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17 January 2019Nariman Behravesh, Ph.D.Sara Johnson
The danger of a global economic downturn has risen, but the
probability of a recession in 2019 is still low. After a brief
spurt in 2017 and 2018, growth in the G7 economies is reverting to
trend, and emerging markets are unlikely to come to the rescue.
This process is likely to be delayed in the US economy because of
fiscal stimulus; however, higher tariffs, financial volatility, and
the government shutdown will hurt growth-the only question is how
much. The good news is that US consumer spending is on solid
footing. However, elevated political risks in Europe are beginning
to darken the outlook. Moreover, China's growth is proving to be
especially fragile, and data for the last seven months show a
marked slowing of activity-the industrial sectors are close to
recession. Policy mistakes, especially regarding trade, continue to
be the biggest threats to global growth. Fiscal and monetary
policies have little room to stimulate in the event of a
downturn.
United States: Real GDP growth was reported at
an annual rate of 3.4% in the third quarter of 2018, and IHS Markit
expects fourth-quarter growth of 2.8%. However, recent turbulence
in financial markets has softened the outlook for 2019 and beyond.
In response, we have removed one Federal Reserve rate increase from
our forecast and lowered our projection for US Treasury yields.
Combined with other developments, the net effect was to reduce our
forecast of real GDP growth by an average of 0.1 percentage point
per year from 2019 through 2022. We made no explicit adjustments to
the January forecast to reflect the partial government shutdown.
Assuming the shutdown lasts three weeks into January, we estimate
first-quarter growth will be cut 0.1 percentage point, and losses
will be recovered in the second quarter.
Europe: Growth is headed lower in 2019.
Eurozone real GDP increased a disappointing 0.2% quarter on quarter
(q/q) and 1.6% year on year (y/y) in the third quarter of 2018.
Gauging the underlying growth trend has been complicated by a
series of distortions, including the emission-test-related slump in
automotive output. An expected rebound there, plus the fiscal
stimulus coming in Germany, France, and Italy, will lead to a
temporary pickup in real GDP growth to 0.5% q/q in the first
quarter of 2019. The IHS Markit forecast calls for just 1.4% growth
in 2019 and 1.2% in 2020, with risks still to the downside.
Meanwhile, recent data and the UK parliament's rejection of the
Withdrawal Agreement support our cautious near-term UK growth
projections. We expect UK real GDP growth to slow from 1.3% in 2018
to 1.1% in 2019.
Japan: The sales tax hike will cloud the outlook for
2019.<span/>Real
GDP declined at a 2.5% annual rate in the third quarter. Available
data suggest real GDP recovered in the fourth quarter, thanks
largely to a rebound in domestic demand. However, net exports were
likely a drag on fourth-quarter growth as imports increased more
rapidly than exports. Real GDP growth is expected to hold steady at
0.8% in 2019, slip to 0.5% in 2020, and rise to 0.7% in 2021. The
scheduled increase in the sales tax from 8% to 10% in October 2019
will contribute to volatility in quarterly growth patterns, as
consumers and businesses shift purchases forward.
China: More signs of fragility. Following the
trade truce reached by the president of the United States and the
president of China, Donald Trump and Xi Jinping, we have assumed
that US import tariffs on USD200 billion of Chinese goods will
remain at 10% rather than increasing to 25%. Economic growth should
stabilize as the government releases additional stimulus, including
corporate tax cuts, credit easing, infrastructure investment, and
looser real estate rules in lower-tier cities. Meanwhile, exports,
industrial production, and retail sales have decelerated, as has
factory price inflation. The balance between weak data and expected
further stimulus leaves the IHS Markit assessment of China's
near-term outlook unchanged.
Other large emerging markets: While currency pressures
have eased, the outlook is not that bright. The pressures
on emerging-market currencies have eased considerably, compared
with the first half of 2018. Further pressure relief can be
expected as the Federal Reserve takes an even more cautious
approach towards raising interest rates. That said, weakening
global growth and more pessimism on commodity prices will do little
to boost growth prospects even among the star performers. Growth is
expected to be lackluster (or even worse) in other large emerging
markets such as Russia, South Africa, Turkey, Brazil, and Mexico.
In the latter two countries, uncertainty about the policies of new
governments is also giving both domestic and foreign investors
pause. All this means emerging markets will not be able to offset
the weakness in developed markets.
Bottom line: Growth is slowing everywhere, but
it is far too soon to run for the exits. Barring a policy or other
type of shock, the world economy is likely to muddle along for at
least another year.
Posted 17 January 2019 by Nariman Behravesh, Ph.D., Senior Economic Adviser, IHS Markit and
Sara Johnson, Executive Director – Economic Research, S&P Global Market Intelligence