Summary

  • The simplest way to characterize how the global economic outlook has developed over the last three months would be “less bad”.
  • Expectations remain less buoyant than at the outset of the year, but there has been an improvement versus three months ago — and this positive inflection in anticipated economic momentum goes some way in explaining the behaviour of markets since April.
  • Economic uncertainty remains exceedingly high due to the persistent lack of clarity concerning US policy, but it has come down from its peaks, as potential for a “scorched earth” approach that was tabled three months ago now appears to be off the table and efforts are being made toward agreements and lower (but by no means low) barriers.
  • Consensus expectations for growth, which were on a one-way ticket lower since the start of the year, have broadly begun moving in a more favourable direction. Relative to the start of the year, growth globally is still projected to be notably slower, but the outlook is “less bad” than previously assumed and expectations of a looming recession have ebbed from their recent highs as well.
  • The question of where things go from here clearly depends on whether the downside risks to the outlook continue to subside — and that is a big “if,” as trade policy returns to the forefront ahead of the latest deadline, the geopolitical backdrop remains fraught, concerns rise over fiscal sustainability as governments show little restraint, while the impact of tariffs and related uncertainty will become more prevalent in the dataflow.
  • Markets are aware of the many hazards on the road ahead and have shown a willingness to continue to climb the “Wall of Worry.” That there is also potential for the outlook to not only turn “less bad” but possibly actually “good” — if the trade deals are reached that reduce tariffs to a greater degree, geopolitical tensions cool, focus in the US turns to market-friendly policy developments and/or added progress with respect to developments in artificial intelligence — that in turn could give markets an added boost through the remainder of the year.