World economy is doing fine, but not everything is rosy – Nordea Markets

Helge J. Pedersen, Chief Economist at Nordea Markets, suggests that so far 2018 has been the year of records in terms of weather and economy as the early summer has never been this hot and employment never as high as now in the Nordics.

Key Quotes

“And much suggests that the trend will continue.”

“Lately sentiment in the financial markets has been sour due to increasing political risks. Especially two risks should be emphasised now that the US and North Korea seem to have found a temporary solution.”

“Firstly,  the escalating trade conflict between the US on the one hand and the rest of the world on the other, which in a worst case scenario may risk to derail the economic upswing. Uncertainty is reflected in the current economic readings from Europe to China – they have nosedived over the past months – and not least in stock market fluctuations.”

“Here and now the increasing risk aversion has caused investors to move into more safe financial assets like bonds and traditional safe-haven currencies such as the dollar and the yen.”

“According to the British research firm Oxford Economics, a large-scale trade war could shrink the global economy by around 1% point over the coming two years. It would be enough to slow down the otherwise solid improvement in labour markets in most countries in the world as well as to lead to a poor investment climate and a significant setback in international trade which could also feed through to the financial sector.”

“Secondly,  the fragile political situation in Europe, which especially this year has been focused around Italy. Although the new patched up Italian government has given assurances that Italexit will not be on the cards, there is no doubt that both the Five Star Movement and Lega Nord are basically Euro-sceptic parties that now support Italy’s participation in the euro not because they want to but because they have to.”

“But all this is still just a risk scenario. The bottom line is that the world economy is still doing fine and will see the strongest growth this year since 2011. And the main reason we can still be somewhat optimistic about financial market stability is that central banks are very vigilant in the current situation.”

“I still believe that we have to wait to 2020 for the benchmark policy rate to turn positive in the Euro area. And should the trade war escalate, I’m certain that the otherwise expected monetary policy tightening will be postponed even further.”