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The path to Global Growth narrows in 2019 after pick up in 2018

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Global growth in 2018 is estimated to be 3.7 percent, as it was last fall, but signs of a slowdown in the second half of 2018 have led to downward revisions for several economies.

Weakness in the second half of 2018 will carry over to coming quarters, with global growth projected to decline to 3.5 percent in 2019 before picking up slightly to 3.6 percent in 2020 (0.2 percentage point and 0.1 percentage point lower).

This growth pattern reflects a persistent decline in the growth rate of advanced economies from above-trend levels—occurring more rapidly than previously anticipated—together with a temporary decline in the growth rate for emerging market and developing economies in 2019, reflecting contractions in Argentina and Turkey, as well as the impact of trade actions on China and other Asian economies.

Specifically, growth in advanced economies is projected to slow from an estimated 2.3 percent in 2018 to 2.0 percent in 2019 and 1.7 percent in 2020.

  • The growth forecast for the United States also remains unchanged. Growth is expected to decline to 2.5 percent in 2019 and soften further to 1.8 percent in 2020 with the unwinding of fiscal stimulus and as the federal funds rate temporarily overshoots the neutral rate of interest. Nevertheless, the projected pace of expansion is above the US economy’s estimated potential growth rate in both years. Strong domestic demand growth will support rising imports and contribute to a widening of the US current account deficit.
  • There is substantial uncertainty around the baseline projection of about 1.5 percent growth in the United Kingdom in 2019-20. The unchanged projection relative to the October 2018 WEO reflects the offsetting negative effect of prolonged uncertainty about the Brexit outcome and the positive impact from fiscal stimulus announced in the 2019 budget. This baseline projection assumes that a Brexit deal is reached in 2019 and that the UK transitions gradually to the new regime. However, as of mid-January, the shape that Brexit will ultimately take remains highly uncertain.
  • Japan’s economy is set to grow by 1.1 percent in 2019 (0.2 percentage point higher than in the October WEO). This revision mainly reflects additional fiscal support to the economy this year, including measures to mitigate the effects of the planned consumption tax rate increase in October 2019. Growth is projected to moderate to 0.5 percent in 2020 (0.2 percentage point higher than in the October 2018 WEO) following the implementation of the mitigating measures.
  • Growth in the euro area is set to moderate from 1.8 percent in 2018 to 1.6 percent in 2019 (0.3 lower than projected last fall) and 1.7 percent in 2020. Growth rates have been marked down for many economies, notably Germany (due to soft private consumption, weak industrial production following the introduction of revised auto emission standards, and subdued foreign demand); Italy (due to weak domestic demand and higher borrowing costs as sovereign yields remain elevated); and France (due to the negative impact of street protests and industrial action).

For the emerging market and developing economy group, growth is expected to tick down to 4.5 percent in 2019 (from 4.6 percent in 2018), before improving to 4.9 percent in 2020.

  • Growth in emerging and developing Asia will dip from 6.5 percent in 2018 to 6.3 percent in 2019 and 6.4 percent in 2020. Despite fiscal stimulus that offsets some of the impact of higher US tariffs, China’s economy will slow due to the combined influence of needed financial regulatory tightening and trade tensions with the United States. India’s economy is poised to pick up in 2019, benefiting from lower oil prices and a slower pace of monetary tightening than previously expected, as inflation pressures ease.
  • Growth in emerging and developing Europe in 2019 is now expected to weaken more than previously anticipated, to 0.7 percent (from 3.8 percent in 2018) despite generally buoyant growth in Central and Eastern Europe, before recovering to 2.4 percent in 2020. The revisions (1.3 percentage point in 2019 and 0.4 percentage point in 2020) are due to a large projected contraction in 2019 and a slower recovery in 2020 in Turkey, amid policy tightening and adjustment to more restrictive external financing conditions.
  • In Latin America, growth is projected to recover over the next two years, from 1.1 percent in 2018 to 2.0 percent in 2019 and 2.5 percent in 2020 (0.2 percentage point weaker for both years than previously expected). The revisions are due to a downgrade in Mexico’s growth prospects in 2019–20, reflecting lower private investment, and an even more severe contraction in Venezuela than previously anticipated. The downgrades are only partially offset by an upward revision to the 2019 forecast for Brazil, where the gradual recovery from the 2015–16 recession is expected to continue. Argentina’s economy will contract in 2019 as tighter policies aimed at reducing imbalances slow domestic demand, before returning to growth in 2020.
  • Growth in the Middle East, North Africa, Afghanistan, and Pakistan region is expected to remain subdued at 2.4 percent in 2019 before recovering to about 3 percent in 2020. Multiple factors weigh on the region’s outlook, including weak oil output growth, which offsets an expected pickup in non-oil activity (Saudi Arabia); tightening financing conditions (Pakistan); US sanctions (Iran); and, across several economies, geopolitical tensions.
  • In sub-Saharan Africa, growth is expected to pick up from 2.9 percent in 2018 to 3.5 percent in 2019, and 3.6 percent in 2020. For both years the projection is 0.3 percentage point lower than last October’s projection, as softening oil prices have caused downward revisions for Angola and Nigeria. The headline numbers for the region mask significant variation in performance, with over one-third of sub-Saharan economies expected to grow above 5 percent in 2019–20.

