RaboResearch - Economic Research

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Global economic outlook: Recession in the US will be temporary, but slow growth in Germany is structural

Economic Quarterly Report

  • In the next two years, we expect the global economy to show the slowest rate of growth since the global financial crisis
  • This is mainly due to further weakness in world trade and industrial activity
  • The global economy is also reaching the limits of its production capacity
  • An easing of the trade tensions between the United States and China is possible, but in any case will be only temporary
  • In the course of 2020, we expect to see a recession in the US
  • But the US has a higher structural growth potential than the Netherlands or Germany
  • The aging population is a long-term factor weighing on the economic growth potential in the Netherlands, but its effect in Germany will be much more serious

Downward revision of global economic outlook

We are forecasting global GDP growth of 2.9 percent in both 2020 and 2021. This would be the slowest growth rate since the global financial crisis. The weakness in the global economy is widespread, although the degree of weakness varies from one economy to than another (see table 1 and figure 1). We expect the major central banks to continue their policy of reducing interest rates in the course of 2020 in this deteriorating economic environment. Despite the unpopularity of negative interest rates, we do not expect the eurozone to be an exception in this respect.

Table 1: Economic prospects for the major economies
Table 1: Economic prospects for the major economiesSource: Macrobond, IMF, Rabobank
Figure 1: Slowest global growth since the crisis looms
Figure 1: Slowest global growth since the crisis loomsSource: Macrobond, NiGEM, Rabobank

The main reason for the downward revision of our growth forecasts lies in the further weakening of world trade and industrial activity. On a 12-month basis, the growth in world trade volumes is close to negative (see figure 2). The last time this happened was nearly 10 years ago, in April 2010.

Figure 2: Growth of world trade at the lowest level in nearly 10 years
Figure 2: Growth of world trade at the lowest level in nearly 10 yearsSource: CPB, Macrobond

The picture of weaker world trade volumes and lower industrial activity is supported by the development of the various sentiment indicators, such as the global purchasing managers’ index (PMI). Despite a recent improvement, the PMI for industry is relatively weak (see figure 3). The weaker activity in most economies is clearly related to a turn in the economic cycle, since what is known as the output gap (the difference between current and potential GDP output) has closed or has nearly closed (see figure 4). In the US, current output is actually 2 percent higher than the potential level of production. So there is little or no room for accelerating growth by exploiting unused capacity in most economies.

Figure 3: Global PMI for industry just above 50
Figure 3: Global PMI for industry just above 50Source: Macrobond
Note: a PMI level below 50 indicates contraction of economic activity, whereas a level above 50 indicates expansion.
Figure 4: Little spare production capacity in the global economy
Figure 4: Little spare production capacity in the global economySource: IMF, Macrobond

The trade war is a continuing headache

Another factor in the worsened outlook is the trade war between the US and China. Although the economic damage from further escalation will be felt mainly in these countries, countries that are not directly involved in the conflict are also negatively affected.

The developments since the start of the trade war correspond to our view that the trade war is a lengthy conflict on various fronts (see for instance here and here). What is being called a ‘mini-deal’ or a ‘phase 1 deal’ is the best that can realistically be hoped for in the short term. Such a deal could in principle form the basis for an overarching trade agreement, providing solution to more structural issues the US has put on the negotiation table, such as intellectual property rights infringement, substantial government subsidies to Chinese state-owned enterprises (SOEs), currency manipulation and forced technology transfer of US companies that want to do business in China. As a sign of good will, in the phase 1 deal China would be prepared to buy more agricultural products from the US in exchange for postponement of higher US import tariffs that are still scheduled (see figure 5).

Figure 5: Escalation in the US-China trade war
Figure 5: Escalation in the US-China trade warSource: Rabobank, US Census

In addition to postponement of tariffs, China wants imposed tariffs to be reversed. In China’s view, negotiations can only lead to a successful outcome if they are conducted on an equal footing. The US will most likely not accept this, mainly in order to maintain pressure. Even if there is a phase 1 deal, we do not expect the parties to be able to reach a comprehensive deal. In such a wider agreement, the US wants to include an enforcement mechanism to ensure that China actually complies with the agreements made. But China is not expected to submit to pressure from a foreign power to change its economic model and national legislation. In summary therefore, the tensions between the two economic mastodons will in our view continue for a long time to come and will continue to cause uncertainty and weaker economic prospects throughout the world.

Are we on the verge of an epidemic in the largest economies?

We see the economic weakness continuing or increasing in many economies. We discuss the developments in the four largest economies below.

Germany: the sick man of Europe?

With GDP growth of 0.1 percent in the third quarter (q-o-q) of this year, Germany has barely escaped a recession and is currently not performing much better than Italy. Germany’s economic weakness is mainly due to problems in the car sector: production of motor vehicles in Germany has fallen by nearly 20 percent since the beginning of 2018 (see figure 6). Since the car sector accounts for 5 percent of German GDP and employs roughly one million people, the slump in demand in the industry is seriously affecting the macro economy as well.

The weakness in the German car industry is caused by difficulties to meet new European emissions standards and a slump in demand from China. The latter is also related to new Chinese emissions standards. As shown by Van Harn (2019), Germany has become much more dependent on exports in the 21st century, especially exports to China. China accounted for 7 percent of German exports in 2019 compared to only 2 percent in 2000. The purchasing managers’ index for German industry holds little hope of a positive development and ongoing weakness in manufacturing activity has become a serious possibility (see figure 7). In addition, the threat of higher US import tariffs on European cars still hangs over the car industry.

