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Global Economic Growth Becomes Fragile as Trade Tensions Persist



Global momentum has weakened markedly and growth is set to remain subpar as trade tensions persist. Trade tensions have disrupted growth. With uncertainty high and confidence low, investment has suffered, and the manufacturing sector has taken a hit.Key risks include a prolonged period of higher tariffs between the US and China, new trade barriers between the US and EU, a sharper slowdown in China, prolonged sub-par growth in Europe and financial vulnerabilities from high debt.

“Overall, however, trade tensions are taking a toll and global growth is projected to slow to only 3.2% this year,” Laurence Boone, OECD Chief Economist, revealed.

The Global Economy in 3600

United States| Stronger Q2 as trade and inventory unwinds

Economic growth accelerated sharply in the first quarter thanks to strong net exports and a buildup of inventories, which more than offset slowing consumer spending and fixed investment growth. Imports contracted largely due to frontloading in Q4, in anticipation of tariff increases on China, while the inventory surge was partly related to softer demand, particularly for vehicles. Shutdown effects, on the other hand, dragged on growth. Nevertheless, monthly indicators for March suggest a rebound in both private investment and consumption momentum at the end of the quarter. Turning to Q2, the trade and inventory boost should unwind and weigh on growth, while conversely, delayed private and public spending due to the shutdown will provide support. Overall, consumer spending will likely gain steam, but weak investment in the residential property market remains a concern.

Economic momentum will cool this year as a variety of factors weigh on activity. Higher interest rates—despite the recent halt of the Fed’s tightening cycle—and slower global growth are notable headwinds. Moreover, trade uncertainty should persist this year—even in the event of a trade deal with China—while fiscal stimulus effects will fade, further dampening growth.

Euro Area| Uncertainty continues in Q2 as growth declines

The economy likely stayed in a soft patch in the first quarter, plagued by problems in the manufacturing sector and a weaker external backdrop. Economic sentiment fell throughout Q1, recording the worst reading in over two years in March, while declining export orders alongside transitory issues caused industrial output to drop in February and kept the manufacturing PMI in contractionary territory in March. That said, a solid labor market should continue to keep activity in the black. Leading data for Q2 has so far been lackluster, with the composite PMI falling in April. Moreover, on the political front, uncertainty continues to reign. While the EU recently approved an extension to the UK’s exit date, questions linger over if and when Brexit will occur and what it will entail. Meanwhile, on 15 April, the EU approved a mandate to open trade talks with the U.S. amid ongoing threats of tariffs from its largest trading partner.     

Growth is seen slowing sharply this year, hampered by a more challenging external environment, souring sentiment and a weaker manufacturing sector. That said, contained inflation, some fiscal loosening and accommodative monetary policy should provide some relief. Risks stem from a larger-than-expected slowdown in China, political turmoil and rising protectionism. Analysts cut the Eurozone’s GDP forecast for the sixth consecutive month in May as downbeat economic data continues to roll in.

United Kingdom| Economy losing momentum in Q2

The economy likely performed better than previously anticipated in Q1, although this was partly due to a favorable base effect and firms stockpiling in preparation for a potential no-deal Brexit at end-March. Solid GDP growth in January and February was supported by manufacturing and construction. Moreover, in December-February the unemployment rate remained at a multi-decade low, while wage growth was robust. This was likely behind buoyant retail sales in the first quarter, despite anemic consumer confidence. However, the economy is likely losing momentum so far in Q2 as the boost from stockbuilding unwinds. On the political front, the EU recently agreed to delay Brexit until 31 October after MPs failed to agree on a way forward. A resolution to the impasse does not appear imminent, and the ongoing uncertainty will continue to hamper business confidence and investment going forward.

Growth this year will be held back by muted business investment and ebbing momentum in key trading partners such as the EU and U.S. However, the strong labor market should prop up private consumption, while the fiscal stance will turn more supportive. The highly uncertain outcome of Brexit remains the key risk to the outlook.

Japan Economic| Uncertain economic outlook weigh on household spending

Growth momentum likely moderated in Q1, mostly on the back of cooling global demand, which traditionally fuels activity in the all-important manufacturing sector and shores up business investment. Against this backdrop, industrial production fell on a monthly basis in March and sentiment among large manufacturers declined to a two-year low in Q1 2019. An uncertain economic outlook could have started to weigh on household spending, as consumer confidence fell to an over three-year low in March. In an attempt to rekindle economic growth, in late March the parliament approved a record JPY 101 trillion (USD 920 billion) budget for FY 2019 (April 2019–March 2020), which increases spending on welfare, public works and defense. The budget also allocates resources to mitigate the negative impact of a planned sales tax hike in October.

Economic growth is expected to decelerate further this year as subdued global demand will take its toll on the country’s external sector and the October sales tax hike will put a dent in consumer spending. However, a boost in fiscal stimulus and a potential recovery in global demand in H2 should cushion the economy against a sharp slowdown.

