World stock markets have endured a difficult three months. They have been buffeted by a series of destabilising events.
Earlier in the year, concerns about rising inflation and tighter monetary policy resulted in a sharp upward move in bond yields and sharp falls in stock markets.
More recently, concerns about a possible global trade war, increased regulation of technology companies, and rising geo-political tensions have unnerved markets.
The results have been a flight-to-quality into safer financial assets and much more volatility on stock markets, with all the main equity indices now showing declines year-to-date, despite their strong start to 2018.
There might be something even more fundamental going on in stock markets, as well. Investors are being forced to reassess whether the benign paradigm that has driven markets higher over the past couple of years, of strengthening global growth against a backdrop of low interest rates, is beginning to wane.
As well as the negative factors outlined above, markets have had to contend with a run of disappointing economic data in recent months.
GDP forecasts for the opening quarter of the year are being scaled-back in all the main economies, as a result of weaker-than-expected data on consumer spending, manufacturing, and the services sector.
There were unexpected, sharp falls in industrial production in the eurozone in January and February, with declines in manufacturing and construction output in the UK, also, during the first two months of the year.
Retail sales have also come in below expectations, declining in the three months to February in both the eurozone and the UK, compared to the previous three months.
US consumer spending also declined in the opening two months of the year.
The weakness in hard data is now also becoming apparent in more recent survey data.
The JP Morgan Global Composite PMI fell sharply in March, hitting a 16-month low of 53.3, down from 54.8 in February.
In March, there was also a softening in other business and confidence surveys in March.
The IMF is due to publish updated forecasts for the global economy this week. In its last set of forecasts, published in January, the IMF projected 3.9% growth for the world economy in 2018 and 2019.
The head of the IMF, Christine Lagarde, indicated, last week, that while it continues to be optimistic about the near-term prospects for global growth, there are “darker clouds looming”.
Ms Lagarde argued that a fading fiscal stimulus, rising interest rates, and tighter financial conditions will eventually see global growth slow, especially against a backdrop of ageing populations and weak productivity growth.
She also warned about the need for governments to “steer clear of protectionism in all its forms”.
A flattening of yield curves recently, with short-term interest rates rising, but longer-term rates declining, is also a sign that markets are becoming concerned that the current economic cycle is at an advanced stage and is likely to slow.
However, the near-term prospects for economies still look quite favourable, as they reap the benefits of looser fiscal policies and continuing, low interest rates.
Despite all the distractions, including a possible trade war, it is likely to be economic data that will have the biggest bearing on markets in the coming months.
We expect the data to show a renewed pick-up in activity after the first-quarter slowdown, which should help calm market nerves.
Oliver Mangan is chief economist with AIB
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