 

Risks to the Outlook

Key sources of risk to the global outlook are the outcome of trade negotiations and the direction financial conditions will take in months ahead. If countries resolve their differences without raising distortive trade barriers further and market sentiment recovers, then improved confidence and easier financial conditions could reinforce each other to lift growth above the baseline forecast. However, the balance of risks remains skewed to the downside.

Trade tensions.

The November 30 signing of the US-Mexico-Canada free trade agreement (USMCA) to replace NAFTA, the December 1 US-China announcement of a 90-day “truce” on tariff increases, and the announced reduction in Chinese tariffs on US car imports are welcome steps toward de-escalating trade frictions. Final outcomes remain, however, subject to a possibly difficult negotiation process in the case of the US-China dispute and domestic ratification processes for the USMCA.

Thus, global trade, investment, and output remain under threat from policy uncertainty, as well as from other ongoing trade tensions. Failure to resolve differences and a resulting increase in tariff barriers would lead to higher costs of imported intermediate and capital goods and higher final goods prices for consumers.

Beyond these direct impacts, higher trade policy uncertainty and concerns over escalation and retaliation would lower business investment, disrupt supply chains, and slow productivity growth. The resulting depressed outlook for corporate profitability could dent financial market sentiment and further dampen growth

 

Financial market sentiment.

Escalating trade tensions, together with concerns about Italian fiscal policy, worries regarding several emerging markets, and, toward the end of the year, about a US government shutdown, contributed to equity price declines during the second half of 2018. A range of catalyzing events in key systemic economies could spark a broader deterioration in investor sentiment and a sudden, sharp repricing of assets amid elevated debt burdens.

Beyond the possibility of escalating trade tensions and a broader turn in financial market sentiment, other factors adding downside risk to global investment and growth include uncertainty about the policy agenda of new administrations, a protracted US federal government shutdown, as well as geopolitical tensions in the Middle East and East Asia. Risks of a somewhat slower-moving nature include pervasive effects of climate change and ongoing declines in trust of established institutions and political parties.

 

Policy Priorities

With momentum past its peak, risks to global growth skewed to the downside, and policy space limited in many countries, multilateral and domestic policies urgently need to focus on preventing additional deceleration and strengthening resilience. A shared priority is to raise medium-term growth prospects while enhancing economic inclusion.

Multilateral cooperation.

Building on the recent favorable developments noted above, policymakers should cooperate to address sources of dissatisfaction with the rules-based trading system, reduce trade costs, and resolve disagreements without raising tariff and non-tariff barriers. Failure to do so would further destabilize a slowing global economy.

Beyond trade, fostering closer cooperation on a range of issues would help broaden the gains from global economic integration, including: financial regulatory reforms; international taxation and minimizing cross-border avenues for tax evasion; reducing corruption; and strengthening the global financial safety net to reduce the need for countries to self-insure against external shocks.

 

Domestic policies. The policy priorities across advanced economies, emerging markets, and low-income developing countries remain broadly the same.

