Global economic outlook: The economy has peaked

Growth of global GDP will decline somewhat in the coming years (Figure 1). The slowdown will affect both developed and emerging market economies. On balance, we expect to see growth of 3.7 and 3.6 per cent this year and next year respectively. Growth will then decline further in 2020 to 3.5 per cent (Table 1).

The risks underlying this forecast have increased rather than declined. The trade war between the United States (US) and China in particular could lead to a harder than expected decline in global GDP growth. Apart from this, there has been a gradual decline in the growth of world trade since the beginning of this year. Underlying this, the largest decline in contribution to world trade growth has been in the Eurozone (Figure 2). This is mainly due to lower exports to the United Kingdom (UK) and emerging Asia. A further escalation of the trade war will significantly add to the factors negatively affecting the development of the volume of global trade.

The slower growth in most of the developed economies is due to the fact that they are at the end of their economic cycle. In other words, economic growth has reached the current capacity limits. In real economic terms, this is usually associated with a tight labour market and higher pressure on real wages and inflation. But despite the fact that growth has led to sharp declines in unemployment in most developed countries (Figure 3), large wage increases have mostly failed to materialise. A recent study by the International Labour Organisation (ILO) shows that the global annual increase in real wages in 2017 was around 1.8 per cent. In the G20 countries, the increase was only 0.4 per cent. This has put downward pressure on the growth contribution from household consumption in these economies.

There is a serious challenge to meet here, since many of these countries have only limited alternatives for boosting their economies if the slowing of growth turns out to be more severe than expected. The developed economies are engaged in reversing their accommodative monetary policies, or have announced that they will do so. Another option could be accommodation through fiscal government stimulus, but not all countries have sufficient room in their budgets to take this route. This is very visible in the Eurozone, where some Member States have little or no room to boost their economies through budgetary policy. So there is little support to be expected from this side in most of the advanced economies, should it be necessary, especially compared to the period after the former crisis.

Growth is also expected to slow in emerging market economies. The reversal of accommodative monetary policy in many of the developed economies is an important item of attention for this group. There are certainly some economies that are more robust than others, as shown in a study we published recently on the vulnerability of emerging markets. Emerging countries with high levels of debt denominated in foreign currency combined with so called ‘twin deficits'[1] are especially exposed to capital outflows. This has already been apparent this year in the foreign exchange markets, although some of the currencies concerned have regained some of their strength since the middle of 2018 (Figure 4). But most investors remain cautious for now on emerging markets, looking at the interest differentials with the US and the many uncertainties that are currently causing concern in the financial markets.

[1] The ‘twin deficits’ refer to a balance of payments deficit on the current account accompanied by a government budget deficit, meaning that countries in this situation have to raise foreign capital to fund their spending needs.

The risks in this expected slowdown continue to increase. This applies especially to the further escalating trade war between the United States and China. After the G20 meeting in November, it was decided to introduce a pause for 90 days to see whether the two countries could avoid further escalation through negotiations. We do not expect this to lead to a breakthrough, and a further escalation between the two parties next year looks likely. In a recently published scenario study, we explain the potential negative effects of this along various lines. If the bilateral trade war does escalate further, the cumulative loss of GDP in the world economy could amount to 2 percentage points in 2030. Should the US decide to point its protectionist measures against other countries as well as China in the coming years, this will only lead to higher negative effects on the global economy.

Besides the trade war, the situation in relation to Brexit is another continuing risk. British Prime Minister May is having great difficulty in convincing parliament to approve the Brexit deal she has negotiated with the EU. Although we still think that an orderly Brexit is possible and also the most likely outcome, we now see an almost equal possibility that the UK will leave the EU without a deal. In Brussels meanwhile, the Italian government is also causing concerns by looking for a confrontation over budgetary rules.

Although growth in developed economies is on average declining in comparison to past years, there are certainly clear differences between individual countries.

United States: The rev counter is falling

The US economy has boomed over the past year, but is beginning to show the first signs of metal fatigue. The most recent jobs data showed that the number of jobs increased by 155,000, against an expected figure of 200,000. The US central bank has also become somewhat more cautious regarding the number of rate hikes in 2019. Looking ahead, we expect the budgetary stimulus from the tax measures by the Trump administration to start to wear off, meaning that growth in business investment will also decline sharply in the coming quarters. In addition, companies have brought forward international orders due to fears of higher prices as a result of the protectionist US policy, so the contribution of net exports will probably fall sharply in the coming quarters. We expect growth to reach 2.4 per cent in 2019, since the growth of private consumption is still relatively strong due to the positive condition of the labour market and rising wages. Towards the end of 2020 however, we expect the US economy to slow sharply, with average growth in that year reaching 1.8 per cent.

Eurozone: A slowdown is not yet a crisis

The Eurozone economy’s performance this year has been significantly less than in the exuberant year of 2017. The generally disappointing figures for the third quarter indeed raise the question of whether this presages an economic slump. We do not believe this is the case. But the figures emphasise the fact that economic growth in the Eurozone is past its peak.

United Kingdom: What more can we say?

There is no avoiding the issue. Brexit has the British public completely in its grasp. British politicians are meanwhile paying little attention to the negative effects that Brexit is already having on the economy: the uncertainty around the future trade relationship between the UK and the EU is making businesses reluctant to invest in the UK. This is evident from the GDP figure, which remains stuck at a meagre 1.3 per cent this year and is not expected to improve next year.

Japan: The economy muddles along

The Japanese economy has not lived up to expectations in 2018, contracting in both the first and the third quarter of 2018. In addition to the modest development of core inflation that is increasingly a cause for concern for the Bank of Japan, the planned increase in VAT in October 2019 is an important thing to watch. During a previous VAT increase 2014, the economy went into recession.

So growth is slowing in a large part of the advanced world. The same applies to most of the emerging economies.

China: slower growth to continue

GDP growth in China declined to 6.5 per cent annualised in the third quarter of 2018, the slowest rate since the beginning of 2009. We expect this growth slowdown to continue, even though concerns have recently led policymakers to restart efforts to boost the domestic economy. The direct impact of the trade war has not yet shown up in Chinese trade figures, but an escalation of tensions is a sword of Damocles hanging over the economy.

India: Political opportunism is damaging investor confidence

The political desire to boost the economy in the run-up to elections is damaging investor confidence and the credibility of Indian policymakers. In recent months, the government has pressured the central bank (RBI) to be less strict with respect to cleaning up the balance sheets of certain state banks and also wants the RBI to replenish government finances. These interventions even led to the recent resignation of the governor of the RBI. Overall, the economic prospects for India in the coming years have deteriorated to some extent.

Brazil: New president, old issues

This year, the Brazilian economy has suffered from public dissatisfaction and political uncertainty in the run-up to the elections. More positive data in the third quarter point to a gradual recovery. Looking ahead, much will depend on the readiness of newly elected President Bolsonaro to work with centrist parties to implement the economic reforms that are urgently needed, in particular in the area of pensions.

All in all, we expect economic growth to slow in both advanced and emerging market economies in the coming years. This is due to several factors: The emerging markets will suffer from reduced risk appetite among investors and specific vulnerabilities that vary from country to country. In the US, the Eurozone, the UK and Japan, it would seem that the capacity limits of output growth have been reached. At the same time, the growth of world trade volume is declining, which will limit any boost from foreign demand. On balance, the risks in this scenario have not declined. A further escalation of the trade war or a chaotic Brexit could mean that the growth slowdown could be more serious than we currently expect. Moreover, there is only limited scope in most countries for any new accommodative monetary or fiscal policy.