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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 Economic Growth forecast in Q2, 2019: Opportunities and Threats



The current global economic growth environment remains subdued, and global business sentiment indicators have yet to find a bottom.

However, despite an expected slowdown in economic activities, a recession in the U.S. seems unlikely at this point in time considering the “inverted yield curve”, and the late stage of the business cycle could prevail for more quarters. Emerging markets are most vulnerable to a recession, and the possible escalation of the trade war, coupled with increased protectionist policies by the U.S. will certainly push these markets an inch closer to a recession.


Prospects of Major Economies


In the US, the strong fiscal boost of the last two years allowed to further lengthen the already long growth cycle, now standing at 99 uninterrupted months, the longest on record. In the next quarters, however, fading fiscal stimulus and tighter financial conditions will contribute to annual GDP growth slowing from 3.1% in Q4 2018 to around 2% by Q4 2019 – still a not worrying rate of growth. The US economy added a huge 312,000 jobs in December, indicating that the labor market will remain healthy with limited impact on wage growth and inflation. On January 30th, the FOMC (Federal Open Market Committee of the FED) signaled a pause in rate hikes coming forward. On top of that, Chair Jerome Powell insisted during a press conference that the “case for raising interest rates has weakened” due to global crosscurrents and muted inflation. The policy statement and Powell’s comments are unambiguously dovish for monetary policy, and bullish for the equity and bond markets. The Fed is likely to be more flexible in its tightening policy and to hike rates only once this year, most likely by 25bp sometime in Q3. While this dovish move will be beneficial for the growth of the US economy, it also represents recognition that a US slowdown is to be expected.



In the European Union, recent data have been quite disappointing as subdued external demand has weighed on the region’s output and undermined sentiment. However, some of the slowdown is related to one-off factors such as the “gilet jaunes” protests in France, the production cuts in the German car sector due to changes in emission regulation and the production and logistic problems in Germany caused by the Rhine draught. The GDP of the European Union has slowed down during the last quarter of 2018 to 1.5%year-on-year, from 1.8% in the third quarter. Nevertheless, while the annual GDP figures for Germany indicate slow growth in Q4 (but not a recession), the Q4 GDP figures show that France proved more resilient than expected, having increased by 0.3% over the quarter, with net trade as the main driver. Spain continues to be a strong performer, registering Q4 GDP growth of 0.7% q/q, up from 0.6% q/q in Q3. Growth was driven by strong exports (1.9%) and robust consumer spending (0.5%). Italy is the most worrying of the big European countries, having entered into recession with two negative consecutive quarters. The comment from ISTAT that net trade gave a positive contribution to growth implies that domestic demand was subdued, on the back of lowering sentiment indicators, especially manufacturing confidence and now also households. Italian growth in 2019 is now expected to be approximately flat.

In a nutshell, as the one-off problems appear to have been resolved, and on the back of a recovery in domestic demand based on signs of stronger wages, lower inflation and a significant fiscal boost (especially in Germany), European growth should hover around 1.5%, just below the 1.8% registered in 2018 overall.



Earlier in March, we saw historic votes in the UK Parliament to reject the withdrawal agreement for the second time, reject the possibility of the United Kingdom leaving the European Union (EU) without a deal, and an instruction to the prime minister to request an extension to Article 50. After much speculation as to the length of the delay requested, the UK Prime Minister Theresa May requested an extension until June 30 without the possibility for a longer-term extension. After eight hours of debate by the leaders of the rest of the EU on Thursday, March 21, an extension was granted in two forms:

  • An extension to Wednesday, May 22, provided the negotiated withdrawal agreement is approved by the UK Parliament by March 29. In this case, the delay will be needed to allow the United Kingdom to ratify the necessary legislation to give the withdrawal agreement legal effect, including, crucially, the transition arrangements.
  • But if the negotiated deal is not approved by the UK Parliament by March 29, then the extension will be shortened to Friday, April 12. This would be an unconditional extension, but the UK government would then be required to achieve a consensus view and indicate a way forward by the end of it.



