Macro views

Where do we go from here?

Globally, economic growth remains in good shape but it is worth noting that whilst the rate of expansion increased in 2017 (after four years of disappointment) there has been some tempering of expectations this year.
July 2018

Steven Bell

Managing Director, Portfolio Manager & Chief Economist, Multi Asset Solutions

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In summary


  • The world economy is growing – with the US leading the way
  • As US inflation approaches the Fed’s 2% target, rates will continue to rise
  • Europe is in reasonable shape, Brexit is a drag on the UK economy
  • Equities are more attractive than bonds
  • We favour developed over emerging markets
  • Trade tensions remain a worry

Globally, economic growth remains in good shape but it is worth noting that whilst the rate of expansion increased in 2017 (after four years of disappointment) there has been some tempering of expectations this year. But how does the situation break down geographically? Composite Purchasing Managers’ Indices (PMI) for key regions remain above 50 – indicating growth – but there have been significant changes from last year when Europe was leading. Notable trends include the US regaining its mantle as ‘global growth leader’ and a relative decline for Europe.

Risk Disclaimer 

Past performance should not be seen as an indication of future performance. Stock market and currency movements mean the value of, and income from, investments in the strategy are not guaranteed. They can go down as well as up and you may not get back the amount you invest.

Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

Global PMIs are still strong



Source: BMO Global Asset Management, Bloomberg as at June 2018. PMI = Purchasing Managers’ Index. LTM = Last 12 months.

The US in focus

Of course, the health of the US economy, and more specifically, the direction of US inflation, has implications far beyond the United States’ borders. Inflation is certainly on the up – after the unexpected weakness in 2017.

So, what’s changed? A normalisation of housing and medical costs has contributed, but more importantly, we have seen wage inflation building and rising import prices are feeding through. Together, these factors mean inflation – using the Fed’s preferred measure of the Personal Consumers’ Expenditure Deflator (ex food & energy) – is heading above the 2% target, which in turn means a likely continuation of the tightening cycle.

Use our handy glossary to look up any technical jargon you are unfamiliar with.
US inflation: heading above target



Source: Bloomberg as at April 2018. CPI = Consumer Price Index.
Europe – still positive but expectations have been tempered

The resurgence of Europe’s economy was one of the stand-out themes in 2017 but this year we’ve begun to see forecasts being revised downwards. The situation is still reasonable though with growth remaining above trend and unemployment easing. Germany’s powerhouse economy is doing comparatively well and this bodes well for the region more broadly. It also suggests that rates may finally move upwards at some point in 2019.

For now, the cost of borrowing remains low, and small and medium sized businesses (a significant driver of growth) are able to access capital at a relatively low cost. Importantly, financial institutions are now willing to lend to companies – a situation that stands in sharp contrast to the position a few years ago.

“The resurgence of Europe’s economy was one of the stand-out themes in 2017 but this year we’ve begun to see forecasts being revised downwards.”


Perspectives on Brexit
Brexit continues to dominate politics in the UK and cloud the country’s prospects economically – it is also the main reason UK PMIs have fallen so markedly. The chart below illustrates the broad composition of activity for the UK – an economy characterised by a large and increasing deficit in goods trade and a corresponding surplus in services. Most of the debate has related to goods and a strong deal here is needed to ease the concerns of multi-nationals like Nissan who commit significant amounts of investment to their UK-based manufacturing operations.
UK trade balance – services surplus



Source: Bloomberg as at April 2018.

Given the services surplus, the prospects for that part of the economy are arguably more pertinent, and financial firms – like ourselves – are already transitioning towards post-Brexit operating models. There will be some setbacks and contraction for the financial sector but when you balance the UK’s attractions against some of the challenges associated with operating on the Continent, it is difficult to believe that London’s position is really under threat.

A similar picture emerges for non-financial services based in the UK – the customers for which often originate outside of the European Union anyway. Of course, it must be recognised that Brexit makes the UK less attractive than it was and there will be plenty of bumps ahead.


Asset class takeaways

Rising inflation and higher interest rates aren’t good news for government bonds so we are relatively cautious on the prospects for the likes of US Treasuries. Additionally, the support Treasuries have historically enjoyed from overseas investors has waned. Elsewhere in fixed income, valuations do not look particularly compelling.

The prospects for equities appear brighter but not spectacularly so. The recent earnings season in the US has been very positive – expectations heading into it were high and investors weren’t left disappointed. Given that the market likes upwards revisions (and doesn’t like disappointments), this is a headwind for US equities and risk assets more generally. Despite recent political concerns, the prospects for European equities remain encouraging – euro strength has provided a headwind to performance recently but the economic backdrop is robust and there is greater scope for earnings expectations to be exceeded.

“Despite recent political concerns, the prospects for European equities are more encouraging”

More generally, we have a preference for developed markets over their emerging counterparts. Economies are buoyant whereas dollar strength, higher interest rates and political uncertainty all suggest emerging markets will be characterised by greater volatility without (at this stage) materially higher returns. We have trimmed exposure to emerging markets.


Recent trade tensions cast a shadow over the world economy as well as risk assets, and have supported US Treasuries in the process. We are worried about the aggressive actions of the White House but anticipate that they will not implement their threats. Nonetheless, it makes us nervous.