adminThe global expansion has weakened.
Global growth for 2018 is estimated at 3,7 percent, as in the October 2018 World Economic Outlook (WEO) forecast, despite weaker performance in some economies, notably Europe and Asia.
The global economy is projected to grow at 3,5 percent in 2019 and 3,6 percent in 2020, 0,2 and 0,1 percentage point below last October’s projections.
The global growth forecast for 2019 and 2020 had already been revised downward in the last WEO, partly because of the negative effects of tariff increases enacted in the United States and China earlier that year.
The further downward revision since October in part reflects carry over from softer momentum in the second half of 2018—including in Germany following the introduction of new automobile fuel emission standards and in Italy where concerns about sovereign and financial risks have weighed on domestic demand—but also weakening financial market sentiment as well as a contraction in Turkey now projected to be deeper than anticipated.
Risks to global growth tilt to the downside.
An escalation of trade tensions beyond those already incorporated in the forecast remains a key source of risk to the outlook.
Financial conditions have already tightened since the fall.
A range of triggers beyond escalating trade tensions could spark a further deterioration in risk sentiment with adverse growth implications, especially given the high levels of public and private debt.
These potential triggers include a “no-deal” withdrawal of the United Kingdom from the European Union and a greater-than-envisaged slowdown in China.
The main shared policy priority is for countries to resolve cooperatively and quickly their trade disagreements and the resulting policy uncertainty, rather than raising harmful barriers further and destabilising an already slowing global economy. Across all economies, measures to boost potential output growth, enhance inclusiveness, and strengthen fiscal and financial buffers in an environment of high debt burdens and tighter financial conditions are imperatives.
Softening momentum, high uncertainty
The global economy continues to expand, but third-quarter growth has disappointed in some economies.
Idiosyncratic factors (new fuel emission standards in Germany, natural disasters in Japan) weighed on activity in large economies.
But these developments occurred against a backdrop of weakening financial market sentiment, trade policy uncertainty, and concerns about China’s outlook.
While the December 1 announcement that tariff hikes have been put on hold for 90 days in the US-China trade dispute is welcome, the possibility of tensions resurfacing in the spring casts a shadow over global economic prospects.
High-frequency data signal subdued momentum in the fourth quarter.
Outside the United States, industrial production has decelerated, particularly of capital goods.
Global trade growth has slowed to well below 2017 averages.
The true underlying impetus could be even weaker than the data indicate, as the headline numbers may have been lifted by import front-loading ahead of tariff hikes, as well as by an uptick in tech exports with the launch of new products.
Consistent with this interpretation, purchasing managers’ indices, notably in the category of new orders, point to less buoyant expectations of future activity.
Commodities and inflation
Crude oil prices have been volatile since August, reflecting supply influences, including US policy on Iranian oil exports and, more recently, fears of softening global demand.
As of early January, crude oil prices stood at around $55 a barrel, and markets expected prices to remain broadly at that level over the next 4–5 years.
Prices of metals and agricultural commodities have softened slightly since August, in part due to subdued demand from China.
Consumer price inflation has generally remained contained in recent months in advanced economies but has inched up in the United States, where above-trend growth continues. Among emerging market economies, inflationary pressures are easing with the drop in oil prices.
For some, this easing has been partially offset by the pass through of currency depreciations to domestic prices.
Financial conditions in emerging markets have tightened modestly since the fall, with notable differentiation based on country-specific factors.
Emerging market equity indices have sold off over this period, in a context of rising trade tensions and higher risk aversion.
Concerns about inflationary effects from earlier oil price increases and, in some cases, closing output gaps or pass through from currency depreciation have led central banks in many emerging market economies (Chile, Indonesia, Mexico, Philippines, Russia, South Africa, Thailand) to raise policy rates since the fall.
By contrast, central banks in China and India maintained policy rates on hold and acted to ease domestic funding conditions (by lowering reserve requirements for banks and providing liquidity to non-bank financial companies, respectively).
As of early January, with some notable exceptions (e.g., Mexico, Pakistan), emerging market governments generally face lower domestic-currency long-term yields than in August-September.
Foreign-currency sovereign credit spreads have edged up for most countries and risen substantially for some frontier markets. — World Economic Forum.
Bongani Ndlovu