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Global Economic Outlook

Global Economic Outlook - March 2019

The global slowdown that began last year has continued to spread. The U.S. economy has shifted into a lower gear, growth has been falling in the Eurozone, Brexit is festering and China is feeling the heat from internal imbalances and an elevated trade spat with the U.S. Economic activity in all regions will continue to be hindered by the uncertainties surrounding global commerce.

Summary

  • Bending, Not Breaking

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The global slowdown that began last year has continued to spread. The U.S. economy has shifted into a lower gear, growth has been falling in the Eurozone, Brexit is festering and China is feeling the heat from internal imbalances and an elevated trade spat with the U.S. Economic activity in all regions will continue to be hindered by the uncertainties surrounding global commerce.

We remain optimistic that these uncertainties will not extend beyond 2019. A de-escalation of US-China trade tensions is in the offing; there are reports a deal could be reached before the end of the month. Brexit remains messy, but the paths to resolution have become somewhat clearer in recent weeks. Should these two situations reach resolution, confidence among consumers, producers and investors will improve.

Overall, we continue to call for the global economy to reach a soft landing. Downside risks remain, and must be carefully managed. Following are our views on how the main world markets will likely fare in 2019 and 2020.

United States

  • Economic growth in the U.S. is entering a period of transition, with fourth-quarter 2018 real gross domestic product (GDP) growing at a 2.6% annualized pace. The economy grew 3.1% for the full year, in line with the administration’s projections included in its proposal for the Tax Cuts and Jobs Act. The recent tapering marks the start of a trend that, in the best case, will be a soft landing for the U.S. As stimulus measures fade and global growth cools, we expect economic growth to continue at a more measured rate during the balance of 2019.
  • Inflation remains calm, with the January Consumer Price Index (CPI) increasing only 1.6% year over year. Core CPI, excluding food and energy, grew at a more firm rate of 2.2%. Steady inflation and slower growth are just two of the reasons the Federal Reserve has struck a theme of patience in the year ahead, waiting for data to make a strong case for rate increases. We anticipate one rate hike later in 2019 to end the cycle of rate increases. Focus is turning to the Fed’s balance sheet reduction, which is likely to end later this year.

Eurozone

  • After a weaker-than-expected second half of 2018, there are still no clear signs of a rebound in eurozone economic activity. While domestic demand remains robust, slowing external demand and country and sector-specific woes (such as the Italian recession and early elections in Spain) have been weighing on the industrial confidence. As a result, we expect growth this year to be slightly weaker than initially expected: 1.5% year-over-year for 2019 vs. our previous estimate of 1.6%.
  • The European Central Bank (ECB), as evident from its latest minutes as well as speeches from its officials, has also acknowledged the growth deterioration. As a result, some market participants are now assigning a higher likelihood to new policy support measures by the ECB, such as a new round of liquidity measures for banks. Rate increases from the ECB seem a long way off: we don’t expect anything before 2020.

United Kingdom

  • The U.K. Parliament is set for another “meaningful vote” on the Brexit withdrawal agreement by March 12th. Should the deal be rejected, the members of Parliament will vote the next day on whether to leave the European Union (EU) on March 29th without a deal. Should that vote also be rejected, another vote will take place on March 14th aimed at seeking an extension of the Article 50 period from the EU. In our base case, we expect an extension of Article 50 followed by a “Brexit in name only” agreement that largely preserves the existing provisions of business and finance. Lingering uncertainty will continue to take a toll on business investments until further clarity emerges on Britain’s future relationship with the EU.
  • Until details of the separation agreement become clearer, the Bank of England is likely to remain on hold. In the event of an agreement, the British pound should regain some of the ground lost since the 2016 referendum.

Japan

  • The Japanese economy is expected to record a modest expansion amid frail export growth and a gradual slowdown in investment expenditure. A healthy labor market will remain the engine of growth over the forecast horizon, but the planned implementation of a consumption tax hike in the last quarter of 2019 would have an adverse impact on consumer spending. The impact, however, will likely be somewhat milder than previous situations of this kind due to the smaller size of the tax hike and offsetting measures planned by the government.
  • Should economic conditions deteriorate, another delay in implementation of tax hike cannot be ruled out. The Chinese slowdown is another area of concern for the Japanese economy, as China is a key export market for Japanese goods.

China

  • A delay in further tariff hikes by the U.S. de-escalated trade tension and was welcomed in Beijing and in the Chinese equity markets. At present, it appears the forthcoming agreement will not address the sensitive areas of China’s support for its domestic industries and telecommunications technology.
  • The Chinese economy is struggling to sustain economic momentum. Given suspicions around the reliability of Chinese hard data, the situation could be far worse than the numbers suggest. With risks remain tilted to the downside, policymakers will continue to rely on a number of monetary and fiscal measures in order to avoid a hard landing.

Global Economic Forecast – March 2019

Carl R. Tannenbaum portrait

Carl R. Tannenbaum

Executive Vice President and Chief Economist
Ryan James Boyle portrait

Ryan James Boyle

Chief U.S. Economist

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