China| Despite growth momentum in Q1, Q2 will decelerate

Although the economy expanded robustly in the first quarter of the year, growing 6.4% on an annual basis to match the previous quarter’s outturn, weak data for April suggests that growth will decelerate in Q2. All retail sales, investment, industrial production, and exports deteriorated markedly in April, increasing the likelihood that authorities will unveil further stimulus measures in the coming weeks. Against this backdrop, trade tensions with the United States have flared in recent weeks, which will likely further erode activity. On 10 May, the U.S. hiked trade tariffs for USD 200 billion of Chinese imports to 25%, to which China retaliated by increasing tariffs on USD 60 billion of U.S. imports. With Trump threatening to tax the remainder of Chinese imports in response, the conflict seems far from over. 

Economic growth is projected to slow this year due to weak global demand, domestic economic imbalances and financial deleveraging. Escalating trade tensions with the United States will add further downward pressure on growth. On the upside, authorities remain committed to easing fiscal and financial conditions in order to keep growth afloat.

East Asian economies| Expected to slow this year compared to last year. 

East Asian economies are expected to slow this year compared to last year. Notably, these highly export-driven economies will face headwinds from weaker global growth and rising trade protectionism. That said, Chinese fiscal policy stimulus and accommodative monetary policy across the region should support activity in the months ahead.

South Asia economies| Set to slow in 2019

Economic growth is set to slow this year on weakness in Pakistan as its government adopts a tighter fiscal stance and implements structural reforms in line with its new IMF deal. In addition, Bangladesh is expected to post softer growth this year. Economic dynamics in India, however, should remain broadly stable thanks to generous government support.

Sub-Saharan Africa| The overall expansion is seen only slightly above last year’s modest outturn

Growth prospects were again cut this month, largely reflecting weak incoming data from heavyweight South Africa and oil-rich Angola. The overall expansion is thus now seen only slightly above last year’s modest outturn. Elevated global trade tensions, commodity-price volatility, adverse weather shocks and policy uncertainty represent key downside risks to the outlook.

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Global growth remains precarious



Global growth is likely to dim this year, due largely to weaker momentum in developed economies and China. However, tight labor markets and more accommodative monetary policy should prop up activity. Against a difficult backdrop that included intensified US-China trade and technology tensions as well as prolonged uncertainty on Brexit, momentum in global activity remained soft in the first half of 2019. There were positive surprises to growth in advanced economies, but weaker-than-expected activity in emerging market and developing economies.

Growth was better than expected in the United States and Japan, and one-off factors that had hurt growth in the euro area in 2018 (notably, adjustments to new auto emissions standards) appeared to fade as anticipated.

Among emerging market and developing economies, first quarter GDP in China was stronger than forecast, but indicators for the second quarter suggest a weakening of activity. Elsewhere in emerging Asia, as well as in Latin America, activity has disappointed.

Despite the upside surprises in headline GDP for some countries, data more broadly paint a picture of subdued global final demand, notably in fixed investment. Inventory accumulation of unsold goods lifted first quarter GDP in the United States and the United Kingdom, while soft imports boosted output in China and Japan.

From a sectoral perspective, service sector activity has held up, but the slowdown in global manufacturing activity, which began in early 2018, has continued, reflecting weak business spending (machinery and equipment) and consumer purchases of durable goods, such as cars. These developments suggest that firms and households continue to hold back on long-range spending amid elevated policy uncertainty.

Global trade relaxed

Spending patterns are also reflected in global trade, which tends to be intensive in investment goods and consumer durables. Trade volume growth declined to around ½ percent year-on-year in the first quarter of 2019 after dropping below 2 percent in the fourth quarter of 2018. The slowdown was particularly notable in emerging Asia.

Weak trade prospects—to an extent reflecting trade tensions—in turn create headwinds for investment. Business sentiment and surveys of purchasing managers for example point to a weak outlook for manufacturing and trade, with particularly pessimistic views on new orders. The silver lining remains the performance of the service sector, where sentiment has been relatively resilient, supporting employment growth (which, in turn, has helped shore up consumer confidence). 

Subdued inflation

Consistent with subdued growth in final demand, core inflation across advanced economies has softened below target (for example in the United States) or remained well below it (euro area, Japan). Core inflation has also dropped further below historical averages in many emerging market and developing economies, barring a few cases such as Argentina, Turkey, and Venezuela.

With global activity generally remaining subdued, supply influences continued to dominate commodity price movements, notably in the case of oil prices (affected by civil strife in Venezuela and Libya and US sanctions on Iran). Despite the large run-up in oil prices through April (and higher import tariffs in some countries), cost pressures have been muted, reflecting still-tepid wage growth in many economies even as labor markets continued to tighten. Headline inflation has therefore remained subdued across most advanced and emerging market economies. These developments have contributed, in part, to market pricing of expected inflation dropping sharply in the United States and the euro area.

Mixed policy cues and shifts in risk appetite

Policy actions and missteps have played an important role in shaping these outcomes, not least through their impact on market sentiment and business confidence. While the six-month extension to Brexit announced in early April provided some initial reprieve, escalating trade tensions in May, fears of disruptions to technology supply chains, and geopolitical tensions (for example, US sanctions on Iran) undermined market confidence.

