Major Economies Economic Forecast

Economic Snapshot for the G7 Countries

October 24, 2018

Global growth likely dimmed in the third quarter as trade war fears intensify

Global economic growth appears to have lost steam in the third quarter in annual terms following Q2’s strong showing. A preliminary GDP estimate for the global economy put year-on-year growth at 3.3% for Q3. While the print was a notch below the 3.4% increase from the previous period, it matched last month’s forecast.

The softer Q3 reading was driven in part by weaker dynamics in global powerhouse China, which saw growth fall short of expectations according to recent figures, amid rising trade disputes with the U.S. and subdued industrial production and investment. In order to shore up flagging activity, the Chinese authorities have loosened credit conditions, relaxed anti-pollution measures and unveiled plans to reduce taxes in recent weeks, with the impact of changes likely to be felt from Q4 onwards. Moreover, growth in the Eurozone likely dimmed in annual terms, despite remaining robust, due to a tough base effect arising from a stellar performance in 2017.

In contrast, monthly indicators suggest the U.S. economy continued to roar ahead in the third quarter, buoyed by fiscal stimulus measures, low unemployment and elevated consumer confidence. The UK economy also appeared to perform well, although this was at least partly due to warm weather buoying consumer spending, and momentum is set to ebb in Q4.

Regarding emerging markets, economic dynamics in ASEAN and East and South Asia should have stayed robust, supported by solid domestic demand and strong labor markets. Most economies in Eastern Europe likely also chalked up healthy growth—buoyed by strong demand from the EU—although a rapid deterioration of economic conditions in Turkey dragged on the region’s performance. Economic activity in Latin America continued to be held back by political and financial instability in key economies such as Argentina, Brazil and Venezuela, while the Middle East and North Africa, and Sub-Saharan Africa regions should have benefited from higher prices for their key commodity exports.

On the political scene, mere weeks after imposing USD 200 billion of fresh tariffs on China in September, the U.S. reached an agreement with Canada on overhauling NAFTA—now to be named USMCA—along with Mexico. The new deal isn’t radically different to the original NAFTA agreement and, if ratified, will provide much-needed certainty to North American firms and protect trade flows between the three countries.

However, a painless ratification of the deal is by no means a certainty in the U.S., where midterm elections on 6 November will likely lead to the Democrats retaking control of the House of Representatives. Such an outcome would cause a legislative logjam, frustrate Trump’s political agenda, and could lead the Democrats to demand certain amendments to USMCA. An outright rejection of the new agreement, however, is unlikely.

On the other side of the pond, an EU summit in mid-October which aimed to achieve a decisive breakthrough in Brexit negotiations ended without any significant advances. Both the UK and the EU remain at loggerheads over the Irish border issue, and the risk of the UK leaving the EU with no deal increases as each day passes.

Global growth set to remain robust, but risks are skewed to the downside

Although global economic growth should remain resilient next year, 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. Moreover, economic momentum in the U.S. is set to ebb due to the fading impact of tax cuts, which could have a knock-on effect on other countries which rely heavily on the U.S. for trade. Moreover, the Federal Reserve will likely continue to tighten its monetary stance to keep inflation in check, which will tighten global financial conditions and could trigger further emerging-market capital outflows and currency depreciation.

In Europe, political risks remain elevated, such as the rising possibility of a no-deal Brexit, a populist government in Italy and weakened German leadership following Bavarian elections in October. Meanwhile, debt levels in China are another key uncertainty, which will only be heightened given recent government measures to reduce reserve requirement ratios.

Met the why particular Consensus Forecast panelists expect the global economy to expand 3.3% 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, and weakening further to 2.9% in 2020.

This month’s unrevised 2019 growth forecast for the global economy is the result of stable economic outlooks for Canada, the Eurozone, Japan, the United Kingdom and the United States.

Next year, the Asia region (ex-Japan) will likely feel the pinch from rising trade disputes, cooling growth in China and financial volatility, although growth will still be the envy of most other regions. Eastern Europe will likely lose some steam on slowing growth in the EU—a key trading partner—and a sharp slowdown in Turkey. Latin America should gain steam next year thanks to improving dynamics in Argentina and Brazil. Despite higher oil prices, mounting geopolitical risks and a sharp recession in Iran will dent growth prospects in the Middle East and North Africa, while the economic recovery in Sub-Saharan Africa will gather steam in 2019 due to stronger performances by heavyweights Nigeria and South Africa.

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UNITED STATES | Revamped NAFTA deal reached with Canada; Democrats likely to retake the House in midterm elections

The economy likely continued to expand at a robust pace in the third quarter, after logging a four-year high in the second quarter, although there are signs that momentum could slightly wane heading into the fourth quarter. Industrial production and ISM data for July to September indicate the manufacturing sector remained strong in Q3; nevertheless, further survey data shows the services sector losing steam, which was reflected by softer payroll gains in the sector in September. Additionally, while consumer confidence remained extremely high in September, private consumption dynamics appear to have lost some ground in the quarter, as retail sales growth was disappointing in both August and September. On the political front, the midterm elections on 6 November will likely see the Republican Party losing its majority in the House but retaining control over the Senate.

