JAKARTA (TheInsiderStories) – The past month has seen some relief in the unrelentingly downbeat news on the global economy. There seems to be an uneasy cessation of trade hostilities between China and the United States. The Trump administration has also signaled that it may delay the threatened tariffs on Europe’ automotive exports.
In addition, the risk of a no-deal Brexit seems to have diminished a little. Equally important, the stimulus provided by central banks is beginning to filter through to easier financial conditions. US equity markets have touched new records and bond yields have risen, signaling reduced fears of an imminent recession.
All these trends have been reflected in the stabilization of IHS Markit purchasing managers’ indexes (PMIs) in global manufacturing industries. Nevertheless, the risks facing the global economy remain elevated. In particular, the trade tensions have not been resolved and hostilities could flare up again, threatening growth anew. Thus, global real GDP growth is projected to slow from 3.2 percent in 2018 to 2.6 percent this year and 2.5 percent in 2020.
The United States: Special factors support growth in 2020
Third-quarter real GDP growth was reported at a 1.9 percent annual rate in the US Commerce Department’s advance estimate. Unanticipated strength in final sales to domestic purchasers and in net exports was partially offset by weaker-than-expected inventory accumulation.
Recent data on consumer spending and business fixed investment were on the soft side, though, and the United Auto Workers’ strike against General Motors lasted six weeks instead of the three weeks we assumed last month. Hence, IHS Markit has marked down our forecast for fourth-quarter growth to 1.5 percent.
Three special factors will nudge up GDP growth up in the first half of 2020: a post-strike rebound of production at GM, a recovery in Boeing’s production of 737 MAX aircraft, and spending for the decennial census. Real GDP is projected to increase 2.3 percent in 2019 and 2.1 percent in 2020.
Europe: Approaching bottom?
The preliminary estimate for eurozone real GDP showed growth of 0.2 percent quarter on quarter (QoQ) in the third quarter, matching second-quarter growth. Year-on-year (YoY) growth eased from 1.2 percent in the second quarter to 1.1 percent in the third, its lowest rate since the end of 2013.
Available country results show real GDP rising 0.4 percent QoQ in Spain, 0.3 percent in France, and 0.1 percent in Italy and Germany (narrowly avoiding a technical recession, in the latter case). Recent data on the IHS Markit PMIs and industrial production suggest the worst of the manufacturing slump may be over. Real GDP growth is projected to slow from 1.9 percent in 2018 to 1.2 percentthis year and 0.9 percent in 2020, before edging up to 1.0 percent in 2021.
The UK economy grew 0.3 percent QoQ in the third quarter. Worryingly, real GDP fell month on month in August and September, which alongside poor survey data suggest the economy will continue to struggle. Moreover, ongoing Brexit uncertainty will keep dragging down fixed investment. We expect UK real GDP growth to subside from 1.3 percent in 2019 to 0.5 percent in 2020.
Japan: The expected growth bounce ahead of the sales-tax hike was slight.
Japan’ real GDP expanded 0.1 percent QoQ (0.2 percent annualized) in the third quarter, less than the anticipated bounce before the sales-tax hike.Contraction is likely in the fourth quarter due to downside impacts from the consumption-tax increase in October 2019 and super-typhoon Hagibis, before a modest economic recovery early next year.
China: Growth is eroding and there is further to go—even after a trade agreement
China’ real GDP increased 6.0 percent YoT in the third quarter, down from 6.2 percent in the second quarter. This rate was the slowest pace since China began reporting quarterly GDP data in 1992. Recent data underscore the weakness in the economy.
In October, annual growth in industrial output, retail sales, and fixed-asset investment slowed. Exports and imports continued to decline, partly because of the ongoing trade conflict. Equally worrisome are the struggles in the automotive sector, where sales keep falling.
Mixed signals regarding the progress of the trade talks between China and the United States continue to cloud the outlook. Real GDP growth is projected to slow from 6.6 percent in 2018 to 6.2 percent this year and 5.7 percent in 2020.
Other large emerging markets: Where to from here?
Not long ago there was lofty talk of emerging markets “decoupling” from the developed world and even leading world growth. More recently, this optimism has soured. Arguably, the biggest-single issue facing these economies (and the developed markets as well) is the sharp drop in productivity growth due to the lack of structural reforms.
India’ spotty track record in recent years is a case in point. High debt levels (both domestic and foreign) are another impediment to growth. Here, China’s blowout debt is a serious threat to its growth and the worlds. Large budget and/or current-account deficits are problems for many emerging markets as well.
Finally, weak growth in the developed world and meager commodity prices make for a tough external environment. All this means emerging markets will not be able to break out of the doldrums in the next few years.
Bottom line: For the moment, the growth outlook seems to have stabilized, but a lot will depend on what policymakers in the United States, China, Europe, and Japan do next.
by Chief Economist of IHS Markit Nariman Behravesh and Sara Johnson, Executive Director of Global Economics