  • Across advanced economies, above-trend growth is set to moderate to its modest potential (in some cases, earlier than previously anticipated). All countries should emphasize measures that boost productivity, raise labor force participation, particularly of women and, in some cases, youth, and ensure adequate social insurance, including for those vulnerable to structural transformation. Monetary policy should ensure inflation expectations remain anchored, while fiscal policy should build buffers where needed to replenish limited policy space for combating downturns.
  • Emerging market and developing economies have been tested by difficult external conditions over the past few months amid trade tensions, rising US interest rates, dollar appreciation, capital outflows, and volatile oil prices. In some economies, addressing high private debt burdens and balance-sheet currency and maturity mismatches will require strengthening macroprudential frameworks. Exchange rate flexibility can complement these policies by helping to buffer external shocks. Where inflation expectations are well anchored, monetary policy can provide support to domestic activity as needed. Fiscal policy should ensure debt ratios remain sustainable under the more challenging external financial conditions. Improving the targeting of subsidies and rationalizing recurrent expenditures can help preserve capital outlays needed to boost potential growth and social spending to enhance inclusion. For low-income developing countries, concerted efforts in these areas would also help diversify production structures (a pressing imperative for commodity-dependent economies), and their progress toward the UN Sustainable Development Goals.

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Economy

Growth strong on the global front despite trade tensions … in Q2 2018

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Global growth remained strong in the second quarter despite rising trade tensions, higher oil prices and increased volatility in the financial markets. Tightening labor markets, robust investment in key global economies and still-accommodative financial conditions propelled economic activity in Q2. Moreover, despite signs of having peaked in Q1, global trade remained relatively robust in Q2. A comprehensive GDP growth estimate for the global economy put year-on-year growth at 3.4% in Q2. While the print was a notch below last month’s preliminary estimate of a 3.5% rise, it matched the result from the previous period.

Among the world’s largest economies, the U.S. continued to show enviable momentum in Q2, with quarter-on-quarter seasonally-adjusted annualized growth posting the strongest reading in nearly four years. Household spending was behind Q2’s solid performance due to an ever-tightening labor market and the effects of tax cuts. Non-residential investment continued to be another of the main growth engines on the back of lower corporate taxes. Although, surprisingly, net exports contributed notably to overall growth in Q2, it mostly reflected a surge in exports ahead of retaliatory tariffs from China, which came into effect on 6 July. Front-loaded shipments ahead of trade-punitive measures between China and the U.S. were also seen in parts of Asia.

In this regard, political risk returned to markets in the second quarter with President Trump ramping up trade tensions by imposing US tariffs on steel and aluminum and implementing tariffs on $34 billion of imports from China.  China also responded with a series of tariffs on US goods and the president threatened to escalate tariffs to autos and another $200 billion of imports from China.

The US decision to impose tariffs on $200bn of Chinese imports marked a serious escalation in its hostilities with Beijing over trade. Yet economists believe protectionist measures will have only a modest impact on global growth— provided the bilateral conflict does not turn into an all-out multilateral war.

The economy in 3600

UNITED STATES | Economy set to post yet another strong performance in Q3

The economy recorded its best showing in almost four years in the second quarter, thanks to strong private spending and a front-loading of business activity—notably export-oriented—ahead of the implementation of reciprocal tariffs with China in early July. Signs further point to robust but slightly decelerating momentum heading into the third quarter. In July, the unemployment rate ticked down, while consumer confidence remained near historic highs and retail sales were solid, boding well for consumption. However, the ISM index eased in July after a burst of activity in June, while industrial production growth only inched up in the same month. Nevertheless, the sharp drop in inventories observed in Q2 is likely to be reversed this quarter, which could provide a sizeable boost to growth.

Economic momentum should remain robust in coming quarters—notably thanks to a sharp increase in government spending— but is expected to moderate somewhat. The rapidly deteriorating trade outlook is the main immediate downside risk. Trade-related uncertainty will likely keep weighing on business confidence and investment, while an escalation of tariff actions could strike a blow to consumer spending. Recent progress on negotiations with Mexico over NAFTA, and possibly talks with China could however signal an appeasement of tensions in coming months. 

EURO AREA | Economic dynamics remain subdued in Q2

The Eurozone economy’s soft start to the year carried over into the second quarter, with preliminary data revealing growth was unchanged at 0.4% quarter-on-quarter. The result confirmed that the economy has shifted into a lower gear after a stellar growth spell in 2017.

Although a breakdown by components is not yet available, rising inflation likely took a bite out of household spending, while lower sentiment due to political and trade concerns also likely weighed on momentum. Available data for the third quarter has also been downbeat, with economic sentiment slipping in July and the composite PMI remaining broadly unchanged in August.

On the political front, the European Union and the United States reached a temporary truce in their trade spat on 27 July, pledging to work together to reduce trade barriers and to refrain from issuing any new tariffs while negotiations are ongoing. However, it is uncertain if the truce will hold, as U.S. President Donald Trump threatened again to slap tariffs on EU car manufacturers on 21 August.

