Global economic outlook: same picture, but far from boring
Economic Quarterly Report
- The economic picture for the largest economies is positive: the US economy has exceeded our expectations in the first six months of this year while growth in the Eurozone is continuing steadily; we expect decent figures for growth next year too
- Emerging markets are in a more difficult position: the currencies of various countries are under pressure from higher US interest rates and global tensions in trade, coupled in some cases with the specific vulnerabilities of the countries in question
- There is a substantial risk of a negative correction to the favourable economic momentum. The Trump administration’s unpredictable policy could turn the picture around, especially if trade tensions with China and other trade partners escalate
The global economy will grow by just under 4 per cent in 2018 and 2019 (table 1). Current growth figures for the developed economies are generally higher than the potential growth. We therefore do not think the growth in these countries can rise much further; we are more likely to see growth dropping off. However, there is little sign so far of the confidence indicators reflecting this economic logic (figure 2). We therefore do not expect moderation in growth figures until after next year.
Emerging economies are experiencing diverse developments. Whereas the Chinese and Indian economies are careering along, Argentina and Turkey are dealing with currency crises and associated sky-high inflation. Other emerging markets are facing a significant deterioration in investors’ sentiment. This has been the case for a while in response to the diminishing gap in interest rates with respect to the United States. What is more, investors are taking a more critical look at the specific vulnerabilities of individual countries. Trade tensions are also reducing confidence.
In this Quarterly Report, we first delve into the main sources of uncertainty in the economic picture, after which we examine a number of individual countries.
Uncertain outcomes the only certainty in trade conflicts
Since the first day of his presidency, President Trump has had trade relations with other countries in his sights. He had already forced various countries back to the negotiating table with threats and new import tariffs. This summer, Trump managed to get things moving in the discussions with Mexico and Canada about the North American Free Trade Agreement. Trump drove Canada into a corner with a bilateral outline agreement with Mexico. Trump also put pressure on relations with the European Union last spring. In July, the President of the European Commission Jean-Claude Juncker was able to provisionally prevent high US import tariffs on European cars. The question is for how long though. The answer should come from a US-European dialogue that has now started.
Even so, Trump’s main target looks to be China for now. He will act strategically in view of the American mid-term elections in November. After the recent introduction of import tariffs on imports worth USD 50 billion from China, the US administration is now considering increasing import tariffs on Chinese goods totalling another USD 200 billion. The US economy has suffered little from these skirmishes so far, despite the countermeasures taken and announced by China and other affected countries. The direct damage to the economy has been limited as the trade measures have (so far?) focused on specific sectors and countries. The indirect damage, however, is difficult to quantify. And, as history teaches us, a broad trade war has no winners.
Brexit troubles a constant factor
Meanwhile, the European Union has its own trade issues. Following the UK’s decision to leave the EU on 29 March 2019, the two parties are negotiating the terms for the ‘divorce’ and future trade relations. These talks are not exactly going smoothly. It is true that the EU and the UK have agreed in principle on a transition period up to the end of 2020, but the British prime minister Theresa May has been unable to get her own government and the Conservative party to agree on what should happen next. What is more, she also has to get the remaining 27 EU member states to agree. That will not be possible before the EU summit in October, which was long seen as the deadline. Even so, we still think it likely that the UK and the EU will be able to avoid a chaotic Brexit with a last-minute deal. A shared vision on a far-reaching free trade agreement to be concluded later will probably be part of this deal. But internal squabbling among Britain’s politicians could lead to completely different scenarios, such as a hard Brexit with no transition period, which would result immediately in severe disruptions to trade flows. The likelihood of this is uncomfortably high. Postponement of Brexit can also not be ruled out. That in turn would extend the current period of uncertainty, with more negative consequences for confidence in the British economy.
United States: great again
America’s economy produced surprisingly positive figures for the second quarter in a row. Growth of 2.9 per cent in the second quarter compared with a year previously shows that the economy is still running at full speed. That will barely change in the rest of this year and next year: consumers are experiencing rising wages in combination with very low unemployment, firms are benefitting from Trump’s tax cuts and the government itself is enthusiastically boosting the economy with stimulatory measures, with a large budget deficit as a result. The biggest source of uncertainty is of course the protectionist course being taken by the Trump administration, as described above. Furthermore, market players are also keeping an eye on America’s yield curve, which suggests that the end of the economic cycle could be in sight.
Eurozone: everything under control(?)
Economic growth in the Eurozone seems to have peaked but remains higher than what we would expect in the long term. Among other things, this means unemployment is falling, which should at some point lead to higher wages and therefore an increase in consumption. It will eventually also push up inflation. The ECB is making use of the room this creates to terminate its net purchases in its bond-buying programme as of the end of this year. However, it has already announced that a rise in interest rates will have to wait until after the summer of 2019. Alongside the question of what will happen with Brexit and the trade dialogue with the US, an important issue for the Eurozone is how the Italian government will behave. An escalating conflict with European institutions and other member states about compliance with budget rules would undermine the current positive sentiment in the Eurozone.
United Kingdom: Brexit is already taking a toll
Firms, households and the government are preparing for Brexit. This is leading among other things to reluctance to invest and relatively cautious growth in consumption. This is also partly due to the high inflation following depreciation of the pound sterling. On the other hand, the trade deficit is falling and unemployment, which was already low, is continuing to decline further. All in all, economic growth in the UK will remain weak up to the date on which it leaves the EU.
Japan: stable and low
The Japanese economy’s growth potential is very low but the immediate future looks brighter. The major engine driving this is the fiscal and monetary stimulus from the Abenomics programme, which is further reinforced by the increasing demand for Japanese products abroad. However, the limits of this growth have been reached due to a very tight labour market and the negative effect of the country’s demographics.
Emerging economies: shared image does not do justice to the differences
The Chinese economy appears to be barely affected at the macroeconomic level by the trade altercations with the US. The economy grew by 6.7 per cent in the second quarter compared with the same quarter a year earlier. Once again, this exceeds the official target of 6.5 per cent for the growth rate. This may change of course if the US introduces a wider package of tariff measures. In that case, the question is how the Chinese government would respond. Would they let economic growth drop a little or would the government instead step up its efforts to stimulate domestic expenditure?
The Indian economy is currently performing extremely well. It combines a high rate of growth with relatively low inflation, and we do not expect this to change in the next while. India has however suffered recently from the turbulent situation in Turkey, with the currency weakening as a result. This was on top of the effects of the tighter monetary policy in the US. Even so, we do not expect this to harm the thriving real economy much.
The Brazilian economy stuttered in the first six months of this year due in part to a major strike by truckers and a number of corruption scandals involving politicians. There is also uncertainty about who will form the government after the elections in October this year. We are assuming the new government will be reform-minded and market-focused, and we are therefore expecting a good 2019 from an economic perspective. This recovery will be further reinforced by rising exports — helped along by the recent fall in the value of the Brazilian real — and levels of inflation that are still relatively low.