Global economic growth is expected to slow down in 2019, according to UBS, as tighter monetary policy, weaker earnings growth and political challenges confront the world’s major economies.

After seeing a growth of 3.8 percent in 2018, UBS said in its outlook for the year ahead that it expected global economic growth to slow to 3.6 percent in 2019.

“Our outlook is that U.S. growth will be constrained by ebbing fiscal stimulus and higher interest rates,” economists at UBS said in a note Wednesday. China, meanwhile, is facing the twin pressures of import U.S. tariffs and economic rebalancing.

“The decline in global growth will mean a weaker tailwind for global markets, which could begin to anticipate an end of the economic cycle as 2019 progresses,” the investment bank said.

In the meantime, solid domestic demand in the euro zone will not be sufficient to offset reduced export growth, the bank said.

On the bright side, UBS said a recession looks unlikely given current rates of consumption, investment and employment growth “and we think the typical causes of a downturn are unlikely to materialize in 2019.”

“Our base case is for inflation to stay contained, allowing central bankers to remain sensitive to growth. We don’t foresee a major fiscal policy shift or a commodity price shock. Consumer balance sheets are in solid shape and improvements in banking sector capitalization since the financial crisis reduce the risk of a global credit crunch.”

It also noted that there are growth opportunities and pockets of value.

“Economic and earnings growth are waning in aggregate. But this slowdown will not be felt uniformly by every country, sector, or company,” economists said. “We expect robust growth in firms exposed to secular trends like population growth, aging, and urbanization. Meanwhile, some assets have already begun to factor in a more challenging backdrop.”

Tighter monetary policy
Among the biggest challenges facing the world’s largest economies is a new era of tighter monetary policy following a decade of stimulus after the financial crisis of 2008.

Central banks in the U.S., U.K., euro zone, Japan and elsewher introduced a mixture of low interest rates and expansionary monetary stimulus programs, known as “quantitative easing” (QE) — essentially large-scale asset purchases — in a bid to boost spending in the economy.

While these tools were useful in re-establishing stability in global financial systems, central banks are keen to “normalize” such policies.

The U.S. has already stopped its QE program and hiked interest rates four times in 2018 while the European Central Bank confirmed in December that QE would end at the end of the month, with bond purchases falling from 15 billion euros ($17 billion) a month to zero. Amid ongoing Brexit uncertainty, meanwhile, the Bank of England has yet to say when its own QE program will end, although interest rates have been raised slightly.

UBS noted that the coming year will represent the first time since the global financial crisis when central bank balance sheets are on track to end the year smaller than they were at the start of it.

The Federal Reserve last raised its benchmark interest rate in December from 2.25 percent to 2.5 percent. UBS said it expected U.S. rates to be 100 basis points higher (at 3.5 percent) by the end of 2019, adding that low and falling unemployment rates also increase the risk of higher inflation, which could spark even faster rate rises.

Markets and trade wars
The prediction of lower global growth comes at an already gloomy time for global equity markets, with shares falling on fears of a potential worldwide economic slowdown and worries around the pace of central bank tightening.

In 2018, U.S. stock indexes posted their worst year since 2008 while Europe’s pan-European Stoxx 600 also suffered its worst year in a decade.

UBS noted that tighter monetary policy will focus market attention particularly on debt serviceability. “Potential hotspots include U.S. and Chinese corporate leverage and Italian government debt,” it said.

It sees profit growth in the U.S. market, which comprises more than half of the global equity market, falling off to roughly 4 percent in 2019 from an eight-year high of 21 percent in 2018.

UBS said it anticipated 9 percent earnings growth in emerging markets and around 5 percent in the euro zone. Noting the limited long-term return potential, UBS said investors would have to “temper their expectations” in the coming years.

The bank said the one-off boost from corporate tax cuts which were instigated by President Donald Trump in 2017 will not be repeated, and tit-for-tat tariffs on imports between China and the U.S. will begin to have a negative impact on the economy.

On the trade war, UBS said tensions run deeper than just trade and that investors should prepare for relations between the two powers to continue affecting markets.

Other political events that UBS thinks investors should take into account this year are elections in India, South Africa, Greece, Canada, and Argentina. Europe will also vote for the EU parliament in May, U.S. presidential campaigning will begin, while instability could provoke a return to the polls for citizens in Italy, Germany, and the U.K. “Polarized electorates make political outcomes even more uncertain than normal,” UBS warned.