The US, European and Asian central banks are on the alert as the economy weakens
It is that time of year when, if you’ve behaved very well and eaten all your Brussels sprouts, elves deliver 2019 macro and markets outlooks to your inbox. Last year, most heralded 2018 as the year of synchronised global growth. The theme did not really pan out, as US expansion far outstripped that of most developed economies thanks to fiscal stimulus.
But what if economists were not wrong, just premature? My view is that 2019 will see global synchronisation, but not in a good way. This year economists anticipated a global acceleration in growth. I expect a synchronised slowdown in the year to come.
The US has seen growth decelerate from the heady days of early 2018. It hit 4.2 per cent in the second quarter and 3.5 per cent in the third. But the Atlanta Federal Reserve’s “nowcast” expects 3 per cent growth for the fourth quarter, a slowing brought on by uncertainty around trade policy and, soon, dwindling fiscal stimulus.
Most economists accept the fiscal tailwind will be a feeble breeze by the second half of 2019. The US could make some headway in its trade dispute with China, but the key issues — intellectual property rights, forced technology transfers and subsidies to the technology sector — have not been addressed.
The eurozone, meanwhile, hit peak growth for the current business cycle in the second half of 2017. Growth has slowed since then, falling from 2.5 per cent in the third quarter of 2017 to 1.7 per cent in the same quarter this year. This was recently driven by a sharp slowdown in Germany, caused in part by problems in the automotive industry, and a surprise contraction in Italian gross domestic product.
Germany should rebound in 2019, but Italy’s government continues to flirt with a budget that breaches EU fiscal rules, and the gilets jaunes protests in France have hurt GDP there. The European Central Bank has just ended an asset purchase programme that has compressed borrowing costs and Brexit could disrupt European trade and supply chains, damping growth as well.
Growth in China started to slow in late 2017 and this is likely to continue through next year, despite a number of fiscal and monetary stimulus measures. The greatest immediate threat to the Chinese economy is an escalation of the trade dispute, which could lead to 25 per cent tariffs imposed on virtually all goods China exports to the US. This would have a material impact on the Chinese economy, not to mention global trade.
A worsening situation could prompt the People’s Bank of China to allow the renminbi to depreciate to offset the impact of tariffs. This would push the US dollar up, putting a significant squeeze on emerging market economies that borrow and invoice imports in dollars.
However, a synchronised global slowdown is not entirely unexpected. First, most major economies will endure growth slowing from well above potential. In the absence of fiscal or monetary stimulus, a boost in productivity growth or an increase in the labour supply, we should have always expected these economies to fall back.
Second, most major central banks seem to be on the alert for a global slowdown. Last week, Mario Draghi, president of the ECB, said that the balance of risks in Europe was “moving to the downside”. The same day, PBoC governor Yi Gang promised China’s monetary policy will remain “supportive”. The Bank of Japan continues to pump money into the Japanese economy. And most importantly, Jay Powell, the chairman of the US Federal Reserve, signalled to the markets last month that the central bank was adopting a more data-dependent and therefore likely dovish rate path for 2019.
As the global economy weakens, central banks are signalling that they are aware of the risks for next year. They do not want to go back to being the only game in town, responsible for propping up growth. But given my grumpy forecast, it is nice to know someone is working to keep recessionary lumps of coal out of investors’ stockings as we head into 2019.