4 Key Issues Affecting Global Growth

"The first half of 2018 has provided quite a contrast to the sunny trends that smiled on 2017. Last year's silky-smooth markets have hit turbulence. Economic growth has dipped and the euphoria following tax cuts is now mixed in equal parts with concern about protectionism."

So begins the "Macro and Markets" section of The Global Investment Outlook, the latest quarterly report from the RBC Global Asset Management (GAM) Strategy Committee. As markets face these potential stumbling blocks, let's look at four key macro risks affecting the global economy.

1. Trade Protectionism

According to RBC GAM Chief Economist Eric Lascelles, trade protectionism is "among the key risks" the team is keeping an eye on. However, Lascelles says he stops "short of calling it a big problem at this juncture simply because it's surprising how much protectionism you actually need before you start to do serious economic damage." The level of protectionism we've seen from the U.S. and other countries in recent months may slow growth a little and push inflation up, but it is still far from trade-war status.

2. Risk of Recession

Economists look to the business cycle as part of measuring the risk of recession. The business cycle is the natural rise and fall of the economy over time — not markets, but the economy — as measured by gross domestic product. The GAM Strategy Committee believes the U.S. is currently at a later stage in the cycle, based on economic indicators. When economic signals are good, interest rates are rising and optimism is strong, it is often a sign that the business cycle is heading toward contraction. According to Lascelles, this shift is currently in view, but not around the corner. "It is crystal clear that we are not presently in a recession, and nor does anything suggest that one is imminent. However, a number of recession gauges are rising."

3. Rising Interest Rates

Central banks around the world are moving away from monetary stimulus and this means interest rates are starting to rise, which can cause a drag on economic growth. In Canada, high household debt levels mean that higher interest rates can have more of an effect, particularly in uncertain housing markets, as mortgage rates rise. "We think there's a fair chance the housing market goes in a more sideways direction in Canada in the future as opposed to the up and up that's been the dominant theme for the last decade," says Lascelles. The Committee believes the tightening from central banks is appropriate at this point in the global economy.

4. Eurozone Instability

Despite recent slowing of the European economy, the region is still growing. In fact, according to Lascelles, Europe is growing well by post-crisis standards. "We think there's a bit of a runway left for that region simply because it hasn't eaten through all of its economic slack just yet," he says. In the U.K., Brexit has held back growth and, according to Lascelles, will likely continue to do so. "It's not a great situation, but they're still growing and their economy is fairly tight for the time being."

Europe might be chugging along well economically, but political upheaval continues. Italy electing a populist government is the latest in a string of changes that could inhibit growth. Despite the ever-changing political situation, Lascelles says, "I would still say the risk of a full Eurozone breakup is quite low."

Looking Ahead

Growth slowed in the first half of 2018, but economies around the globe are still expanding and the rate of global growth remains positive overall. The RBC GAM Strategy Committee believes that the global economy will "successfully navigate" the challenges above (among others) and "continue to expand."