Global Economic Outlook - May 2019

Editorial

The global economy finds itself in a fragile place. Clouds were already gathering when we reported about the stance of the global economy and its outlook, in November last. Uncertainty about economic policy had leapt up markedly, predominantly driven by assertive US foreign policies, especially related to trade. Moreover, monetary policy normalisation was ongoing, constraining financing conditions of firms around the globe. It was argued that there was no room for economic policy mistakes.

In the late autumn of last year, a string of bad economic data came pouring in, amid concerns that central banks would stick to their tightening paths. Financial market sentiment started to shift as well, with cumulative losses for the S&P 500 index reaching 10% in December only. One of the major risks we had identified in our previous outlook, a strong financial market correction further, seemed to materialise. It threatened to augment the slide of the global economy.

This was prevented with policy interference familiar since the great financial crisis of 2007. First and foremost, central banks, led by the Fed, made what is arguably a U-turn, by at least pausing the monetary tightening. Such tightening had been slow and steady so far. Then, feeling the heat of the ongoing trade war, China indicated it would use more of its monetary and fiscal policy space to keep the economy on its high growth track. Finally, the White House announced a truce in its unfolding trade war with China, preventing a large-scale escalation for the time being.

This had a definite impact. Financial markets veered up. The weakening of emerging economies currencies versus the US dollar largely halted. Financing constraints for firms weakened. Policy uncertainty eased but remained elevated. Whereas turmoil in the financial market was prevented, the global economy had unmistakably embarked on a markedly slower growth path. The clouds may no longer be threatening, but the sky is grey at best, particularly after the recent escalation in tariffs by the US on Chinese imports.

It is straightforward that peace on the US-China trade front and removal of uncertainty related to US-EU trade that is left hanging, will provide a boost to the global economy. Even if a deal is reached – the odds of which have not improved – it is unlikely to be sufficient. Moreover, monetary policymakers may have done what should have been done, but see the bottom of their toolkit with such low interest rates and the economy awash with money. For this reason, we look in this Economic Outlook in more detail at the second classical leg of economic policymaking that was amply used shortly after the crisis: fiscal policy.

As we argue in this Outlook, we should not get over-excited about what is currently happening and can be expected to happen on this front. This is partly due to legacies from the financial crisis, lingering in the form of high government debt. This put a constraint on what governments can do, even now that interest rates are so low. Moreover, one can question to what extent fiscal stimulus to push up demand, for example via lower taxes, should be used, especially in the US and the eurozone. Those economies are running at, or close to, capacity.

Therefore, the call for government action is predominantly for structural policies in these dominant economies, such as via investments in infrastructure and the energy transition. These policies are neutral or even beneficial for government debt levels, particularly if the private sector can be involved. Still, the White House has only recently attempted to break the deadlock on the election promise to build ‘roads, bridges and airports’. On the flipside, it has withdrawn from the Paris Agreement. In the eurozone, efforts have also been limited, although German fiscal policy is now mildly expansionary. Only China, which admittedly has more fiscal space, is taking up the challenge, with both infrastructure, at home and abroad with its Belt and Road Initiative, and the energy transition. But that is not sufficient to avoid the bleak global growth picture that we are currently facing. For governments, it is time to act.

John Lorié, Chief Economist Atradius

Key points

• Following a remarkable 3.2% expansion in 2018, world GDP growth is forecast to slide to 2.8% in 2019. In 2020, growth is expected to grow at the same rate.
• Advanced markets are generally shifting into a lower gear this year, led by the eurozone economy, which is expected to expand only 1.3% in 2019 and 1.5% in 2020. As the boost to growth from fiscal stimulus fades, US GDP growth is forecast to slow to 2.6% and further to 1.7% in 2020. Japan is muddling through with only 0.5% and 0.4% expected. The UK bucks the trend but growth is to remain at low rates: 1.5% and 1.8%.
• Economic growth in emerging markets is edging slightly lower to 4.3% this year but will hold up reasonably well beyond, rebounding to 4.7% in 2020. Emerging Asia and Eastern Europe are both slowing, from 5.6% to 5.5% in 2020 and from 2.7% to 2.5% respectively. Latin America and MENA are both expected to see worse performances in 2019 but gain some steam in 2020. Sub-Saharan Africa is expected to see economic growth accelerate both this year and next.
• Insolvencies are expected to begin increasing in 2019 as the global economic growth loses steam. After a modest 2% decline in 2018, corporate insolvencies are expected to increase 2%, marking the first annual increase since the global financial crisis.

Chapter 1 presents the global macroeconomic environment: what has happened in the past six months and what we expect to happen in the remainder of 2019 and 2020. Global economic growth is slowing modestly in 2019 as US fiscal stimulus fades. With the monetary toolkit limited, the prospects for fiscal policy to keep growth steady are high. Trade growth is decelerating more rapidly. Trade policy uncertainty and higher global headwinds have strained trade significantly. From 3.4% in 2018, we expect it to slow well below 3% in 2019 before recovering slightly in line with better global growth prospects in 2020.

There still remain significant downside risks to this forecast but the urgency of the most dire risks has subsided slightly. The most prominent risk is still that of trade war proliferation. The escalation of tariffs between the US and China in May shows that despite nearing a deal, we are not out of the woods yet. Furthermore, the risk of escalation with Europe is still on the table. A slowdown in Chinese GDP growth is the second highest risk while the fallout from misguided Fed policy has fallen into third as we gain more confidence in effective policymaking. Policy uncertainty and oil price volatility are also ongoing threats to our economic outlook.

The economic outlook for the eurozone, US, UK, and Japan is presented in chapter 2. The eurozone is facing dimmer growth prospects and continues to grapple with high policy uncertainty, related to Brexit, Italy’s fiscal problems, and increasingly trade risks. The US still enjoys solid fundamentals but is losing momentum as fiscal stimulus fades. Brexit uncertainty continues to weigh on business investment in the UK, but a better external environment and some government support underpins a still-stable outlook.

Chapter 3 outlines the outlook for emerging markets. Growth prospects in general for EMEs are reasonable though lower global trade and ongoing uncertainty are weighing on growth. While export growth is under pressure, growth continues to be supported by healthy domestic demand. Monetary and fiscal stimulus in China will keep growth rates high there, boosting the outlook for many other EMEs. High debt levels, political risk, and external vulnerabilities still plague many individual economies though.

The current economic slowdown is translating to higher insolvencies, analysed in chapter 4. After nine consecutive years of decreasing insolvencies, the number of business failures is expected to increase modestly by 2% in 2019. With monetary tightening and trade war escalation both on hold, risks to businesses have eased but vulnerabilities, especially in corporate debt, continue to grow.