2019 Quarter 1 Economic Review

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  • Global stock markets went up over the first three months of the year.
  • Investors became more confident as the possibility of a global trade war subsided and the UK economy remained on a stable footing.
  • However, the outlook is mixed because of an increased possibility of a recession in the US and a global economic slowdown.

Many people view the new year as the time for a fresh start and it seems that was the case for stock markets. While the final three months of 2018 were a difficult period when global markets fell in unison, there was a great deal more confidence in the air in January.

This was because the factors that caused markets to fall in the autumn – rising interest rates and the threat of a global trade war – eased off at the beginning of the first quarter and encouraged investors to take more risk. However, there are growing worries that the global economy is deteriorating and this may pose a risk to further stock market growth.

Economic update

In recent months it has become more apparent that economic growth around the world is slowing down. This was particularly apparent in China, which has faced lower demand for manufactured goods. A similar situation is playing out in Germany, where the economy is suffering from falling exports, while the US economy is beginning to slow down as the positive boost from corporate tax cuts dissipate.

In the UK, economic growth has been subdued. In the three months to the end of January 2019, the gross domestic product (GDP) – which is the main measure of economic activity – grew by just 0.2%, due in part to falling demand for UK manufactured goods around the world.

In spite of this, the UK labour market has been strong. The Office for National Statistics reported that the number of people in employment reached 32.7 million between November and January, the highest rate seen since records began in 1979. Meanwhile, the inflation rate – which measures the price of goods such as food and clothing – fell to 1.9% in February following two years of sitting above the Bank of England’s target of 2%. This target is considered ideal for the economy; if inflation is too high, people may put off spending, while if it is too low, prices may fall too far and businesses may go out of business.

Looking further afield, economic growth in Europe was weak during the first quarter, with manufacturing activity continuing to experience a downturn. The services sector, which includes businesses such as hotels, banks and restaurants, showed some resilience, but there were broad concerns that the eurozone is vulnerable to recession. Germany was close to falling into technical recession (two consecutive quarters of negative growth) in the fourth quarter of 2018, although it has since seen renewed confidence levels.

The big story in the US over the quarter was the ending of the longest government shutdown in history, running for 35 days between 22 December 2018 and 25 January 2019. The shutdown, combined with bad winter weather, may take a bite out of economic growth during a period when it was already showing signs of slowing down. The US Bureau of Economic Analysis reported that growth for the fourth quarter of 2018 stood at an annual rate of 2.6%, down from 3.4% in the third quarter.

In Asia, fortunes were mixed. Japan suffered disappointing corporate earnings, lower levels of industrial output and weak exports over the quarter. Given its already low growth levels and the fact its economy relies on the success of the world economy, Japan could struggle if we see a global slowdown.

Meanwhile, there were sighs of relief in China when US President Donald Trump delayed the implementation of further tariffs on Chinese goods, raising hopes that a trade war might be averted. However, the Chinese economy continues to slow down and its manufacturing sector is contracting. A slower Chinese economy may result in lower demand for energy and commodities from its trade partners, causing economic reverberations around the world.

Market commentary

We observed a strong global stock market bounce back in the first quarter, much of this driven by a more positive mood among investors. As mentioned above, this was largely because the threats that caused markets to fall late in 2018 – worries about slowing global growth, rising interest rates, potential trade wars between the US and China, and Brexit uncertainties – appeared to dissipate.

On average, stock markets increased steadily throughout most first three months of the year. There were positive returns across the US, UK, Europe, Asia Pacific and emerging markets indices, although there was variation on a country-by-country basis within each region.

The UK stock market saw steady growth over the quarter as it was propelled by a more positive mood about Brexit. Stock markets in the US also performed well, making up many of the losses that were seen in December. IT and industrial sectors were particularly strong, while consumer discretionary and communications services grew at a slower rate.

The emerging markets delivered positive stock market growth over the quarter as the US Federal Reserve held off raising interest rates and signalled that no further increases are likely in 2019. Higher interest rates can be problematic for emerging markets because it makes their US dollar-denominated debt more expensive to service and increases import costs.

Government bond yields in the UK, US, Germany and Japan ended the quarter lower than they were at the beginning, meaning prices increased, as investors sought safer havens. Even though stock markets saw buoyant growth in the first three months of the year, much of this was driven by the fact that the US Federal Reserve held off raising interest rates and the threat of global trade wars had receded. In reality, the threat of political uncertainty and slower global growth never really disappeared, and this was reflected by falling bond yields as the quarter came to a close.

This came to a head in the closing days of March when concerns of a recession in the US returned and markets grew more turbulent. The trigger for this was a rare occurrence in the US government bond market where yields on longer-term bonds fell below yields on short-term bonds, known as a yield curve inversion. Bond yields move in the opposite direction of prices. When investors are seeking safer assets, they invest in bonds and this pushes up their prices, causing yields to fall. A yield curve inversion is therefore seen as an indicator of slower growth in the future, and is believed to be a predictor of an oncoming recession in the US.

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27 Oct 2023

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