US Fiscal Stimulus Fades, Monetary Policy Tightens and Geo-Political Risks Accumulate
The global economy will continue expanding at more than 3 percent in early 2019, but growth is showing signs of peaking, especially in the Euro Area and emerging markets, according to The Conference Board’s latest Global Economic Outlook. The Conference Board projects global growth to be 3.1 percent next year, down from 3.2 percent in 2018.
The Conference Board Global Economic Outlook 2019 provides projections for the output growth of the world economy, including 11 major regions and individual estimates for 33 mature and 36 emerging market economies for 2019–2023 and 2024–28.
“The global economy will remain strong through the next half year – with no signs of a downturn – assuming there are no major policy disruptions such as a widespread escalation in tariffs on trade,” said Bart van Ark, Executive Vice President and Chief Economist at The Conference Board. “But business cycles are maturing in most economies and growth rates are gradually reverting to slower trends in the medium-term. Looking beyond 2019, the main concerns are slower growth of labor supply and modest projections of productivity growth.”
The study finds that the US expansion will likely peak in the next few months as the effects of tax cuts and fiscal spending wane during the course of 2019. The expansion in Europe is moderating as a toughening global economic environment challenges the external sector. The outlook for major emerging markets is under the greatest strain because of inflation, a rising US dollar and domestic economic and political challenges.
Monetary policy will continue to tighten, but only moderately, unless inflation emerges much faster than anticipated. Trade disputes will impact some sectors and companies exposed to tariffs but the effects are still small at economy-wide levels, provided tariff increases do not further escalate. Labor markets – and not just for workers with higher skills – are tightening, while wages and productivity show only modest signs of a comeback.
Mature economies are projected to grow 2.4 percent in 2019, about the same as in 2018, but there are significant differences across regions.
The US is forecast to grow 3.1 percent in 2018, rising to 3.2 percent next year before returning to its longer-term potential of just above two percent. Short-term growth remains strong on the back of fiscal stimulus and strong business and consumer confidence. This will fade in the course of 2019 with rising interest rates, as the fiscal stimulus will have run its course and labor and capacity constraints become more apparent. Rising interest rates also provide a greater challenge in servicing government debt. Medium-term growth is hampered by slowing labor force growth. Faster productivity growth is needed to avoid a more precipitous slowdown. Trade tensions remain a barrier for business, especially auto industry imports from Canada and Mexico and technology firms entering the Chinese market.
Together, Europe’s economies are expected to expand at 1.9 percent on average in 2019, down from 2.1 percent in 2018 and 2.4 percent in 2017. The slowdown is mostly the result of weaker global trade in the short-term. In the longer-term, supply-side factors such as labor, capital and productivity will push down growth rates towards 1.4 percent in the next decade.
The UK is forecast to grow 1.2 percent in 2019, unchanged from last year. Despite a record-low unemployment rate and decent GDP growth in the second half of 2018, the UK faces the highest risk of recession among the thirteen economies around the globe for which The Conference Board tracks business cycle performance. A hard Brexit would have major implications for R&D, the influx of migrant workers and a further devaluation of the pound.
Japan is projected to grow 0.9 percent in 2019, down from 1.1 percent in 2018. Current conditions are favorable, with unemployment near record-lows and elevated consumer and business confidence. A booming US economy, the most important foreign economy for Japan, will help keep conditions favorable in the near term. However, several factors could derail the Japanese economy towards the end of 2019, including the planned hike in the consumption tax in October 2019. Also, Japan’s fundamental medium-term issue concerns the slowdown in labor force growth as a result of a rapidly aging population, putting an even greater burden on the need to raise productivity.
Emerging markets are projected to grow by 3.7 percent in 2019, slightly down from 2018. The Conference Board Leading Economic Index® for emerging economies suggests that the growth momentum is moderating further, but there are significant differences across countries.
Based on The Conference Board’s estimates of China’s GDP, the economy will grow 3.8 percent through 2019, down from 4.1 percent in 2018. China’s economic uncertainty in 2018 will play into a longer-term slowdown, and growth projections beyond 2019 critically depend on China’s ability to shift towards more qualitative growth sources driven by human capital and productivity improvements.
India is forecast to grow 6.8 percent in 2019, down from 7.2 percent in 2018. India remains one of the best-performing major economies but the expected potential growth rate for the next decade will drop below six percent as structural issues related to deindustrialization and weak human capital are becoming more visible.
Southeast Asia’s open economies face global headwinds, but in the long run restructuring of supply chains may benefit those economies as parts of global value chains that currently run through China may relocate to the region.
Brazil will enter a period of significant policy turbulence as a new administration faces a large task ahead to get the economy back on a sustained growth path. The economy, which is forecast to grow 2.0 percent in 2019 while recovering from a deep economic crisis, is still experiencing growing unemployment in Brazil which will challenge its consumer-driven growth.
The Conference Board projects that Mexico will improve its growth performance from 1.9 percent in 2018 to 2.3 percent in 2019. The USMCA deal should relieve Mexican concerns over trade with the US, limiting the potential damage to Mexico’s participation in manufacturing supply chains in North America in the medium term.
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