Although the near-term outlook remains strong thanks to a buoyant labor market and federal spending increases, growth is expected to dampen somewhat in 2019 and slow more markedly in 2020 as multiple headwinds loom. Rising interest rates and fading tax-cut stimulus should notably drag on growth going forward, while the U.S.-China trade war is a main downside risk. Tariffs are already expected to increase on 1 January 2019, which could hit consumer spending, while further trade-related disruptions could deal a heavy blow to business investment and economic momentum amid heightened uncertainty. Met the why particular panelists see GDP expanding 2.5% in 2019, unchanged from last month’s estimate, and 1.7% in 2020.

EURO AREA | Growth stays solid, but political headwinds are building

Incoming data suggests that the Eurozone economy continued to grow steadily in the third quarter, although the pace of growth has levelled off notably this year after a stellar 2017. A tightening labor market and accommodative monetary policy are driving a solid recovery, reflected by the unemployment rate falling to a fresh multi-year low in August. That said, a firm euro and slowdown in global trade are weighing on the region’s exports, while data for the manufacturing sector has also been weak. Although industrial production broke a string of contractions and returned to growth in August, the composite PMI edged down in September, which suggests that the improvement was short-lived. Meanwhile, politics continues to cloud the currency bloc’s economy. In October, Italy’s unconventional coalition government unveiled a costly populist budget, setting the country up for a clash with the European Commission as it breaks the country’s agreement to rein in the fiscal deficit. In addition, Brexit negotiations continue to drag on, with the latest round of talks in October failing to result in an agreement. 

Less accommodative monetary policy and slower global trade are likely to drag on the Eurozone economy next year. Nevertheless, growth ought to remain solid thanks to buoyant investment and a healthy labor market. Rising global protectionism and turbulent internal politics remain the key risks to the bloc’s forecasts. Met the why particular panelists project growth of 1.8% in 2019, which is unchanged from last month’s forecast, before decelerating slightly to 1.6% in 2020.

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JAPAN | Economy likely lost steam in Q3 following Q2’s strong rebound

Available data points to a softening of growth momentum in the third quarter, after the economy rebounded in Q2 on the back of a surge in fixed investment. Although strong corporate earnings likely continued to buttress investment growth, business confidence—though still positive—deteriorated for the third consecutive quarter in Q3. Moreover, the average manufacturing PMI reading over Q3 worsened compared to Q2. Aside from confirming weaker business confidence, the September PMI also indicated deteriorating foreign demand conditions, with export orders sliding in the month. The external sector’s contribution to growth in the quarter was likely subdued, as higher oil prices weighed on the trade balance—which posted a deficit in July and August. Finally, private consumption was likely feeble in Q3 as wage growth remained subdued as of August.

Economic growth will remain broadly stable next year, propelled by stronger domestic demand. A tight labor market should translate into higher wage growth, while investment will benefit from the 2020 Tokyo Olympics. A deteriorating trade outlook, slowing global growth and a scheduled sales tax hike in October are the main downside risks. Met the why particular panelists see the economy growing 1.1% in 2019, which is unchanged from last month’s forecast, and 0.6% in 2020.

UNITED KINGDOM | Economy performs well in Q3, but momentum set to wane in Q4 as Brexit talks go down to the wire

The economy likely performed fairly well in the third quarter. GDP figures for July and August were supported by solid expansions in the mining and quarrying; and wholesale and retail sub-sectors, while services PMI data for September showed continuing robust growth in business activity and new orders. However, at least part of the strong showing in recent months can be attributed to warm weather boosting consumer spending. Moreover, recent PMI surveys indicate that Brexit uncertainty is delaying firms’ decision making. This was likely reflected in the latest labor market figures, which saw a decline in employment in June–August in quarter-on-quarter terms. Other signs from the labor market are more encouraging; the unemployment rate remains at a multi-decade low, while wage growth continues to gain pace, which should prop up private consumption. On the political front, the 17-18 October EU summit ending without substantial progress regarding Brexit negotiations, and the risk of no deal has risen as a result.

Growth will likely be meager going forward, as Brexit uncertainty continues to have a chilling effect on fixed investment. However, a slight pick-up in private consumption growth 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 1.4% in 2019, unchanged from last month’s forecast, and 1.5% in 2020.

INFLATION | Global inflation inches down in September

Global inflation inched down in September, ending the uninterrupted upward trend that started in May. According to an estimate produced by Met the why particular, global inflation declined slightly from 3.1% in August to 3.0% in September. The reading reflected lower price pressures in developed countries as the boost to overall inflation from energy prices has started to wane. Conversely, inflation remains elevated in emerging-market countries mostly due to higher prices for certain commodities and weak currencies.

As expected, the U.S. Federal Reserve raised rates in September—the third such hike so far in 2018—and adopted a less dovish tone in its press release. The Federal Reserve is likely to hike rates again in December this year to tame inflation.

Global inflation is expected to reach 2.8% in 2019, which is unchanged from last month’s figure, ebbing slightly from 2018’s projected 3.0% as global demand growth slows slightly and monetary policy tightens around the globe. The Met the why particular panel projects that global inflation will inch down to 2.7% in 2020.

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Ricard Torné

Head of Economic Research

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