The biggest risk to the global economy is the US Federal Reserve overshooting its interest rate increases, according to HSBC Bank Canada’s CEO of Asset Management.
Marc Cevey told WP one of the driving fundamental factors for investors heading into 2019 is how quickly the Fed will hike. He admits it’s a narrative everyone is familiar with but that this shouldn’t mask its significance.
Cevey said HSBC said the previously expected four raises in 2019 is now down to three and could even go down to two by the time it plays out. And he believes this is because there is not a full appreciation – or ability – to fully price in events that are no longer going to be a factor, like tax cuts.
He said: “The tax cuts were very stimulative; very good for corporate profits but that’s not going to feature going forwards. It’s done, it’s priced in, it’s there – that’s a critical factor.
“Growth has been buoyant and consumer spending has been very strong but we have to realise there is a stumbling block to continued consumer growth in the US – and that’s the rate hikes that they’ve experienced.
“It’s quite significant. You are really seeing some softening in terms of the real estate market so you could see some softening in terms of consumer spending – and this is the goldmine for the US economy.
“What investors have to realise is the very rosy scenario the US has experienced in the past 18 months at least is going to taper off a little bit. That doesn’t mean we are going to go into recession; it does mean we are going to have deceleration.”
Cevey believes the US will continue to lead global economies in 2019 even though growth has become more divergent because of the different trading blocks. He said that the deceleration of the US economy, however, is actually positive and much-needed because if it continued to grow at the current pace, a potential downturn in 2020 could be “quite violent”.
“Deceleration is positive because if the US economy were to continue to grow above capacity, full employment and an economy that is at full capacity, any added productivity measure is at an incremental cost. The cost of labour, the cost of production and, of course, you have tariffs to contend with.
“If the US economy were to perform the way it is performing today, there is no doubt in my mind that inflation pressure would grow rapidly and the Fed would continue to hike rates. Ultimately, the downturn, if it’s not in 2019, call it 2020, would be quite violent.”
While a normalization of the US economy is a good thing, Cevey said the danger is whether the Fed is going to be able to measure that correctly. So far, so good.
“The positive signal would be if the Fed really delays until the latter part of Q1 to see more readings and also to get a sense of what is happening on the trade front. The tone of the minutes will also be critical and everyone will pore over the words.”
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