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Early readings on first-quarter economic activity around the
world point to a mild strengthening of momentum. Growth rates in
the United States and eurozone were stronger than expected, while
Chinese growth remained stable. Yet, the downside risks have once
again risen. Both the global manufacturing and services PMIs
compiled by IHS Markit for JP Morgan dropped in April, highlighting
this fragility. Even more worrisome is the increase in policy
risks. The raising of US tariffs on Chinese imports on 10
May—and Chinese retaliation—could lead to a damaging upward
spiral of trade hostilities and seriously hurt growth. Meanwhile,
the escalation of military tensions in the Persian Gulf could push
up oil prices more, which would have large negative consequences
for global growth.
United States: A strong start to 2019.
The advance estimate of first-quarter US GDP growth was reported
at 3.2%, up from 2.2% in the fourth quarter of last year and in
line with the 3.0% rate of increase averaged over the four quarters
of 2018. The robust first-quarter pace is expected to be temporary,
as it was driven by two sources of strength that could easily
reverse in the second quarter: inventory investment and net
exports. A better indicator of economic health is final sales to
private domestic purchasers, which decelerated in the first quarter
to the slowest rate of increase in nearly six years (1.3%). We
expect real GDP growth to moderate beginning in the second quarter,
and we look for a 2.7% rate in calendar year 2019. We predict
annual growth will decelerate to 2.1% in 2020 and 1.8% in 2021. The
recently announced tariff increases by the United States and China
will further erode growth—a lot further if the trade war
intensifies.
Europe: Better than expected.
The flash estimate showed eurozone real GDP increasing 0.4%
quarter on quarter (q/q) in the first quarter of 2019, double the
pace of the final two quarters of 2018. Year-on-year (y/y) growth
leveled off at 1.2%, well below the cyclical peak of 2.7% in the
third quarter of 2017. Available data suggest private consumption
benefited from moderating energy inflation rates, resilient
employment, and higher compensation growth. The drag from net trade
appears to have eased, with export growth improving somewhat.
Eurozone real GDP growth is projected to slow from 1.8% last year
to 1.2% in 2019 and 1.1% in 2020, before edging up to 1.2% in 2021.
Meanwhile, the uncertainty about Brexit continues, as the decision
deadline has been extended to the end of October. The UK economy
will lose some momentum in the second and third quarters, as the
stocking up that boosted first-quarter real GDP growth to 0.5% q/q
unwinds.
China: Steady growth—but the economy is not out of
the woods yet.
China's economic growth held steady at 6.4% y/y in the first
quarter, helped by rebounds in the industrial sector and exports.
Unfortunately, China's economy is not out of the woods yet. Viewed
on a q/q annualized basis, real GDP growth has decelerated steadily
from 7.4% in the second quarter of 2017 to 5.7% in the first
quarter of this year. Moreover, the first-quarter stabilization was
largely due to surging exports, mostly to the European Union and
the Association of Southeast Asian Nations (ASEAN). The
sustainability of the export rebound is questionable—in fact,
exports fell in April. An even bigger risk is the recent increase
in US tariffs on Chinese exports, which will lower growth by about
0.2 percentage point this year and next. The Chinese government has
gradually ramped up fiscal and monetary stimulus to support
growth—and will do more if needed. Real GDP growth is projected
to slow from 6.6% in 2018 to 6.2% this year and 5.9% in 2020 and
2021.
Other large emerging markets: Hazards
galore.
Even as the global economic environment looked as if it would be
improving for emerging markets (slightly stronger growth and easier
monetary conditions) political and policy risks have risen sharply.
This is bad news for the world economy, and especially emerging
markets. The re-escalating trade conflict between the United States
and China will damage growth, both directly and indirectly. Higher
US tariffs and Chinese retaliation will directly hurt growth in the
economies of the two antagonists. This, along with disruptions in
supply chains, will drag down growth in the emerging world. The
indirect effects will include hits to the stock markets and
currencies of the most vulnerable economies. Against this backdrop,
investors have no shortage of other anxieties (some new and some
old), including a bad combination of politics and economics
(recessions) in Argentina and Turkey, as well as a dangerous
escalation of the conflict between Iran and the United States.
Bottom line
Growing political and policy threats mean any rebound in global
growth could be ephemeral.
