With a rumbling trade war, Brexit worries and challenges in both the US and China, what is the outlook?
In 2018, we witnessed two global sell-offs, emerging market currencies weakening against the dollar, tightening monetary policies and trade war headwinds start to impact the global economy. So, what can we look forward to in 2019?
To begin to answer that question it would be best to recap the events of the key economic regions last year and look at the expected outlook for each, before circling back and attempting to answer the headline question.
In late 2018, the European Central Bank announced at its monetary policy meeting that it would end its €2.5trn (£2.26trn) quantitative easing programme. During the run-up to the meeting, the bloc had seen sluggish GDP growth in the previous quarter, inflation excluding oil prices remain low and the political saga that is Brexit rumble on.
While headline inflation has been broadly in line with the ECB’s target of 2 per cent since 2017, it has largely been artificially driven by the oil price. If we were to strip out its volatile components, the core annual inflation rate would have hovered around the 1 per cent mark since 2016.
Weak growth in Europe
Italy, whose economy contracted in the third quarter of 2018, published an ambitious budget plan to increase public spending in order to kick-start an economy which has undergone a long period of stagnation.
Unsurprisingly this did not go down too well with the EU, which would have liked to have seen reduced spending plans – Italy’s debt-to-GDP ratio is more than twice the 60 per cent limit. While Germany’s growth reversal can be argued to be an anomaly due to tighter car manufacturing laws, Italy has lost its momentum of early 2018, and future GDP growth is expected to slow down and remain at 0.9 per cent over the next two years, as domestic and external demand weakens.
Uncertainty in the UK
GDP growth is expected to be sluggish for the UK in 2019. Brexit talks dominated headlines last year and one certainty is that they will continue to do so.
The meaningful vote, which had been scheduled for 11 December, was postponed, creating uproar in the House of Commons. Business investment growth is set to remain weak in the future as political uncertainty spills over into the new year.
Jitters in the US
Over in the US, tightening monetary policy due to the Federal Reserve’s continual rate hikes has inadvertently helped reduce the yield curve spread (the difference between 10–year and two-year US treasury bonds) as the longer-dated bonds have struggled to keep up with the rising short-term rates. US markets have been on an incredible bull run since 2009 but the two global sell-offs and the reduced spread have created a jittery market.
The spreads of some of the other relationships turned negative recently. For every recession since the mid-1970s, a yield curve inversion has preceded it.
With the Democrats now controlling the House, they have the ability to veto acts that could help economic growth, and as the election campaign gains momentum next year this could prove to be tempting. The Congressional Budget Office forecast strong growth for 2018 as the corporate and personal income tax cuts were applied by the government, buoying spending. The CBO expects growth to slow to 2.4 per cent in 2019, citing growth in business investment and government purchases as falling.
Encouraging signs in Brazil
In Brazil, much of its outlook is heavily dependent on the president being able to deliver on his political manifesto. Jair Bolsonaro’s promise to cut taxes and privatise state-owned companies has sounded like music to investors’ ears and, if reforms can be implemented, growth is expected to pick up over the next two years.
Turkey, meanwhile, is dealing with rampant inflation. The Turkish lira alongside the Argentine peso, has been one of the worst performing EM currencies. External borrowing has picked up heavily over the last eight years, with debt currently standing at $457bn (£361bn), and the possibility of a strengthening US dollar does not help ease the country’s burden. The nation is expected to suffer a contraction, albeit a short one, in 2019.
China’s rebalancing phase
China was in tariff disputes with the US for a good portion of 2018. Whether a full-blown trade war or a de-escalation happens seems impossible to accurately predict. For now, an uneasy truce is being upheld by the two nations. China is currently at a rebalancing phase, whereby policymakers must ensure that a move away from its reliance on manufacturing and external investment to a focus on domestic growth is handled with minimal disruption.
Beijing officials are aiming to maintain growth while creating a sense of stability. Even through the political turbulence, growth is expected to continue in 2019, albeit at a slower rate.
The global economy is certainly navigating choppy waters. The OECD believes GDP growth is strong but has peaked, citing that in many countries unemployment is well below pre-crisis levels. Meanwhile, labour shortages are biting and inflation remains tepid.
The global economy is expecting a soft landing in 2019 with global GDP growth estimated at 3.5 per cent. However, much of this will be down to how well key policymakers are able to steer their respective economies through the noise.
Ahmed Mohamoud is research assistant at FE