Turning to China, economic growth slowed further in Q4, amid weakening external and internal demand. Growth is likely to remain under pressure at the start of 2019, but find a floor around Q2 in response to an increasing array of growth-supporting measures. Overall, GDP growth is expected to slow to 6.1% this year from 6.6% in 2018. Key risks are trade tensions with the US and a continued tight stance vis-à-vis shadow banking and local government debt. The latest PMI surveys indicate further weakening in industrial activity in December, although the services sector held up well, suggesting that also in China overall growth is not falling sharply.

Recent announcements and statements following December’s Central Economic Work Conference (CEWC) signaled no major shift in macro policy stance. But policymakers have moved to a more growth-supporting macro stance than in 2018. The latest fiscal and monetary steps include a further 100 basis point cut in reserve requirement ratios, new urban railway projects and a quota for local government bond issuance in 2019, which should speed up infrastructure investment. Policymakers will aim to halt the slowdown, rather than try and engineer a significant pick-up in growth.

The gradual policy easing should help China’s GDP growth bottom out around Q2 2019 and would allow economic growth to be in line with a target likely to be set at “6.0%-6.5%”, after “around 6.5%” in 2018. The Central Economic Work Conference (CEWC) gave a mandate for more fiscal and monetary support in 2019 as downward pressure on growth increases. But the desire not to “overdo” it will continue to shape the extent of policy easing.


Geo-political developments and risks associated

Geo-politics have played a significant role in determining market movements over the last decade, and investors need to have a thorough understanding of the underlying geo-political situation.

At present, the trade war between the U.S. and China remains one of the most important developments that should be monitored by investors.

The trade war between the two largest economies in the world is finally set to come to an end with the possibility of a trade deal between the two parties becoming a reality. Both of these parties have been involved in a tit-for-tat tariff implementation over the last year, and this contributed significantly to the pessimistic outlook on Asian markets. Now that the trade war is finally expected to come to an end, global markets are expected to regain some lost momentum. However, a trade deal has not been finalized yet, and either party can still withdraw from trade talks at any time. Historically, both parties have failed to reach a middle ground, and there is every possibility of the same thing happening once again. If the trade war does not come to an end anytime soon, it is more likely that we will see a collapse in the Chinese economy, and many sectors in the U.S. will also be hurt severely.

Even as a trade deal is to be signed, investors and analysts are still unaware of the terms and conditions of such a deal, and this puts a question mark over the effectiveness of such a trade deal between the U.S. and China. Protectionist policies by the U.S. have already hurt emerging markets badly, and the failure to end such policies will result in these countries being pushed into recession territory, which would be a negative development for developing countries as well.

Nonetheless, it is believed the possibility of a trade deal is very high, given that both parties understand the dire consequences of failing to come to an agreement soon. U.S. elections are also not far away, and the American President might want to paint a positive picture about the future growth of the American economy to secure his votes, and signing a trade deal with China would be integral to achieve such economic growth. Overall, it is believed the trade tensions have created many investment opportunities, particularly in emerging markets, and investors should be keen to get the most out of such opportunities.

Focusing on the European region, Brexit remains the key geo-political concern. The possibility of a no-deal Brexit is creating panic among British investors, and the overall European region will be hurt badly if Brexit related tensions are not addressed anytime soon. For U.K, neighboring European countries are important trade partners, and the failure to strike a deal before Brexit will hamper economic growth of the region severely, which would be reflected by a regional market rout. European region has underperformed relative to U.S. markets for the last 10 years.



On top of the uncertainty created by Brexit, there are political woes in France, Italy, and even in Germany, which are all adding up to paint a pessimistic outlook for the future. As revealed earlier, the European Central Bank has already slashed growth projections for 2019, and Euro zone markets are more likely to underperform other regions in the next couple of years.

However, despite the uncertainty surrounding the geo-political situation of the European region, it is believed the region provides a robust investment opportunity for opportunistic investors. Many European markets are trading at low valuation multiples, and investors should consider adding securities from this region to achieve attractive returns once the geo-political situation becomes supportive of regional growth.

The geo-political situation will be a key driver of growth for many emerging markets as well, and history has proven that these countries are extremely vulnerable to instable politics. Escalating problems in the Middle East will especially hurt the regional growth, and needs to be monitored by investors carefully.

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