The cycle is turning

Many of the indicators that tend to turn first around peaks in the business cycle are now flashing red in several major economies. Admittedly, some survey measures of confidence and real activity remain at fairly high levels by past standards. But their direction of travel suggests that a synchronised slowdown is now underway. We estimate that world GDP last quarter expanded at its slowest rate since 2016, and we think that the economy will lose further momentum over the next year or so, led by slowdowns in the US and China. With core inflation in the US already past its peak, below-trend GDP growth should be enough to convince the Fed to begin cutting interest rates by early-2020. And given the headwinds in China’s economy, we’re expecting stimulus measures – including the reserve requirement cuts announced by the PBOC today – only to stabilise growth later this year, and not to drive a significant rebound. Meanwhile, there are increasing signs that euro-zone GDP growth won’t be as good in 2019 as it was in 2018, raising the risk that the ECB will wait until after September before hiking rates.