We expect global GDP growth to ease modestly from 3.6% this year to about 3.3% in 2019. The drivers of the slowdown include tighter financial conditions, fading US fiscal stimulus and an ongoing slowdown in China, as well as generally deteriorating sentiment, not least because of continuing trade tensions. Late next year and into 2020, the downturn will most likely be led by the US. We see emerging markets generally cooling as well, as this cyclical slowdown in advanced economies plays out. Importantly, we are forecasting a cyclically driven global slowdown (and a possible brief and shallow recession), but not a crisis per se.
During 2019, the US expansion is poised to become the country’s longest recovery on record. Celebrations should be muted, however, as the economy will begin to lose momentum in the second half of 2019, and then head towards a mild – and brief – recession around mid-2020, probably not that dissimilar from the 2001 recession. Several factors will contribute to the slowdown, including tightening financial conditions and the petering out of fiscal stimulus, at a time when wage pressure is building and corporate balance sheets are becoming stretched. In this base-case forecast, we see only moderate monetary tightening in the USA in 2019.
We forecast growth in the euro zone to bounce back from the technical setback in the third quarter of 2018, before then moving through most of 2019 at slightly above trend. In terms of year-on-year growth, we expect 2019 to show a small slowdown to 1.7% from 2.0% this year. However, the Eurozone will likely suffer a loss of momentum in the latter part of next year, which will intensify over the course of 2020 as the US heads towards a recession. Hence, the window of opportunity for the ECB to normalize policy rates is likely to close fast. We think they will just manage to raise the deposit rate – in two steps, starting in September 2019 – back to zero.
With global growth – and earnings – slowing while financial conditions are tightened, markets will very likely see the end of the long bull market. As this plays out, we expect volatility to rise further with an increasing risk of a sudden leg down in markets where valuations are particularly stretched. As a result, we recommend a further move towards defensive assets. Highly rated fixed income should be increasingly preferred over equities, where we see limited upside potential and chances of large downside moves. The less-stretched valuations of European and emerging markets risky assets might offer better value than US peers, but at times of market stress, correlations are likely to be very high. We suggest being very selective in emerging markets and avoiding issuers particularly exposed to global financial conditions and outflows, as the market environment might be difficult for them. 
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