IMF chief Christine Lagarde warned this week that trade wars and tighter credit were starting to darken the economic outlook.

In comments made on Monday she warned that the clouds of risk she warned were forming six months ago, were starting to get a little bit thicker with signs that major economies such as the US have seen GDP growth plateau. She went on to say that it’s not pouring but there is a little bit of drizzle, and that the IMF were quite likely to downgrade its growth outlook later this month when they update their projections for the global economy.

Her reference to the US is also odd given that GDP growth is still holding up well, coming in at 4.2% in Q2, and likely to come in around 3% in Q3, while only making passing mentions of emerging markets, or Europe.

The big question from hereon in, if you take the drizzle analogy to its logical conclusion, is when investors will need to start reaching for the umbrellas. For now investors continue to remain sanguine about US markets, though they appear less so about emerging markets and markets in Europe, which have been struggling for several weeks now.

The German DAX has been in a steady downtrend since it made its summer highs of 13,200, while Italian markets, which had been the best performing European benchmark in early May this year, up as much as 12%, are now down over 5% year to date, highlighting quite neatly where the European risk play currently is.

This is why Europe is more of a concern given that it’s been quite obvious since the end of last year that economic activity has been softening for a while. We were told that the slowdown on Q1 was likely to be temporary, however that doesn’t appear to be the case with the French economy in particular struggling to rebound from a weak performance of 0.2% GDP growth in each quarter of the first half of this year. The PMI numbers have been in decline for most of this year, and thus far don’t appear to be showing any inclination to rebound.

Italy is a concern particularly since the government there seems determined to push back hard against EU fiscal rules, citing the French example of the past in not being able to meet the bloc’s rules on budgets, while European Commission president Juncker seems determined to hold Italy to the same rules that were applied to Greece.

While the European Central Bank has been warning that it remains on course to taper its asset purchase program and end it completely by year end, some of the headline economic numbers have shown that economic activity has been steadily declining. This trend in the numbers calls into question the wisdom of not only paring back stimulus, but also signalling an intention to raise rates by the end of 2019, at a time when bond yields appear to be starting to edge back up, and political risk is rising.

Concerns about trade, and the US’s current policy on it have been one part of the slowdown story, with the implementation of tariffs, but the pace of growth seen in 2017 for the EU was always likely to be difficult to sustain in the absence of any meaningful economic reform within the Euro area. This is an area that has been sadly lacking, and while unemployment has been coming down, it still remains eye wateringly high in areas of southern Europe where youth unemployment remains well above average levels.

A rise in oil prices of over 25% this year alone is also feeding through into higher input and output costs for business, while a rise in US rates is causing a sharp selloff in emerging markets as the US Federal Reserve worries that a rise in inflationary pressures will unleash an inflationary shock as President Trump’s fiscal stimulus filters down into the US economy. Against this backdrop it is hard to see why the FOMC won’t continue to keep hiking rates, while at the same time paring down the size of its balance sheet.

This is likely to prove increasingly difficult for those emerging markets, which are already having to deal with higher US dollar funding costs, but are now having to deal with rising oil prices with countries like India, Turkey and Thailand being particularly vulnerable to surging inflation, and a weaker currency. Earlier today Turkey’s latest inflation numbers for September jumped to 24.5% from 21.1% in August, but that only told part of the story, producer prices which tend to be much more forward looking surged to 46.1%, from 39.6%. This suggests further pain for the Turkish economy in the months ahead.

Indonesia, where the currency has also hit record lows, has managed to boost domestic oil production so the effects of a higher oil price are likely to be mitigated, but nonetheless emerging markets look likely to remain under pressure as long as oil prices continue on their current trend higher towards $90 a barrel, and potentially even higher.

Against this sort of backdrop it is hard not to agree with the IMF’s concerns about the gathering of economic storm clouds. The only question remaining is whether global investors agree with the funds forecast.

As things stand it already appears to be raining in some emerging markets, while we might be in the verge of a light drizzle in Europe. The bigger question is when we start to see signs of accumulating storm clouds in the US. For now we’re not there, given decent jobs and wages gains, but if things continue to play out the way they have been, umbrella sales might well be the next growth industry.

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