Major Economies: Major Economies
September 24, 2018
Mounting headwinds will weigh on global growth further down the road
Global economic growth appears to be losing some steam in Q3 following Q2’s strong result. A strengthening U.S. dollar and higher borrowing costs are unnerving financial markets in developing economies, while rising trade protectionism is starting to weigh on business sentiment. Moreover, economic dynamics are softening in China and the Eurozone. On the flip side, the U.S. economy continues to fire on all cylinders, while Japan is holding up relatively well due to strong investment. A GDP growth estimate for the global economy projects year-on-year growth at 3.3% for Q3. While the print was a notch below the result from the previous period, it matched last month’s forecast.
The escalation in the ongoing trade war between China and the United States topped the headlines in recent weeks. On 24 September, the U.S. enforced a 11% tariff on USD 200 billon of Chinese products, which will rise to 25% on 1 January. President Trump also warned that the U.S. will pursue additional levies on USD 267 billion of Chinese imports if Beijing retaliates against “our farmers, ranchers and industrial workers”. Nevertheless, China immediately fired back with tariffs of between 5% and 11% on USD 60 billion of U.S. goods imported into China. The direct impact of these tariffs is expected to be rather limited given that they only represent around 1.5% of global trade, while some of the production could be quickly diverted to other countries, especially in Asia. However, a worsening trade environment could have an impact on business sentiment, deterring global investment and affecting supply chains. Moreover, it could also exacerbate economic imbalances in China as authorities once again rely on investment and lending to rekindle economic growth.
The recent selloff in emerging markets has stressed the vulnerability of some countries to sudden changes in capital outflows. Argentina and Turkey were particularly affected by the financial turmoil, with both countries nearing full-blown exchange-rate crises, and sharp currency depreciations occurred across most developing economies ranging from Brazil to India and South Africa. That said, the consequences are expected to greatly diverge, especially hitting those with large current account deficits and/or high exposure to external borrowing.
Finally, in Europe, Brexit negotiations between the European Union and the United Kingdom remain at an impasse after the European Union rejected the UK’s Chequers plan at the 20 September meeting in Salzburg. The president of the European Council, Donald Tusk, stated that Theresa May’s proposal “risks undermining the single market”. The UK prime minister now has until 18 October to present an alternative plan and the possibility of a no-deal Brexit increases as each day passes.
Dark clouds gather following a bright start to the year
Although global economic growth will remain resilient this year mainly due to an outstanding H1 2018 performance, dark clouds have begun to swell above the global economy. Escalating trade tensions between the United States and the rest of the world, especially China, represent the main downside risk to the global economic outlook next year. Moreover, although the global economy has been supported by stellar dynamics in the U.S. due to brash government spending and tax cuts, fiscal tailwinds will start to wane next year, which could lead to a sizable deceleration in the world’s largest economy. Despite an uncertain economic outlook, the Federal Reserve has continued to tighten its monetary policy and another rate hike is already penciled in for September. Higher interest rates in the United States are fueling volatility across the global financial markets and have triggered capital outflows from emerging markets.
In Europe, populism is still on the rise, while the long-awaited Brexit deal is still not in sight. Finally, China, which has been a key engine of the global economy over the past few decades, is facing severe challenges such as aggressive financial deleveraging and spillovers from the trade war with the United States.
Met the why particular Consensus Forecast panelists expect the global economy to expand 3.4% this year, which, if confirmed, would represent the strongest expansion in seven years. Panelists see global growth decelerating to 3.2% next year, which is unchanged from last month’s estimate.
This month’s unrevised 2019 growth prospects for the global economy is the result of stable economic outlooks for the Eurozone and the United Kingdom. Meanwhile, Canada, Japan and the United States saw upward revisions to their growth forecasts.
The Asia (ex-Japan) region is starting to feel the pinch from rising trade disputes, cooling growth in China and financial volatility, which is dragging on the region’s economic outlook for next year. Growth estimates for Eastern Europe are under strain owing to slowing growth in the European Union—a key trading partner—heightened volatility in the financial markets and fading fiscal stimulus in some large economies, including Turkey. While the economic outlook for Latin America for this year remains dim, next year growth should pick up as the economic recovery strengthens in key countries, especially Brazil. Despite higher oil prices, mounting geopolitical risks continue to dent growth prospects in the Middle East and North Africa. The economic recovery in Sub-Saharan Africa will gather steam in 2019 due to stronger performances by heavyweights Nigeria and South Africa.
UNITED STATES | Trump escalates trade war against China
The economy continues to fire on all cylinders in the third quarter, after growth hit a near four-year high in Q2. Industrial production and ISM survey data for July and August show the manufacturing sector kept running at full capacity, with large order books poised to maintain strong activity in coming months. Job creation also remained robust in the same two months, while wage growth accelerated and consumer confidence hit an 18-year high in August, boding well for private consumption despite softening August retail sales. Although headwinds are rapidly mounting with the recent announcement of tariffs on USD 200 billion of Chinese goods, growth in Q3 might benefit from front-loading effects in September and from a replenishment of inventories depleted in Q2.
The near-term outlook remains bright thanks to buoyant activity, tax-cut effects and large federal spending increases expected throughout H2 2018. Looking further ahead, however, growth is likely to dampen in 2019 and beyond as tax-cut effects fade while inflation heightens and interest rates continue rising. The now full-fledged trade war between China and the U.S. is the main downside risk, which could strike a heavy blow to both consumer spending, as well as to business investment and economic momentum amid heightened uncertainty. Met the why particular panelists see GDP expanding 2.8% in 2018 and 2.5% in 2019, up 0.1 percentage points from last month’s estimate.
