The phrase of the day has moved away from 2017’s “synchronized global growth” to the less cheerful “global slowdown”. Indeed, global GDP growth has moved down from 3.8% in mid-2017 to 2.6% at the end of 2018. The Markit global manufacturing PMI survey moved a bit lower still in February to 50.6, the lowest level since June 2016 and a sign that slower growth is still in the cards this quarter. However, to put it in perspective, the PMI is still sitting comfortably above the levels seen back in 2012 and certainly above the levels of 2008. Global economic growth has downshifted, but it has not stalled.

What has been behind this downshift? A striking difference has developed between the move down in the manufacturing PMI and the stability in the services one. In addition, even within the manufacturing survey, a big divergence has emerged between the steep fall in investment goods and the stability in consumer goods. This tells us that business investment has been weighing the global economy down, while consumer spending has been the life vest keeping it afloat.

An explanation for this dynamic is that economic policy uncertainty increased substantially over 2018. This includes a laundry list of issues such as trade tensions, Brexit, political tensions in Italy and France, and the U.S. government shutdown. This confusion about the path ahead caused businesses to feel frozen in place when it came to big investment decisions. Thankfully, businesses did not feel frozen about hiring, with employment continuing to grow strongly around the world. Consumers, focusing on their own positive personal situations, felt encouraged to continue on their spending path.

The concern late last year was that policy uncertainty would worsen to the point that businesses might actually rein in hiring as well, deflating the consumer life vest and causing the downshift to worsen. Three new developments this year have made that scenario less likely, including: 1) the pause in Fed tightening, 2) the pivot in trade negotiations, and 3) the China put on its economy. Looking ahead, these developments make moderate but positive economic and earnings growth around the world more likely. As a result, it has helped to lift investor sentiment and enabled a solid rebound in risk assets.

While this assessment does indeed make sense, the next phrase of the day is likely to be “global stability” – not a return to “synchronized global growth”. As such, compared to 2017, investors should focus on a more nuanced story for international equities (with a more positive backdrop for EM than Europe and Japan) and a balanced approach between equities and fixed income.

Globally, business investment has been the weight, consumers have been the life vest

Global manufacturing PMI sub-indices

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Source: Markit, J.P. Morgan Global Economic Research, J.P. Morgan Asset Management. Data are as of March 15, 2019.