After the global economy experienced strong growth in 2017 and early 2018, in the second half of last year, global economic activity slowed noticeably. This trend is expected to continue in 2019. The International Monetary Fund (IMF) are forecasting that the global economy will slow from growth of 3.6% in 2018, to 3.3% in 2019. In 2020, the IMF expects global growth to recover to 3.6%.
The US economy has started to show signs of the global economic trend, for example, the US ISM non-manufacturing index was expected to fall to 58.7 from 59.7, but actually dropped to 56.1. This is the weakest level since August 2017, however, it must be stressed that respondents remained optimistic about overall business conditions and the economy.
Given the prospect of a weaker economy, the US Federal Reserve will continue to support the economy through a more accommodative monetary policy. Markets are also more optimistic about a US-China trade deal.
Brexit and the UK economy
The big uncertainty facing the UK economy is Brexit and the future UK-EU relationship. The EU has granted the UK an extension to Article 50 until 31 October and, therefore, the UK will remain in the EU for the time being.
In the meantime, the UK Government is looking to negotiate with the Labour Party for an agreement that would provide support in Parliament, to enable it to bypass the opposition within its own party ranks. Given the radical left-wing nature of the Labour Party and their desire for a customs union, an agreement appears unlikely and there appears no end to the economic uncertainty. Overshadowing the UK government’s negotiations with the Labour Party is the forthcoming European elections, with the Conservative Party expected to perform poorly.
Despite the uncertainty surrounding Brexit, the UK economy is continuing to expand, rising 0.3% in the first three months to February but, “remained modest” according to the Office of National Statistics. The economy benefited from stockpiling by manufacturers’ before the prospect of Brexit.
In March, there was also a small reduction in activity in the all-important UK services sector, ending just over two and half years of sustained expansion. The downturn in the service sector output reflected a lack of new work to replace completed projects. Until there is a clear outlook regarding Brexit, the cloud of uncertainty will hang over the UK economy.
The Eurozone economy is also in the process of slowing down and this can be illustrated in the latest figures from Germany. In February, Germany’s industrial production decreased 0.4% compared to the same month, in the previous year. Manufacturing orders also declined in February. The German economy is Europe’s leading goods manufacturer and China’s economic slowdown has weakened demand for foreign goods.
President Trump’s tariffs on steel and aluminium are also an issue and it is possible that the US will impose tariffs on cars, which could do a lot of damage to Germany.
Germany is not the only Eurozone economy experiencing difficulties. Italy’s economy is continuing to struggle and remains in a period of recession.
In response to the difficulties within the Eurozone, the European Central Bank (ECB) has reversed its policy of quantitative tightening and will start to provide cheap finance to the banks. Interest rates are expected to remain unchanged until 2020. The ECB has downgraded economic growth for the Eurozone in 2019, from 1.9% to 1.1%. The ECB President, Mario Draghi, said the Eurozone risks are, “tilted towards the downside”.
Although China’s economy has experienced a slowdown, there are signs of an improvement and in the first quarter of 2019 its economy grew faster than expected at a rate of 6.4%. Analysts had expected a growth rate of 6.3%. This news has been greeted as a sign that government-easing measures may be taking effect.
The Indian election
The Indian economy remains the potential global star and in the 2018/19 fiscal year, is expected to grow at 7.3%, but key to the economic outlook will be the general election, which is currently being held in seven phases from 11 April to 19 May. The counting of votes and the announcement of the results will be on 23 May. The position of the existing Prime Minister, Narendra Modi, is expected to weaken, and he may need to form a coalition, however, most of the important reforms have already been undertaken.
The price of Brent oil has risen from recent lows at the start of the year to $74.23 per barrel. The rise has been caused by lower global supply due to the political turmoil in Venezuela and the US economic sanctions to Iran. The US has decided to end exemptions from sanctions for countries still buying oil from Iran. Waivers for China, India, Japan, South Korea and Turkey should expire in May, after which these countries could face US sanctions. The US policy towards Iran should support the oil price, however, until there is rising demand the oil price is unlikely to rise higher than the recent highs of $86 per barrel.
The global economy is slowing down, but at this stage of the economic cycle, the global economy is not expected to enter a recession, in the short term. However, the risks towards the global economy have increased, particularly in relation to trade tensions. Not only could there be an escalation in the US-China trade dispute, but there could be a trade dispute between the US and the European Union or perhaps with other nations. Trade disputes are in no-one’s interests but indicators suggest markets have factored in a resolution to these disputes.