The bright outlook presented in May has proven true but clouds are quickly gathering on the horizon. In an increasingly uncertain environment, there is no room for policy mistakes.
Editorial
The bright sky envisioned in May has proven true in 2018, with even a mild GDP growth acceleration to 3.1% from 3.0% in 2017. It is a synchronised growth pattern across the regions as well. The eurozone continues on a robust growth track as the US accelerates on the back of fiscal stimulus. Emerging economies are continuing on steadily with a few notable exceptions. Next year global GDP growth is expected to moderate. This is not really a surprise: the business cycle peaks, US fiscal stimulus fades, the Fed continues monetary tightening and China’s economic growth continues to slow. It is increasingly appropriate that we included the ‘for now’ qualification to our ‘bright sky’ outlook. Clouds are quickly gathering on the horizon, emanating primarily from policy mistakes.
First and foremost, the US administration has not only barked, but has also started to bite in trade matters. In May we interpreted US trade policy measures as a first sign of a looming, but not per se imminent, trade war. Since then, tariffs announced have been implemented and China has retaliated. Most importantly, the US has announced tariffs on USD 200 billion of Chinese imports. It triggered the expected Chinese tit-for-tat response. The remaining USD 267 billion of imports from China is now being considered for tariff levies as well. A trade war between the US and China is now unfolding, with the underlying issue being global economic supremacy. The unfolding trade war will prove a net negative for all parties involved, and beyond.
Moreover, the US administration has decided to withdraw from the multilateral deal designed to contain Iranian nuclear ambitions. While such withdrawal is a strong signal of US unilateralism that threatens the global order, raising geopolitical uncertainty, its economic impact is in restoration and reinforcement of US economic sanctions on Iran. Iran oil exports may be hit to the tune of 1.3 million barrels per day. This figure comes in addition to a supply implosion in Venezuela, a country in disarray, and a disruption in Libyan production. As OPEC plus Russia is not willing, and the US not able, to ramp up supply sufficiently, we have observed a further climb in the oil price. It has already hit USD 85 per barrel Brent in early October, almost twice the level recorded in mid-2017. Such level, and the uncertainty it creates for further rises, is a setback for the global economy, especially for oil-importing emerging economies.
Furthermore, a number of emerging economies have walked into dire straits, reflected by sharp currency depreciations. Argentina was the first country to lose confidence over the summer leading to a record USD 57 billion IMF programme. Turkey followed after its economy overheated from a poorly-targeted fiscal stimulus. Central bank interest rate hikes have so far helped to avoid a turn to the IMF, but the situation remains fragile. These crises have had limited contagion to other countries, but they stand as warnings to other emerging markets. Poor domestic policymaking can quickly spell disaster as the global economic situation becomes more challenging.
Europe is also increasingly vulnerable to policy mistakes. Italy, the eurozone’s third largest country, has defied rules by coming up with a fiscal deficit four times as large as agreed. The underlying spending spree of the populist government is supported by a majority of the Italian electorate. With the Italian government debt at more than twice the level allowed and banks loaded with it, the prospect of a Greek-style crisis period in the eurozone is not unrealistic. On top of this, the threat of a no-deal Brexit has mounted as time is running out.
Over the summer a number of policy-driven clouds have gathered that threaten the global economy. Uncertainty has gone up markedly. While the global outlook is still reasonably positive, there is no room for further policy mistakes.
John Lorié, Chief Economist Atradius
Executive summary
Following a robust expansion in 2017, global economic momentum has been more or less maintained in 2018 but is set to increasingly lose steam through 2019. Risks to the outlook continue to mount, especially stemming from the unfolding US-China trade war. In a more challenging global environment, it is increasingly clear that the room for policy mistakes is limited. Poor policymaking has already translated to crises in several emerging economies and potential for policy missteps such as trade policy in the US and populist policies in Italy could have global ramifications.
- Global GDP growth is forecast to slightly accelerate to 3.1% in 2018 from 3.0% in 2017. In 2019, the world economy is forecast to expand 2.8%.
- The US economy, with strong fundamentals further fuelled by fiscal stimulus, is expected to expand 2.9% this year before easing to 2.5% growth next year. The eurozone economy continues to cool off as growth decelerates from 2.0% in 2018 to 1.7% in 2019. The UK’s economy is slowing to 1.3% this year but is expected to remain resilient with 1.5% in 2019, should Brexit proceed in an orderly manner.
- GDP growth across emerging market economies (EMEs) is holding up in 2018 and 2019 at 4.5% and 4.4% respectively. Emerging Asia will remain the growth leader but is losing pace to 5.6% growth in 2019 from 6.0% this year. Eastern Europe and MENA are also losing momentum while Sub-Saharan Africa and Latin America are forecast to see moderate accelerations in 2019.
- As global growth keeps pace this year, another 4% decline in insolvencies in advanced economies is forecast. We forecast only a 1% decline in 2019 as growth momentum eases.
The global macroeconomic environment is presented in Chapter 1 of the Economic Outlook. The positive global growth outlook is increasingly clouded by downside risks, especially the unfolding trade war between the US and China. Rising uncertainty could strain global investment, a major determinant of global trade. As such, global trade to ease from a remarkable 4.6% expansion in 2017. We forecast 3.7% growth in 2018 and further slowing to 3.0% in 2019.
Our global outlook is cautious though as downside risks continue to mount. The most prominent risk is that of a global proliferation of the US-China trade war. The second highest risk remains misguided Fed policy which would put a brake on US economic activity and cause financial turbulence largely at the expense of EMEs. The remaining risks are (3) a financial market correction, (4) the rapid continuation of the upward trend in the oil price, (5) a hard landing of the Chinese economy, and (6) geopolitical risk.
Prospects and risks for advanced economies are assessed in Chapter 2. Another slight upward revision to the US outlook confirms the strength of the domestic economy and effectiveness of fiscal stimulus. However the economy is expected to cool in 2019 and policy missteps, whether monetary or in trade policy, could cause that deceleration to come on much more rapidly. Policy uncertainty in the eurozone is also increasingly clouding its steady outlook, stemming from the new populist government in Italy and Brexit negotiations with the UK. The UK’s outlook is sluggish but resilient but could be thrown off track if a deal is not reached before its departure from the EU. Advanced Asia is losing momentum as growth in China and global trade eases.
Chapter 3 outlines the outlook for emerging markets. In general, prospects for EMEs remain bright over the forecast period, but idiosyncratic weaknesses and ongoing vulnerability to external developments continue to cloud individual countries’ outlooks. Capital outflows and currency depreciations experienced this year are highlighted as evidence of this. As global trade conditions deteriorate, these markets are more dependent on strong domestic economies and stable policymaking. In line with the heterogeneity of countries, the consequences of the unfolding trade war and domestic policy differ greatly.
The momentary bright sky that has characterised the global economy translates to a relatively benign insolvency environment, explored in Chapter 4. Business risks continue to grow though as trade and monetary policy move in a less accommodative direction for firms. As such global insolvencies are forecast to stabilise in 2019.
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