Growth is expected to decelerate this year as a firm euro and geopolitical tensions dent exports, while rising inflation weighs on household spending. That said, an improving labor market and accommodative monetary policy will keep activity healthy overall.

JAPAN | Domestic demand propels economic activity in Q2

The economy recovered vigorously in the second quarter following the contraction in the previous quarter. Private consumption benefited from summer bonuses and a tight labor market, which propelled wage growth, especially in May and June. Investment also posted significant gains in Q2, reflecting works related to the 2020 Tokyo Olympics and businesses trying to automatize processes in a context of labor shortages. On the flip side, the external sector weakened in Q2 amid growing global trade tensions. Early data for Q3 suggests solid domestic economic dynamics are supporting overall growth. In the political arena, Japan’s ruling Liberal Democratic Party (LDP) elected its new leader on 20 September. This vote sets Abe on track to become Japan’s longest-serving prime minister.

Accommodative financial conditions, a robust labor market and construction projects related to the 2020 Tokyo Olympics will bolster growth in the coming quarters. However, risks are looming on the horizon: Rising trade protectionism could hurt Japan’s all-important external sector, while mounting geopolitical risks could strengthen the yen. 

UNITED KINGDOM | All-important services sector continues to shore up growth in Q2

Growth accelerated somewhat in the second quarter thanks to an improved performance from the services sector and a rebound in construction. Consumer-facing service industries performed particularly well, although this was at least partly due to the prolonged period of warm weather. However, manufacturing contracted, suggesting the short-term boost to competitiveness from the weaker pound is ebbing.

Moreover, signs from the labor market were mixed; although the unemployment rate dipped to a multi-decade low, earnings growth still failed to gain traction. The economy has begun Q3 in muted fashion, suggesting a further uptick in GDP growth is unlikely. In July, both the services and manufacturing PMIs declined on slower output and new orders growth, while consumer sentiment soured.

Looking ahead, growth will be anemic, with fixed investment depressed by Brexit uncertainty and export growth slowing after the temporary boost provided last year by the weaker pound. However, a slight pick-up in government spending should provide some support. A failure to reach a Brexit agreement with the EU before the UK departs in March 2019 is a substantial downside risk.

SSA grows firmly against poor performance from regional giants

Available data suggests that Sub-Saharan Africa’s (SSA) economy kept pace in the second quarter as growth in the region continued firming in the aftermath of the commodity price-driven slump. That said, regional growth through the first half of the year was downgraded significantly this month as metrics for a number of the heavyweight economies fell short. Regional GDP is projected to have grown 2.8% in the second quarter, in line with the first quarter’s expansion—although growth in the first half of the year was down a notch from the fourth quarter last year.

Still solid by most measures, the second-quarter outturn appears to have been bolstered by the supportive external environment, in large part thanks to robust global demand for key commodities. Growth dynamics were, however, far from uniform across the region as the two largest economies confronted challenging scenarios. 

Regional growth to accelerate in 2019

A healthy global economy, elevated commodity prices and improved agricultural output, as well as solid government spending, are expected to support the SSA economy next year. Regional GDP is seen growing 3.2% in 2018, which would mark the best result since 2015 if confirmed. Although the economy has been on a firmer footing since growth fell to an over two-decade low two years ago, challenges to the outlook remain.

Difficult business conditions and poor infrastructure, as well as relatively small private sectors, have restrained the pace of the recovery. In addition, several economies are burdened with high levels of public debt, and perennial security concerns continue to plague investment. Despite these downside risks, however, regional growth is seen climbing to 3.7% next year, unchanged from last month’s projection.

However, four of the region’s economies saw next year’s growth projections cut, including heavyweights Angola, Nigeria and South Africa. That said, upward revisions to the growth forecasts of four economies, including Ghana, offset the downgrades. Meanwhile, five economies saw no changes to their growth prospects next year.

Ethiopia and Cote d’Ivoire are expected to be the region’s fastest growing economies next year, each expanding over 7.0%. Tanzania, Ghana and Uganda are seen growing at or above 6.0%. Meanwhile, the region’s largest economies are expected to perform well below the regional average, with South Africa seen growing the slowest, at a rate of 1.8%, followed by Angola at 2.2% and Nigeria at 2.8%.

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