Global Economic Outlook Q1 2019
The current global economic growth environment remains subdued. Our suite of short term activity indicators has deteriorated since our last outlook, and global business sentiment indicators have yet to find a bottom.
In response, we are seeing policy stabilisers kick in. Central banks in developed market (DM) economies have put policy tightening on hold, while policymakers in China are adding to stimulus efforts. Finally, some of the political risks that plagued markets in 2018 have become less acute in the short term.
Central bankers have found this policy easier to justify on account of still subdued inflation. Headline price growth has been depressed by lower global energy prices, but underlying measures of inflation have also been soft. Indeed, even the US economy, which has enjoyed an unusual late-cycle fiscal stimulus, is still delivering muted underlying price dynamics. This makes it easier for central bankers to delay tightening in a more uncertain economic environment.
The speed and extent of the shift in Federal Reserve (Fed) communication has been most remarkable. Chair Powell has shifted from signaling multiple further hikes, to a warning that the next change in policy is as likely to be up as down. In the Eurozone, the European Central Bank (ECB) has pushed back its guidance on rate hikes until at least 2020; the Bank of Canada (BoC) has shifted in a dovish direction; the Bank of England (BoE) is on hold amidst Brexit uncertainty; the Bank of Japan’s (BoJ) yield curve control framework is on lockdown; and, in many DMs, policy tightening is on ice.
Meanwhile, signs also point towards Chinese policymakers taking further steps to loosen domestic policy settings. Reserve requirement ratios have been cut, and are likely to be lowered further while other credit easing measures have been implemented, although the authorities are still signaling a desire to constrain shadow banking growth. Taxes have also been lowered again, adding to last year’s fiscal easing through personal and corporate tax cuts.
Before November’s G-20 meeting, we were fearful that the US would impose a 25% tariff on all imports from China by mid-2019. At the same time, intransigence in both Rome and Brussels over Italy’s 2019 budget left open the potential for a more serious debt crisis. However, in both instances, brinkmanship has softened, as leaders faced the economic, political and financial consequences of their aggressive stances.
Because the underlying drivers remain in place, these political risks have most definitely not gone away. But as long as the uneasy truces now in place hold, the drag on growth and returns from uncertainty should moderate as the year progresses. This is also true of Brexit where, although a catastrophic ‘no-deal’ scenario cannot be ruled out, our assessment is that a softer outcome remains much more likely.
The combination of easing short-term political risk and a more accommodative stance of policy is loosening financial conditions. Government bond yields have fallen sharply, the trade-weighted dollar has depreciated, portfolio capital flows to emerging markets have picked up, corporate credit spreads have narrowed and equity prices have rallied. It is our judgement that this loosening will have at least some efficacy. Indeed, in aggregate we expect global GDP growth to slow from 3.6% in 2018, to 3.2% in 2019, before picking up to 3.5% in 2020. In sequential terms, the maximum growth impulse will be felt in H2 2019 and H1 2020 before growth moderates again.
This impulse should be most powerful in emerging market (EM) economies. Last year, they were caught in the crosshairs of US and Chinese policy tightening, slowing global trade growth, and building risks around protectionism. Relief on all these fronts, alongside cyclical base effects, will help EM economies hit hardest in 2018. The upshot is that while aggregate EM growth is expected to drop to 4.2% in 2019 from 4.6% in 2018, we now expect growth jump back to 4.7% in 2020.
The DM story is a little more nuanced. The open Eurozone economy will benefit most from the expected acceleration in the global production and trade cycles. Japan will similarly enjoy a better global growth backdrop, albeit with domestic headwinds from a consumption tax hike in the autumn. The US meanwhile is expected to continue to slow, with the fading of its 2018 fiscal stimulus still dominating its growth profile.
It is important to emphasise that the expected pick-up in growth over coming months is unlikely to be as powerful as in 2016/17, because policy stimulus will be more muted and there is less spare capacity to be absorbed. Moreover, the risks to this turnaround are tilted to the downside, with leverage in key countries and sectors potentially a constraint on the growth impulse from easier financial conditions and the deeper political backdrop still unfavorable. As such, it is plausible that a more aggressive easing from major central banks will be necessary before growth finds a bottom.
Global forecast summary