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Deutsche Bank Makes Case for an Economic Rebound. But Trade Is Key.

A team of economists led by Peter Hooper says that easing trade tensions—and more important, easing monetary policy—should revive global manufacturing and stoke a rebound in economic growth.

A team of economists led by Peter Hooper says that easing trade tensions—and more important, easing monetary policy—should revive global manufacturing and stoke a rebound in economic growth.

Global economic growth could improve from here, if Deutsche Bank economists are reading the tea leaves correctly.

A team of economists led by Peter Hooper says that easing trade tensions—and more important, easing monetary policy—should revive global manufacturing and stoke a rebound in economic growth.

Their call follows several months of growing investor concern about slowing European demand and escalating trade tensions between the U.S. and China. Those worries were accompanied by the bond-market recession indicator known as an inverted yield curve, a pricing anomaly in which short-term yields are higher than long-term yields.

Now, however, markets appear to have shrugged off the risk of recession. The bond-market warning signal has disappeared, stocks are climbing to records, and the gap is narrowing between corporate bond yields and Treasury yields, indicating lower default risk.

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So investors are wondering whether the 10-year-old economic expansion will continue, or whether the rally is a last gasp of optimism ahead of a turn in the business cycle. Deutsche Bank comes down on the side of the bulls for now, and cites a few indicators to argue that case.

First, the global manufacturing purchasing managers index has climbed in each of the past three months, rising to 49.8 from 49.3. That is a small improvement, to be sure, and readings below 50 indicate contraction. But they say global manufacturing PMI could increase more, citing improvement in indicators of growth, such as Taiwan’s manufacturing PMI and rising Korean semiconductor exports.

Second, monetary policy has eased in the past several months, as the Federal Reserve has cut rates and the European Central Bank has resumed its bond-buying program. Those steps have pushed the bank’s global financial-conditions index higher, indicating looser central-bank policy. That could help revive economic growth, the bank says, even if “the upside from here may be limited.”

A long-term pickup in growth would probably need cooperation from global authorities outside the central banks. Namely, it would require U.S. officials to remove trade barriers between the U.S. and China, and step away from threats of auto tariffs. It might also require the worst-case scenario for Brexit to be averted, the economists say.

“If our expectations are correct that global auto tariffs are delayed or taken off the table, a [preliminary U.S.-China trade] deal is passed, and no further tariff measures are implemented, it seems more likely that global growth momentum has bottomed,” they wrote in a recent note.

Write to Alexandra Scaggs at alexandra.scaggs@barrons.com

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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