The last week was dominated by Davos, downgraded global growth forecasts and Brexit, but at the end of it there was good news as the US government shutdown came to an end.
The market was already enjoying the possibility that the Fed could end its balance sheet tightening sooner than expected, so the news of an end to President's Trump's government closure will likely lift sentiment further at the beginning of this week.
Last week it got off to a rough start, however, with the IMF downgrading its forecast for global growth this year, in the latest update to its World Economic Outlook (WEO). The Fund now expects global growth of 3.5 percent in 2018, down by 0.2 percentage points since the October WEO.
The revisions were lower across both developed (mainly Europe) and emerging markets. While this is still a solid growth rate, albeit the slowest in three years, the IMF cited a significant rise in downside risks, including increased trade tensions, tighter financial conditions, Brexit, and a prolonged US government shutdown. The Mena growth forecast was also revised down by 0.3 percentage points to 2.4 percent in 2019, with Saudi Arabia gross domestic product forecast cut to 1.8 percent from 2.4 percent previously.
While this is still a solid growth rate, albeit the slowest in three years, the IMF cited a significant rise in downside risks.
Tim Fox, Emirates NBD
This followed from similar downward revisions from the Organization for Economic Co-operation and Development and the World Bank and news that China's economy grew 6.4 percent year-on-year in the fourth quarter of 2018. This was the slowest rate since the financial crisis, setting the stage somewhat auspiciously for Davos World Economic Forum with the theme of 'globalization'.
Not surprisingly, the mood of the event was said to be muted, with prominent global leaders missing and key issues avoided. Politics have changed so much in the past few years that US Secretary of State Mike Pompeo was able to chide the event over a video link for not keeping up with that change.
And in the background the soundtrack remained resolutely gloomy. German investors' assessment of current economic conditions deteriorated sharply in January, with the ZEW current situation index – an indicator of economic sentiment – falling to 27.6 from 45.3 in December.
Germany's Ifo Business Climate Index for January also fell to the lowest level since February 2016, while the German PMI manufacturing index hit a 50-month low, providing further evidence that economic growth in the eurozone's largest economy has stalled. Japan's PMI manufacturing index also fell to 50 in January from 52.6, ending the longest expansionary run in a decade and new export orders fell at the sharpest rate since July 2016.
Against this, the European Central Bank had no choice but to drop its earlier optimism that the risks were 'broadly balanced', with the chairman of the ECB, Mario Draghi, now acknowledging that the incoming data has been less than expected and that the risks are down to the downside
Luckily there was one bright spot at the end of the week with news that the US government was to be reopened. Although President Trump has only agreed to a temporary financing of government until mid-February, it is unlikely that the shutdown will resume, as the President has dropped his insistence that full border wall funding must be included. First quarter growth fears in the US are now likely to decrease, allowing forecasters to start revising up their estimates. The markets were already enjoying rumors that the Fed was considering an early end to its balance sheet reduction program, with the Wall Street Journal reporting that with the rate policy hold for now the topic could be more actively discussed at this week's Federal Open Market Committee meeting. So, the news of a breakthrough on this other thorny issue is likely to be welcomed in the coming week.
It is unlikely that the other major intractable issue impacting markets, Brexit, will find such a timely resolution. Theresa May's Plan B is due to be voted on by Parliament in the coming week and is unlikely to pass. However, amendments to the bill have the potential to kick the Brexit 'can' down the road and beyond the March 29 Article 50 deadline if a deal has not been agreed by the end of the next month. In the context of the whole Brexit saga to date, a delay may be the best thing that markets can hope for at this point.
Tim Fox is chief economist and head of research at Emirates NBD
Updated: January 27, 2019 11:26 AM