JAKARTA (TheInsiderStories) – World real gross domestic product (GDP) growth is projected to hold steady at 3.3 percent this year before easing to 3.2 percent in 2019 and 3.0 percent in 2020, said Chief Economist Nariman Behravesh and Sara Johnson, the executive director, Global Economics of IHS Markit in their latest report. The steadiness in growth belies the possible impact of gathering storm clouds.

First, the increasingly belligerent trade stance of the United States could trigger a damaging trade war. Second, higher oil prices will erode growth—although at current levels the impact will be limited.

Third, rising political risks in Europe (especially in Italy and Spain) could hurt growth prospects. Finally, increasing financial pressure on key emerging markets (including Argentina, Brazil, South Africa, and Turkey) is darkening the outlook. None of these looks like a recession trigger—yet.

United States: A strong rebound after a weak first quarter

After slowing to a 2.2 percent annual rate in the first quarter, real GDP growth is projected to strengthen to 4.1 percent in the spring quarter. Incoming data suggest that growth could be even higher.

The IHS Markit forecast for calendar year 2018 has been raised 0.2 percentage point above last month’s prediction, to 3.0 percent. After this year, we expect real GDP growth to slow as interest rates rise and the boost from fiscal stimulus subsides. While equity prices are higher than in last month’s forecast, a stronger dollar and higher oil prices will hurt.

In the next two years, we predict real GDP growth of 2.8 percent and 1.8 percent, respectively. The unemployment rate will reach a five-decade low of 3.4 percent next year before beginning to turn up.

Europe: More slowing, while political risks are on the rise 

While transitory factors likely overstated the deterioration in activity data early in the year, there is clearly an underlying slowdown. The recent weakening of service-sector data is noteworthy, and rising oil prices are crimping household real incomes.

Foreign trade and industrial production data have also softened. Despite favorable financing conditions, an investment switch-off remains a downside risk because of rising uncertainty on the trade and political fronts. Potentially unstable governments in Italy and Spain—a coalition of populist left-wing and right-wing parties in Italy, and the support needed by the new government in Spain of separatist parties—promise stormy times ahead.

Consequently, Eurozone real GDP growth is projected to slow from 2.6 percent in 2017 to 2.1 percent this year and 1.7 percent in 2019. Likewise, UK growth has been revised down to only 1.1 percent this year and 1.2 percent in 2019.

China: On track for a gradual slowdown 

The latest economic data support the IHS Markit outlook for a moderate slowdown in China’s economic growth. The government will try to strike a fine balance between deleveraging and maintaining a relatively supportive environment for growth.

Broadly based weakness in domestic demand, particularly slowing retail sales and infrastructure investment growth in May, indicates a slowdown in the second quarter. Moreover, the ongoing monetary tightening may push up borrowing costs, restraining growth in the second half.

Finally, the United States’ protectionist trade policies increase the potential risks to China’s exports and manufacturing growth. Putting these trends together, China’s real GDP is projected to slow from 6.9 percent last year to 6.7 percent this year, 6.4 percent in 2019, and 6.1 percent in 2020.

Other large emerging markets: First Argentina and Turkey, then Brazil, and now South Africa—how big of a risk is contagion?

While the tailwinds for emerging markets remain strong (e.g., strong global growth and higher commodity prices), the stiff headwinds of rising U.S interest rates and a strengthening dollar are triggering an outflow of capital from some emerging markets and forcing their central banks to raise interest rates.

The hardest hit have been Argentina and Turkey, whose central banks were forced to substantially tighten recently. Brazil, Indonesia, and South Africa have also come under some pressure. The most vulnerable are emerging markets that are highly reliant on foreign capital for financing.

They have large amounts of debt coming due in the next year and do not have enough dollar reserves to cover these debts. The good news is many emerging markets—especially those in Asia and the Middle East—are not in the “danger zone,” as measured by standard indicators of vulnerability.

Bottom line: The outlook for global growth remains steady this year and next, thanks mostly to strong US growth. But, after that, fading stimulus in the world’s largest economy will lead to a global slowdown.

Email: linda.silaen@theinsiderstories.com

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The Insider Stories Founder Linda Silaen has a solid, proven history, established over more than a decade as a journalist with a leading internasional news organization, of being the first with the biggest economic news stories in Indonesia. Specializing in corporate news, Linda is also a veteran of some of the biggest macroeconomic and general news stories as Indonesia rapidly transforms into a major market economy. One of the founders of the original blog from which this company developed, Linda’s knowledge of investors’ information communications and data us developed from unrivaled networking skills that make her a well-known name among CEOs, bankers, government officials and private equity investors both in Indonesia and other countries.

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