Major Economies Economic Forecast

Economic Snapshot for G7 Countries

March 27, 2019

Global economic outlook cut amid softer dynamics among developed economies

Global economic growth is expected to decelerate this year. This is mostly due to softer dynamics among developed economies, which are approaching the tail-end of their current economic cycles. Nevertheless, the global economy is seen benefiting from tight labor markets, still accommodative monetary and policy stimulus in some countries like China.

The global economy is projected to expand 2.9% in 2019, down 0.1 percentage points from last month's forecast. For 2020, the global economy is projected to grow 2.9% again.

 
United States Economic Outlook

The economy decelerated noticeably in Q4 2018 on softer consumer spending; declining federal outlays—partly due to the government shutdown—and residential investment; and a feeble external sector. However, still-solid business investment partly cushioned the slowdown. Turning to Q1 2019, available data indicates a further weakening. Feeble payroll gains in February, together with shutdown effects and tepid retail sales data in January, bode poorly for private consumption. Furthermore, a weak housing market may cause residential investment to keep contracting, and Fed Chair Powell recently noted that business investment is also seen slowing in the quarter. Turning to trade talks, negotiators for both China and the U.S. now hope to reach an agreement by the end of April, though progress could be stalled by enforcement issues.

Growth is seen slowing in 2019 amid strong headwinds. Despite a likely halt to Fed rate hikes, notably weaker global growth and the fading of the fiscal stimulus could dampen momentum. Furthermore, trade tensions with China—though likely to abate—will stoke uncertainty at least until H2. An elevated fiscal deficit and high corporate debt also cloud the outlook.

Euro Area Economic Outlook

Comprehensive data confirmed that the economy stuttered again in Q4 2018, with growth barely picking up after the Q3’s weak performance. Downbeat sentiment, troubles in the manufacturing sector and the unwinding of inventories weighed on the domestic economy. While the economic backdrop remains somber in 2019—with heightened uncertainty over Brexit and tariffs on the automobile industry—recent signs have emerged of a tentative stabilization. Retail sales jumped in January and the unemployment rate held at a multi-year low, boding well for household spending. Low oil prices, meanwhile, should keep inflation and the import bill in check. Furthermore, although economic sentiment continued to fall in February, the pace of decline moderated significantly. That said, the manufacturing PMI slumped in March, suggesting that the sector is still reeling from a slowing global economy and a bruised car sector.    

The Eurozone’s growth outlook was cut for a fifth consecutive month on the back of a disappointing 2018 and ongoing woes in the manufacturing sector. Risks to activity linger from automobile tariffs, political uncertainty and sluggish global demand. Nevertheless, a tightening labor market, contained inflation and accommodative monetary policy should provide some relief.


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United Kingdom Economic Outlook

The economy appears to have grown meagerly in Q1 against a backdrop of heightened Brexit uncertainty, with the services and manufacturing PMIs hovering only slightly in expansionary territory in the first two months of the year amid soft new orders. More positively, in the three months to January employment surged, the unemployment rate dipped, and wage growth remained at a multi-year high. The strong labor market should have supported private consumption in Q1, as suggested by healthy retail sales growth in January and February. On the political front, the EU recently agreed to delay Brexit until 12 April, although there is still no clarity over the final outcome of the process. Earlier in March, the chancellor presented his Spring Statement, highlighting stronger-than-expected public finances and suggesting a looser fiscal stance if the UK leaves the EU with a deal.

The outlook for 2019 hinges on the outcome of Brexit; leaving the EU with a deal, or remaining in the EU, would likely unleash pent-up investment and boost consumer sentiment, while leaving with no deal could cause a serious economic shock. An extension to Article 50 would prolong uncertainty and thus continue to hamper investment.

Japan Economic Outlook

Despite a confirmed rebound in economic activity in the fourth quarter of last year, available data suggests that growth was weak in the first quarter of 2019. The average manufacturing PMI hit an over two-year low in Q1, as nominal exports contracted for the third consecutive month in February amid an economic slowdown in China. Moreover, consumer confidence deteriorated markedly at the outset of the year, which does not bode well for private consumption this year, while machinery orders—a leading indicator for investment in the coming three to six months—contracted for the third period in a row in January. In light of recent developments, the government downgraded its assessment of the economy for the first time in three years on 20 March. This could prompt Prime Minister Shinzo Abe to take action ahead of the election in the upper house, which is to be held this July.

Frontloaded consumer spending ahead of the planned sales tax hike in October and a recovery in gross fixed investment—partially due to works related to the Tokyo 2020 Olympic Games—will shore up economic growth this year. On the downside, the economy will feel the pinch of weak global demand, especially from China and Europe.

Global Monetary & Financial Sector News

Global inflation rose from 2.4% in January to 2.3% in February, according to an estimate produced by Met the why particular, which excludes Venezuela. Disinflationary pressures are mostly stemming from weak global economic growth, while subdued price pressures in China—which is a key driver of global commodity prices—are also helping to suppress global inflation.

Central banks in Canada, the Eurozone, Japan, the United Kingdom and the United States all left their monetary policy rates unchanged in recent weeks. Moreover, many of them adopted a more dovish stance against a gloomier view on the global economy, while the ECB recently launched a third round of targeted longer-term refinancing operations (TLTRO-III).

The exchange rates of the world’s main economies against the USD were broadly stable in recent weeks. News about a potential trade deal between China and the U.S., coupled with weak economic data in Asia and Europe, strengthened the USD. Conversely, a dovish tone by the Fed and doubts about the health of the U.S. economy weakened the USD. 

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