time, the Fed confused a cyclical growth spurt for a secular revival and tightened monetary policy to kill the ghost of the Philips Curve, or the idea that there is a link between low unemployment and higher inflation. This, in turn, brought the U.S. and the world close to a recession.
However, long before the Fed pivoted, the Chinese started to ease policy last year. At that time, the Fed was still issuing confusing pronouncements. Fed Chairman Jerome Powell in early October of last year said, “We may go past neutral. But we're a long way from neutral at this point, probably.” Inexplicably, the Fed was still convinced it needed to raise rates further.
We are already seeing the results of Chinese easing.
In March, Chinese industrial production surprised meaningfully on the upside. Both domestic demand and exports are adding to the growth recovery.
Unlike in previous episodes, infrastructure spending is not driving the growth spurt. Instead, it is being driven by credit easing, which in the Chinese context directly translates into property investment.
With Chinese property investment on the rise, everything China will slowly but surely fall into place. Consumption is likely to increase and the ever-present disinflationary pressures are likely to ease as well.
In addition, as the Chinese domestic economy stabilizes, the knock-on effect on the European economy and other emerging markets is likely to be substantial, and we’re already seeing recessionary pressures easing in those markets.
The Likely Path for the U.S. Economy
We expect a similar story to play out in the U.S.
I remain convinced that the Fed is done raising rates for this cycle, and that the next move will be a rate cut, but with a substantial pause.
As a result, financial conditions in the U.S. have eased meaningfully – equities are up, credit spreads are getting close to their historical tights, and the dollar remains relatively stable.
And we are already seeing green shoots – or “green sprouts” as Fred Smith of FedEx recently called them – in the cyclical parts of the U.S. economy, especially in housing.
The second half of 2019 for the U.S. – and maybe even the second quarter – is already looking much better.
The bottom line is that recessionary fears were somewhat misplaced, and while overall global growth is likely to be lower in 2019 than in 2018, there is NO impending recession.
As I have said repeatedly: FIVE MORE YEARS.
In this environment, global equities, especially international and emerging market equities, should do reasonably well. In addition, we have probably already seen both the highs and lows for U.S. rates in 2019 – a rosy environment for risk assets.
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These views represent the opinions of OppenheimerFunds, Inc. and are not intended as investment advice or to predict or depict the performance of any investment. These views are as of the publication date, and are subject to change based on subsequent developments.