The Global Economy in 2019

In collaboration with Nedbank

The beginning of 2018 saw a global economy characterised by robust, synchronized growth which receded as the year progressed. Through 2019, global growth is projected to remain consistent at 3.7 percent. However, there remains a risk of trade conflicts intensifying which could lead to a contraction in world trade, thereby resulting in a more constrained growth environment. Moreover, tighter monetary conditions can be expected to dampen growth somewhat, initially in advanced economies, thereafter filtering through to emerging markets. While a flattening U.S. yield curve is indicative of possible recessions looming in the future, this is highly unlikely to occur in 2019.

Growth in the United States is projected to decline to 2.5 percent in 2019. Growth in 2018 (at 2.9 percent) was facilitated by significantly large pro-cyclical fiscal stimulus in the form of tax cuts and spending increases that were enacted, as well as financial conditions that remain loose despite expected monetary tightening. The corporate tax rate was decreased from 35 to 21 percent and the Federal budget deficit increased by 17 percent. The effects of this stimulus will remain evident in 2019, with its potency tapering off as the year advances.

The Chinese economy’s growth will continue to slow in 2019, with growth projected to decline from 6.6 percent in 2018 to 6.2 percent in 2019. Policymakers have implemented a series of monetary and fiscal policies that aim to aid growth and stabilize financial markets, such as significant cuts to taxes and fees as well as “prudent” monetary policy in order to create a balance between tightening and loosening – these policies are, however, expected to remain modest.

The trade war between the US and China has the potential to do significant damage to the global economy, should protectionist measures be taken by the two global giants. The two nations could experience economic welfare losses whilst third-party countries could be subject to collateral damage through reduced demand for final consumption products and the input materials for such. The events of this trade war will be scrutinized in 2019 as it could have a large impact on global productivity and output.

Growth in the Euro area is expected to decline slightly from 2.0 to 1.9 percent in 2019.  Strong aggregate demand ensues, supported by consumer expenditure as well as job creation and supportive monetary policy. Medium-term growth in the Euro area is estimated to be around 1.4 percent and is expected to be constricted by slow productivity growth. Country-specific growth rates vary.

Turmoil around Brexit will continue to have a negative effect on the United Kingdom’s growth outlook, at least in the short term. Growth in the United Kingdom was 1.4 percent in 2018 and a gradual increase to 1.5 percent in 2019 has been projected. Due to expected higher barriers to trade caused by Brexit, medium-term growth is expected to remain at 1.6 percent.

Japan’s economic growth is expected to decrease further from 1.1 to 0.9 percent in 2019. Two major lags on Japan’s growth are the slowdown in the Chinese economy, as well as the decline in trade due to trade tensions between China and the United States. Growth in 2019 is expected to be sustained by the expected rise in construction expenditure for the 2020 Olympics, with the impact of these effects tapering off as the year progresses.

Source: International Monetary Fund

Growth in the emerging market and developing economies is projected to stay constant at 4.7 percent in 2019. This growth outlook is predominantly attributed to inflation, the strengthening US dollar, high levels of debt, political events and domestic challenges. Commodity prices are also expected to be volatile in 2019. Political uncertainty in certain countries may have a negative impact on foreign capital inflows. Continued hikes in US interest rates are expected to lead to financial withdrawals in numerous countries, specifically those who already struggled with high debt and economic mismanagement. The Argentine peso and Turkish lira fell to crisis levels in 2018, with Argentina securing assistance from the IMF. These nations are expected to experience lackluster growth in 2019 as they battle to resuscitate their economies.

Source: International Monetary Fund

The world’s largest economies are currently in an era of tighter monetary policy after a decade of stimulus following the global financial crisis in 2008. These tighter financial conditions may put households, corporations and sovereigns under pressure, following years of debt accumulation through the historically lower interest rates of the past decade. Central banks in the UK, US, Japan and Euro area, who introduced quantitative easing to boost demand in their economies through the crisis years, are now moving towards quantitative tightening in order to normalize their monetary policy positions for a higher global growth environment.