E Is There A Disconnect Between The Stock Market And The Global Economy?

World economic growth is moderating and coming off peaks that were achieved in 2017 and 2018. In part this long-predicted development reflects the tightening by central banks, a natural cooling of the pace of growth, the elevated uncertainty in financial markets and the evolution of the China-US trade war.

While the growth rates of the advanced economies probably peaked last year, the amount of slowing projected into 2019 and 2020 is far from catastrophic. Yet the stock markets have been in a down phase for quite a while (although not in January), and the shape of the yield curve signals slower growth, if not a recession some time ahead.

Up to last month the major central banks that have all been tightening (the Fed, the Bank of Canada, and the European Central Bank) but as already noted, in January the Fed signalled a pause in its tightening because of the worries surrounding the global slowdown and trade war concerns.  

The consensus global economic forecast as reflected in recent IMF projections has world growth slowing from 3.7% in 2018 to 3.5% in 2019 and 3.6% in 2020.  However, the stock market declines and the movements in the shape of the US treasury yield curve imply a much greater growth markdown in the global and the US economies, including the possibility of recession in some countries.

By and large, indicators in Canada and the US, and isolated indicators in the UK and Europe, suggest that there is still momentum in the economy. Moreover, in recent months Canadian and American jobs growth have tended to surprise on the upside.

Ironically, while there is a spate of bad news out there in terms of the US and global economic outlook, it does seem to this writer that the major economies still have considerable momentum.

Economic expansions need not die of old age. If the current expansion ends, expect either an external real or financial shock or a mistake on the monetary policy tightening front.



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Arthur Donner 1 year ago Author's comment


Every time I think that the markets should have fully discounted an issue-e.g. tariffs, rate changes--somehow the market still reacts.

Who really knows.

Gary Anderson 1 year ago Contributor's comment

The stock market may be starting to factor in the likelyhood of at least some continuing tariffs. The steel tariffs in the USA are a disaster for drawing companies to this nation in manufacturing. And increased tariff danger lurks as the tariff man appears to be deluded about what he can accomplish.