Global growth is expected to slow down significantly in the coming months as borrowing levels dominate in both China and Europe and “Trump-mania” is set to fade, a chief economist at Danish investment firm Saxo Bank told CNBC on Monday.
“Our main global macro outlook still maintains that recession is more likely than not in the near future (12 to 18 months) based on the global credit impulse having peaked simultaneously with global inflation,” Steen Jakobsen, chief economist at Saxo Bank, said.
In a recent note, Jakobsen explained that the biggest “perception-versus-reality gap” in the market currently remains this risk of recession. He added that his company is not predicting a recession, but that its economic model does indicate a significant slowdown as “the large credit impulse from China and Europe in the early part of 2016 has not reversed to negative”, which it says should make the market conservative, risk averse push investors into U.S. fixed income.
“While the market at large sees less than a 10 percent chance of recession, we at Saxo – together with our friends at South Africa’s Nedbank – see more than a 60 percent chance,” he added in the note.
Europe is seen as the main region driving global growth, according to Jakobsen, beating the U.S. in the second and third quarters of this year. Jakobsen is not alone in this thesis, with a number of investment houses recently upgrading their outlooks on European stocks as fears recede on the rise of populism and polls indicate that centrist candidate Emmanuel Macron is likely to do well at the upcoming French elections.
Mike Bell, global market strategist at JPMorgan Asset Management, told CNBC Monday that European stocks “look pretty cheap” compared to U.S. stocks. “What you’re starting to see now is that underperformance of earnings that you’ve seen since the financial crisis is disappearing,” he said. There’s been a fundamental acceleration in the euro zone economy, he also noted.
But, according to Jakobsen, Europe’s momentum is not followed in other parts of the globe.
“One thing is absolutely clear: Asia is not going to contribute anything in 2017 to growth. China is on total standstill,” Jakobsen said Monday.
“They don’t know what to do with (President Donald) Trump and I think Trump again showed his hand over the weekend that he is not to be relied on in terms of a set-out path for how they conducted themselves,” he added.
Trump and Chinese President Xi Jinping agreed during a summit last week to develop trade talks during the next 100 days to reduce the Chinese trade surplus with the U.S. They also agreed to increase cooperation to curb North Korea’s nuclear program.
Shortly after the meeting, Trump sent 100,000-ton USS Carl Vinson and U.S. Navy support ships to the Pacific as a show of force amid rising fears that North Korea will launch an intercontinental ballistic missile test in the coming days. Last week, Trump approved a missile strike on Syria, after an alleged chemical attack. Such a decision overshadowed the summit with his Chinese counterpart.
Furthermore, the main driver of U.S. equities seems to be hope, Jacobson added. The S&P 500 has reached historic highs since the new president took office on expectations that he will deliver massive tax cuts and infrastructure investments.
“A dominant part of the equity analysts sees a significantly higher S&P but it’s based on hope. Hope to me belongs in church on a Sunday,” Jakobsen said.