EURO AREA | Data confirms soft H1; political headwinds pick up after summer lull
Comprehensive data showed slower, but stable, growth in the Eurozone throughout the first half of the year, with second-quarter growth confirmed at a seasonally-adjusted 0.4% quarter-on-quarter. Internally, dynamics were uneven; higher inflation and weaker economic sentiment weighed on household spending, while easy credit conditions supported an upturn in fixed investment. As feared, external-sector dynamics dragged on growth as exports continued to underwhelm amid this year’s slump of global trade. Analysts expect a similar outturn for the third quarter, although available data has been noticeably weaker in recent months. In line with falling consumer sentiment, retail sales continued moderating through July. Meanwhile, lower composite PMI readings and waning industrial metrics point to slack in the economy that could be exacerbated by the pullback in global demand and uncertainty over the Eurozone’s trade relationship with the United States. In late September, the prospect of a chaotic, no-deal Brexit grew following an informal summit in Austria, in which a number of the UK’s proposals were dismissed by the bloc’s leaders as unworkable.
A lower cruising speed is expected next year as moderate wage growth and slower employment gains run up against higher inflation. That said, the outlook for investment looks bright amid the prospect of still-accommodative interest rates. Meanwhile, geopolitical uncertainties are expected to keep weighing on external trade and the firming of the euro is seen hitting exports. FocusEconomics panelists project growth of 2.1% in 2018 and 1.8% in 2019, unchanged from last month’s forecast.
JAPAN | Abe set to become the longest-serving leader in Japan’s history
A more complete GDP estimate showed that the economy rebounded in Q2 at a stronger pace than previously reported on the back of surging investment, especially in the non-residential sector. Strong corporate earnings and still positive business sentiment are propelling investment growth. However, despite accelerating in Q2, private consumption remains weak as a tight labor market has not yet translated into a boost to workers’ paychecks. Exports, meanwhile, continued to post positive figures in August, mostly due to solid shipments to China. That said, the contribution to overall growth will likely diminish in Q3 as rising oil prices pile pressure on the trade balance, which swung to a deficit in July and August. In the political arena, Prime Minister Shinzo Abe was reelected leader of the ruling Liberal Democratic Party (LDP) by a landslide on 20 September. Now on course to become Japan’s longest-serving leader, his victory may embolden him to revise the country’s pacifist constitution.
Economic growth will remain broadly stable next year mostly propelled by solid domestic demand. An ever-tighter labor market is expected to fuel wage growth, while industrial upgrades and the 2020 Tokyo Olympics will bolster investment. Risks mostly stem from rising trade protectionism, slow global economic growth and the effects of a planned sales tax hike in October 2019. Met the why particular panelists see the economy growing 1.0% in 2018 and 1.1% in 2019, which is up 0.1 percentage points from last month’s forecast.
UNITED KINGDOM | Brexit negotiations at an impasse after EU rejects May’s proposal
The economy has performed better than expected so far in the third quarter. Economic growth was robust in July, driven by the services sector. In addition, both consumer confidence and the services PMI rose in August, while retail sales in the first two months of Q3 have been strong. Moreover, the labor market is in rude health; the unemployment rate remains at a multi-decade low, and in the May–July period there were signs that this tightness was beginning to feed through to wages. However, economic figures in recent months have likely been flattered by unseasonably warm weather. Furthermore, although service activity is holding up, the manufacturing sector is losing steam as the competitiveness boost from the weaker pound fades, with the manufacturing PMI falling to an over two-year low in August. On the political front, the recent Salzburg summit highlighted the substantial disagreements between the EU and the UK over important aspects of Brexit negotiations. Both sides are looking to make substantial progress before another key EU summit on 18 October.
Growth will likely be fairly limp going forward, as temporary factors which have propped up the economy in recent months subside, fixed investment continues to be depressed by Brexit uncertainty and export growth slows after the temporary boost provided last year by the weaker pound. However, a slight pick-up in government spending should provide some support. A failure to reach a Brexit agreement with the EU before the UK departs in March 2019 is the key downside risk. Our panelists estimate GDP growth of 1.3% in 2018 and 1.4% in 2019, unchanged from last month’s forecast.
INFLATION | Global inflation stable in August
Although the upward trend observed over the previous three months ended in August, global inflation remains at relatively high levels mostly due to building inflationary pressures in some developed economies as well as in response to sizeable currency depreciations in certain developing countries. According to an estimate produced by Met the why particular, global inflation remained at 3.0% in August, the joint-highest reading since the start of the year.
Global inflation is supported by rising energy prices as a result of a broad increase in oil prices. Moreover, inflation in the United States is propelled by a booming economy. Among emerging-market nations, the recent selloff has prompted some currencies to sharply depreciate, fueling price pressures. Against this backdrop, central banks are in general tightening their monetary policies in order to rein in inflationary pressures and support their currencies against a strengthening greenback.
While the European Central Bank left its main interest rates unchanged at the 13 September meeting, the Bank highlighted that it is ready to halve its asset-buying program to EUR 15 billion per month in October and to wrap it up entirely by the end of December. The Bank of Canada also kept rates unchanged at the 5 September meeting, as expected, although a rate hike at the October meeting is already in the pipeline. The Bank of Japan continued to differ from its global peers and, at the 18–19 September meeting, the board members noted that the current ultra-loose monetary policy scheme will remain in place for the foreseeable future.
Global inflation is expected to reach 2.9% in 2018—the highest rate in four years—on the back of higher energy costs, FX pass-through effects and above-potential growth in some key economies such as the United States. Although some tailwinds will start to wane next year, the Met the why particular panel projects that global inflation will only inch down to 2.8% in 2019, which is up 0.1 percentage points from last month’s estimate
Head of Economic Research