In its latest world economic outlook, the International Monetary Fund (IMF) has downgraded its growth forecasts for the global economy to 3.5% in 2019, from 3.7%, which was forecast in October last year. The IMF has warned that escalating trade tensions could undermine global economic growth. The IMF has also warned of the risks from a no-deal Brexit.
Apart from the threat of a full-scale US-China trade war the other big economic question in the new year, is how often will the Federal Reserve (Fed) raise interest rates? With headline inflation (Consumer Price Index) falling to 1.9% in December, together with weakness in the oil price, which should put further downward pressure on inflation, the Fed may feel less pressure to raise interest rates. Any further increases in US interest rates should, therefore, come only if economic indicators signal continued strength in the economy, rather than due to runaway inflation.
The US economy is showing signs of strength, which can be seen in the latest employment data. Non-farm payrolls rose by 312,000 in December, significantly ahead of the 176,000 expected. At the same time, wages rose 3.2% from a year ago, the best since April 2009.
However, the US-China trade tensions are beginning to affect the economy and this can be seen in the latest data from the Institute for Supply Management, which revealed that their index for US manufacturing dropped by the largest amount since the 2008 recession, to a two-year low. This is on concerns that the trade war with China is denting economic growth. Just 11 of 18 industries reported growth.
The US economy has benefited from stimulus provided through tax cuts and fiscal policy, but these policies should wear off by 2020.
The IMF is forecasting that the UK economy will grow 1.5% both this year and in 2020, but it stressed that there is substantial uncertainty surrounding these figures.
The latest economic data has shown the weakness in the UK economy. Over the Christmas period, the retail sector showed a 3% decline in footfall compared with the previous year. In-store shopper numbers on Boxing Day fell by 3.1%, year-on-year. The housing market saw gross mortgage lending dip 2% from November 2017 to November 2018. The number of mortgages approved by the main high street banks in the month of November 2018 was 10.6% lower, over the same period last year. The weakness in the UK economy reflects the uncertainty surrounding the outcome of Brexit and the UK’s future relationship with the European Union.
On the positive, UK employment in the three months to November 2018 reached its highest level on record, whilst wages grew at 3.4%, well ahead of inflation. At the same time, the unemployment rate returned to the previous low of 4%.
Eurozone economic slowdown
The IMF has forecast slower growth for the Eurozone in 2019 at 1.6%, from 1.8% in 2018. One of the main risks to the Eurozone is the threat posed by Italy, where markets have been unsettled by the Italian government’s plans to expand public expenditure. There is also fundamental weakness in Italy’s banking system.
The threat of the US-China trade war has begun to impact the Eurozone, and this can be seen in the German economy, which grew by only 1.5% in 2018. This follows a 2.2% expansion in 2017. This is the weakest growth rate in 5 years, amid the global economic slowdown, trade tensions and the risk of the UK leaving the EU without a deal.
China’s economic growth
In 2018, China’s economy grew 6.6%, its slowest rate since 1990. In the three months to the end of December, the economy grew 6.4% from a year earlier, down from 6.5% in the previous quarter. The economic data produced no shocks, but underlines recent concerns about weakening economic growth and the potential knock-on effect on the global economy. The threat of an escalation of the trade war with the US has added to the gloomy outlook.
Whilst analysts have always advised caution with China’s official GDP numbers, the data is seen as a useful indicator of the country’s growth trajectory.
China’s manufacturing Purchasing Managers’ Index (PMI) dropped to 49.4 in December, the weakest since early 2016 and below the 50 level that denotes contraction. This not only reflects the threat from a prolonged trade war dampening sentiment, but also companies increasingly turning elsewhere for low-cost manufacturing. The IMF is forecasting China’s slowdown to continue, with its forecast for 2019 at 6.2%.
The IMF has said that a range of factors weighs on the outlook for some emerging and developing markets. Iran is impacted by sanctions, whilst Saudi Arabia should be hit by weaker oil production. The economies of Turkey and Argentina are also expected to contract.
2019 should see a slowdown in the global economy, but it should be another year of growth. However, the risks to this positive scenario have increased and there are signs of more negative economic data filtering through. Trade tensions appear to be the biggest worry, not just with the US and China, but with the UK and the EU. The IMF is quoted as saying. “The main shared policy priority is for countries to resolve co-operatively and quickly their trade disagreements and the resulting policy uncertainty, rather than raising harmful barriers further and destabilising an already slowing global economy”. The key to the success or failure of 2019 appears to be successful trade negotiations.