Figure 6: Nearly 20% fall in production in less than 2 years
Figure 6: Nearly 20% fall in production in less than 2 yearsSource: Macrobond, Rabobank
Figure 7: PMI for German industry points to further contraction
Figure 7: PMI for German industry points to further contractionSource: Macrobond

The Chinese economy is also not immune

Figure 8: Ongoing weakness in Chinese imports
Figure 8: Ongoing weakness in Chinese importsSource: Macrobond

The fact that the Chinese economy is not doing that well is shown by general weakness in imports, not only the decline in imports of German cars. Growth in imports has been virtually consistently negative since 2018. The negative growth of imports from the US is particularly notable, and is directly related to the trade tensions (see figure 8). This slower growth has several causes, is to some extent structural and will be less offset by large-scale government and monetary stimulus than in previous periods (see Every and Giesbergen, 2019). We therefore do not believe that China has the ability to provide a further substantial boost to global economic growth, as it did 2010 and 2016.

Japan still ailing due to VAT increase

The relatively strong economic growth in Japan in 2019 will not likely continue in 2020. This is mainly due to the long-expected increase in the rate of value-added tax (VAT) from 8 to 10 percent on 1 October 2019. The last time this sales tax was increased was in April 2014 (from 5 to 8 percent), and the Japanese economy slipped into recession. Although this time the government has taken policy measures to mitigate the harmful effects, we still expect the net effect of the increase to be negative.

United States has ‘tremendous stamina’

Figure 9: The US economy has peaked
Figure 9: The US economy has peakedSource: Macrobond, Rabobank, NBER, BLS
Note: the vacancy rate is measured as the number of outstanding vacancies as a percentage of the labor force.

Economic growth in the US shows little sign of weakening. But cracks are beginning to appear in the American economic bastion. The ISM purchasing managers’ index for industry is below 50, indicating further weakness. Vacancies are also declining rapidly, and in the past this has often been an indicator of a looming recession (see figure 9). We stick to our previous view that the US will face a mild recession in 2020.

Europe is in worse shape than the US

Contrary to the US, we do not expect a recession in the eurozone in the short term (see De Groot and Van Geffen, 2019). The structural growth potential of Germany and the Netherlands is however lower than that of the US. Structural economic growth is the degree to which an economy’s production capacity is increasing. This is determined by the growth of three factors: capital (such as machinery, infrastructure, computers and factories), labor (hours worked) and so-called total factor productivity (TFP) (see figure 10). TFP measures how productive capital and labor are used and is thus an indicator of technology (in the widest sense).

Figure 10: Structural growth is determined by three factors
Figure 10: Structural growth is determined by three factorsSource: Rabobank 

The US economy has higher structural growth than the Netherlands and Germany

Figure 11: Lower structural growth potential in Germany due to aging population
Figure 11: Lower structural growth potential in Germany due to aging populationSource: Rabobank, Macrobond

According to our calculations, the US will probably be able to grow faster than the Netherlands and Germany in the medium to long term (see table 2). This is due to the effects of an aging population and a lower expected capital contribution. The aging population will especially change the future growth outlook in Germany: this effect will increase to between -0.7 and -0.8 percentage points per year at the end of the next decade (see figure 11).[1] As a result, total annual German economic growth in this period will not be able to exceed 0.4 to 0.6 percent.

Table 2: Structural growth in the US, Germany and the Netherlands
Table 2: Structural growth in the US, Germany and the NetherlandsSource: Rabobank, Macrobond

Increasing productivity growth

Since the global financial crisis, growth in the US has risen mainly due to positive employment growth and productivity growth has been falling. Labor productivity growth has been a meagre 0.5 percent per year between 2011 and 2017, compared to 2.2 percent between 2000 and 2010. Many sectors have accordingly lost much of their huge productivity advantage compared to other countries (see figure 12). The US is still the global productivity leader in 16 of the 36 sectors that have examined. But government policy focusing on education, innovation and entrepreneurship is needed to safeguard higher structural growth of labor productivity going forward (see Erken, Marey and Van Es, 2019). This is also true for other countries such as Germany and the Netherlands, which can increase productivity growth by making such an investment.

Figure 12: US productivity is a world leader, but not productivity growth
Figure 12: US productivity is a world leader, but not productivity growthSource: Rabobank, EUKLEMS.
* US ICT services has a value on the vertical axis of 2000, meaning that this sector is 20 times more productive than the average in other countries.

Recent studies by RaboResearch show that an investment package of 150 billion euros in the German economy could lead to 5.5 percent cumulative additional GDP growth up to 2030. For the Dutch economy, an investment of 50 billion euros could increase economic growth by around one percentage point in this period. This would make the Dutch economy roughly 80 billion euros larger than in a scenario without such investment.

[1] This is a conservative estimate, in which we assume increasing labor participation, a constant number of hours worked per person employed (while this has declined sharply in this decade) and an ongoing low unemployment rate.

Hugo Erken
RaboResearch Netherlands, Economics and Sustainability Rabobank KEO
+31 6 2223 1650
Björn Giesbergen
RaboResearch Global Economics & Markets Rabobank KEO

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