Although the global economy currently remains resilient, recent activity indicators are showing signs of a slowdown of global growth in some countries.
But ongoing cuts to fiscal spending, especially from the US government, poses the biggest risk to growth, according to Kristina Hooper (pictured), Invesco’s chief global market strategist.
“In my view, the US is on a dangerous path of continuing to aggressively cut fiscal spending while economies like Germany and China will be adding fiscal stimulus,” she said in a recent note.
“This is far more important than ongoing tariff wars, as their impact is likely to be very temporary in nature, so long as they don’t last for an extended period of time.”
She pointed to a recent report from the Organisation for Economic Co-operation and Development (OECD) which revised its economic forecasts lower, flagging “softening global growth prospects”.
Hooper said: “The OECD sees clouds forming for the global economy, Federal Reserve expectations indicate an increased risk of stagflation in the US, and the Bank of England is taking a hawkish tone due to global uncertainty.”
“The most important takeaway is that the OECD warned that significant changes had occurred in trade policies that, if continued, would hit global growth and cause a rise in inflation.”
Implications for investors
Although most investors have been narrowly focused on the impact of potential tariffs from the US, Hooper emphasised the importance of monitoring for any changes in fiscal spending.
She warned that investors will likely continue to see signs of a “tectonic shift” in fiscal stimulus around the globe.
In terms of the impact for investors, she pointed to gold as a beneficiary. Gold prices have surged some 60% over the past two years, recently surpassing $3000 per ounce.
Hooper said: “The ongoing economic policy uncertainty and rising geopolitical risks have created increased demand for gold, which is likely to continue as these conditions show no signs of abating.”
“There’s opportunity for stocks where there’s potential for positive surprise, and that can come from greater fiscal stimulus,” she added.
“However, sovereign debt is likely to be punished in countries where government borrowing rises significantly — hence the rise in the 10-year German bund yield in the last several weeks.”
She added that with a risk of resurgent inflation, it could slow some central banks’ path towards cutting interest rates – benefitting bank loans handily.
