(Bloomberg) -- The global economy headed into the final stretch of 2018 in weakened shape, handing investors renewed reason to question how much central banks will be able to tighten monetary policy next year.
Fresh data from the world's third and fourth-largest economies on Monday added to the concern. A manufacturing gauge in Japan dropped to the lowest since early 2016, and business confidence in Germany fell for a third month.
The slowdown against the backdrop of volatile markets and a burgeoning trade war has implications for monetary policy worldwide. The European Central Bank has a crucial meeting in December where it's due to confirm the end of net asset purchases, a key crisis-era tool. The U.S. Federal Reserve looks set to raise interest rates again next month but may be more cautious in 2019.
ECB President Mario Draghi acknowledged the “prominent” risks and the euro-area slowdown at a European Parliament testimony on Monday, but told lawmakers that some of the issues are temporary and the institution remains on track to cap quantitative easing. Fed Chairman Jerome Powell is scheduled to speak on Wednesday.
Read more: Draghi Says ECB Still Expects Net Bond Buying to End in December
After a bad week for stocks, the changing economic outlook will be a topic for Group of 20 leaders when they gather in Argentina, especially given their warnings in March about the damage from protectionism.
Complex World
Nathalie Errard, senior vice president and head of Europe and NATO Affairs at Airbus, said on a panel in Hamburg that even if the U.S. and China remain the focal point for protectionist measures, her company won't remain untouched.
“You have to be aware there is price to pay on growth and traffic,” she said. “You need to look at the global supply chain as well. If there are tariffs on our U.S. suppliers, it's not good for margins. It's a complex world, I'm afraid.”
Last week, the OECD downgraded its global outlook, and the MSCI All-Country World Index dropped almost 3 percent. On Friday, the Dutch statistics office said its measure of global trade fell 1.1 percent in September.
“Factors related to protectionism, financial market volatility and vulnerabilities in emerging markets are creating headwinds that are becoming increasingly noticeable,” ECB chief economist Peter Praet said in Frankfurt on Monday.
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The latest souring of confidence in Germany, Europe's biggest economy, means the business climate index is now at its lowest since March 2017. A “swift and strong rebound is becoming increasingly unlikely” after the nation's third-quarter contraction, said ING's Carsten Brzeski.
In its Japan report, IHS Markit said the underlying trend is “skewed to the downside” and noted “easing global growth momentum.”
The trend has got economists rethinking what central banks might do next year. Barclays expects the ECB to announce new round of long-term loans to banks as early as December to “prevent a tightening in lending conditions” and keep money flowing into the economy. HSBC sees such loans being announced next year.
Read more: Barclays Sees TLTROs as Early as December Despite ECB Steer
Morgan Stanley analysts see the Fed pausing in mid 2019, confronted with a deceleration in economic growth to just 1 percent. That compares with 3.5 percent in the last three months.
“This is a market in the U.S. that had an enormous amount of adrenaline shot into it by fiscal stimulus,” said Andrew Sheets, Morgan Stanley's chief cross-asset strategist. “Next year, that kinda pulls back, so you're going to see quite sharp levels of deceleration.”
--With assistance from Xiaoqing Pi and Alessandro Speciale.
To contact the reporters on this story: Fergal O'Brien in Zurich at fobrien@bloomberg.net;Piotr Skolimowski in Frankfurt at pskolimowski@bloomberg.net
To contact the editors responsible for this story: Simon Kennedy at skennedy4@bloomberg.net, Paul Gordon, Brian Swint
©2018 Bloomberg L.P.
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