Risk sentiment appears to have regained some ground in June, supported by central bank communications signaling the likelihood of further accommodation. Following the June G20 summit, where the United States and China agreed to resume trade talks and avoided further increases in tariffs, market sentiment has been lifted by the prospect of the two sides continuing to make progress toward resolving their differences. Financial conditions in the United States and the euro area are now easier than at the time of the April World Economic Outlook, while remaining broadly unchanged for other regions.

Global Growth to recede

Global growth is projected at 3.2 percent for 2019, improving to 3.5 percent in 2020. On the trade front, the forecast reflects the May 2019 increase of US tariffs on $200 billion of Chinese exports from 10 percent to 25 percent, and retaliation by China. The downgrades to the growth forecast for China and emerging Asia are broadly consistent with the simulated impact of intensifying trade tensions and associated confidence effects.

The projected pickup in global growth in 2020 relies importantly on several factors including financial market sentiment staying generally supportive; continued fading of temporary drags, notably in the euro area; stabilization in some stressed emerging market economies, such as Argentina and Turkey; and finally, avoiding even sharper collapses in others, such as Iran and Venezuela. About 70 percent of the increase in the global growth forecast for 2020 relative to 2019 is accounted for by projected stabilization or recovery in stressed economies. In turn, these factors rely on a conducive global policy backdrop that ensures the dovish tilt of central banks and the buildup of policy stimulus in China are not blunted by escalating trade tensions or a disorderly Brexit.

Global economy @ 3600

United States| Strong growth on the back of robust exports and inventory accumulation

2019 growth is expected to be 2.6 percent, moderating to 1.9 percent in 2020 as the fiscal stimulus unwinds. The revision to 2019 growth reflects stronger-than-anticipated first quarter performance. While the headline number was strong on the back of robust exports and inventory accumulation, domestic demand was somewhat softer than expected and imports weaker as well, in part reflecting the effect of tariffs. These developments point to slowing momentum over the rest of the year.

Euro Area| Growth expected to pick up over the remainder of the year

Growth in the euro area is projected at 1.3 percent in 2019 and 1.6 percent in 2020. The forecast for 2019 is revised down slightly for Germany (due to weaker-than-expected external demand, which also weighs on investment), but it is unchanged for France (where fiscal measures are expected to support growth and the negative effects of street protests are dissipating) and Italy (where the uncertain fiscal outlook is similar to April’s, taking a toll on investment and domestic demand). Growth has been revised up for 2019 in Spain, reflecting strong investment and weak imports at the start of the year. Euro area growth is expected to pick up over the remainder of this year and into 2020, as external demand is projected to recover and temporary factors (including the dip in German car registrations and French street protests) continue to fade.

United Kingdom | Growth set to expand

The United Kingdom is set to expand at 1.3 percent in 2019 and 1.4 percent in 2020. The upward revision reflects a stronger-than-anticipated first quarter outturn boosted by pre-Brexit inventory accumulation and stockpiling. This is likely to be partially offset by payback over the remainder of the year. Monthly GDP for April recorded a sharp contraction, in part driven by major car manufacturers bringing forward regular annual shutdowns as part of Brexit contingency plans. The forecast assumes an orderly Brexit followed by a gradual transition to the new regime. However, as of mid-July, the ultimate form of Brexit remained highly uncertain.

Japan | Economy set to grow on the back of strong Q1

Japan’s economy is set to grow by 0.9 percent in. The strong first quarter GDP release reflects inventory accumulation and a large contribution from net exports due to the sharp fall in imports, thus masking subdued underlying momentum. Growth is projected to decline to 0.4 percent in 2020, with fiscal measures expected to somewhat mitigate the volatility in growth from the forthcoming October 2019 increase in the consumption tax rate.

Emerging Economies |Emerging and developing Asia expected to grow

Emerging and developing Asia is expected to grow at 6.2 percent in 2019–20. The forecast is 0.1 percentage point lower than in the April World Economic Outlook for both years, largely reflecting the impact of tariffs on trade and investment. In China, the negative effects of escalating tariffs and weakening external demand have added pressure to an economy already in the midst of a structural slowdown and needed regulatory strengthening to rein in high dependence on debt. With policy stimulus expected to support activity in the face of the adverse external shock, growth is forecast at 6.2 percent in 2019 and 6.0 percent in 2020—0.1 percentage point lower each year relative to the April WEO projection. India’s economy is set to grow at 7.0 percent in 2019, picking up to 7.2 percent in 2020. The downward revision of 0.3 percentage point for both years reflects a weaker-than-expected outlook for domestic demand.

Sub-Saharan Africa | Growth expected to be 3.4%

In sub-Saharan Africa, growth is expected at 3.4 percent in 2019 and 3.6 percent in 2020, 0.1 percentage point lower for both years than in the April World Economic Outlook, as strong growth in many non-resource-intensive countries partially offsets the lackluster performance of the region’s largest economies. Higher, albeit volatile, oil prices have supported the outlook for Angola, Nigeria, and other oil-exporting countries in the region. But growth in South Africa is expected at a more subdued pace in 2019 than projected earlier following a very weak first quarter, reflecting a larger-than-anticipated impact of strike activity and energy supply issues in mining and weak agricultural production.

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