JAKARTA (TheInsiderStories) – Growth is slowing in most of the world’s key economies. At best, these economies are reverting to trend. More worrisome is the rising risk that growth will drift below trend.

Perhaps an even bigger problem is that potential growth everywhere has been drifting down because of diminishing labor-force growth rates and sluggish gains in productivity. Based on this facts, IHS Markit projects global growth to slow from 3.2 percent in 2018 to 2.9 percent in 2019 and 2.8 percent in 2020.

As growth slows, vulnerability to shocks will increase, leading to rising recession risks in the next few years. In the near term, trade tensions are, arguably, the single biggest threat to world economic growth. Despite these growing near-term threats, we believe that the probability of a recession in 2019 is still relatively low largely thanks to continued policy accommodation.

United States: Reduced financial headwinds keep growth on track

The US federal government has reopened, and data reports that had been delayed are beginning to trickle in—although the Commerce Department has yet to report fourth-quarter real GDP growth, which we estimate at 2.4 percent. Financial conditions have improved in early 2019: equity values have rebounded sharply from late-December lows, the dollar has retreated from a mid-December peak, long-term Treasury yields remain near 12-month lows, and risk spreads are narrowing.

Improved financials are helping to support continued growth in the private sector. On the other hand, a markdown to our projection of growth of federal spending based on a new, official accounting of outlays from the 2018 budget acts implies less support from the public sector.

These effects roughly offset, leaving our growth forecast little changed; after a 2.9 percent advance in 2018, we expect real GDP to increase 2.4 percent in 2019 and 2.0 percent in 2020.

Europe: A new round of euro-gloom.

The preliminary flash estimate for the eurozone showed real GDP growth holding at 0.2 percent quarter on quarter (q/q) in the fourth quarter of 2018. Italy fell back into recession (its fifth since adopting the euro 20 years ago), and Germany came close (average growth in the second half was a small negative).

However, France fared a little better and Spain showed continued vigor with 0.7 percent q/q growth. While the risk of a recession has clearly risen, the triggers for a deep output contraction are not evident (adverse supply shocks, financial stress, and policy tightening). Still, manufacturing is in recession and event risk and persistent uncertainty could bring modest quarterly GDP contractions.

IHS Markit projects real GDP growth to slow from 1.8 percent in 2018 to 1.2 percent in 2019 and 1.0 percent in 2020. Subdued by Brexit-related concerns, United Kingdom real GDP growth is projected to slow from 1.3 percent in 2018 to just 0.9 percent in 2019 before edging upward to 1.1 percent in 2020.

China: Slowest growth since 1990—but no collapse in sight.

China’ real GDP growth eased to 6.4 percent year on year in the fourth quarter—the slowest pace since the second quarter of 2009. On an annual average basis, growth in 2018 was 6.6 percent—the slowest since 1990.

While continued pressure on the Chinese economy will lead to additional stimulus, China’ large debt overhang will keep the government cautious. On the monetary policy front, the Chinese central bank cut the reserve requirement ratio four times in 2018 by a total of 250 basis points.

The government also plans to use tax cuts and additional spending to support the economy. Since the current slowdown in domestic demand is largely self-induced from the deleveraging policy and the drive to cut industrial capacity, Chinese authorities should be able to stabilize the economy as they have done successfully in the past.

As a result, the IHS Markit projection for real GDP growth is unchanged from last month and calls for a deceleration from 6.6 percent in 2018 to 6.3 percent in 2019 and 6.0 percent in 2020.

Other large emerging markets: Vulnerable to China’ slowdown.

Since September, financial markets have been kind to emerging markets. Currency, bond, and equity indexes have all seen partial reversals of their earlier setbacks. Yet, with global growth slowing, few emerging markets have the positive internal dynamics or the political stability to fight the outgoing tide.

These economies are vulnerable to headwinds and structural trends facing China’s economy. First, the trade war between China and the United States along with the Chinese government’s deleveraging campaign, are both cutting Chinese trade volumes and ensnaring other countries (especially in Asia) in the trade conflict.

Second, the big structural shift in China from investment to consumer spending means slower growth in demand for raw materials from the emerging world. Finally, the modest stimulus put in place by China’s government has not been enough to offset these trends.

IHS rated, with growth slowing to trend—and possibly weaker—even a mild shock could push the global economy over the edge.

by Linda Silaen, Email: theinsiderstories@gmail.com