RaboResearch - Economic Research

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Global economic outlook: Is the glass half full or half empty?

Economic Quarterly Report

  • We expect global economic growth to weaken further in the coming years
  • The first signs of economic weakness are already visible in global trade volume and sentiment indicators
  • We have penciled in a recession in the US in the course of 2020, based on indications on financial markets and weakness in the American housing market
  • The slowing of growth is happening in both the developed and the emerging economies, and the downside risks are mostly related to the development of Brexit and the trade war

Global economic growth weakens further

We expect the growth of global gross domestic product (GDP) to decline further in the coming years (Figure 1). In 2018, growth declined slightly against expectations compared to the preceding years. We are forecasting global growth of 3.5 percent in 2019, with a further decline to 3.4 percent in 2020 (Table 1). Although this is consistent with a scenario of a gradual slowdown, we believe that a recession in the developed economies will become more likely in the course of 2020 and thereafter. The risks in this global economic scenario appear to have declined in 2019 compared to last year, but they are still very much present. Important decisions relating to Brexit and the trade war between the United States (US) and China have mostly only been postponed.

Table 1: Economic prospects for the key economies
Table 1: Economic prospects for the key economiesSource: Rabobank, Macrobond, IMF
Figure 1: Global growth slows further
Figure 1: Global growth slows furtherSource: Macrobond, NiGEM, Rabobank

Less contribution from trade

The fact that global economic growth is still adequate in most economies is mainly due to relatively strong domestic demand. The development of global trade is still under pressure (Figure 2). The volume of global trade actually declined by 0.9 percent in the fourth quarter of 2018[1] compared to the previous quarter, when quarterly growth was still positive (1.3 percent). While there are clear signs of weakness in the developed economies, especially the Eurozone, the contraction of trade is mainly caused by slowing trade in emerging Asia, of which China is the most important contributor.

Figure 2: Global trade growth declines further at the end of 2018
Figure 2: Global trade growth declines further at the end of 2018Source: CPB, Rabobank
Figure 3: Leading indicators on a downward-sloping trajectory
Figure 3: Leading indicators on a downward-sloping trajectorySource: IHS Markit

Apart from the volume of global trade, leading indicators based on survey data have become increasingly less positive since 2018 (Figure 3), especially those relating to industry. The combined global purchasing managers’ index (PMI) still clearly indicates growth in the coming period, but there is a clearly visible downward trend towards the neutral level of 50. If the level of the PMI falls below 50, this usually indicates a period of contraction in the subsequent period.

Broad-based slowdown

The slowing of growth in the global economy is not concentrated in any specific region. The average growth rate will decline in both the developed and the emerging economies in the coming years.

A US recession in 2020

For the world’s largest economy, the United States, we are forecasting two consecutive quarters of contraction in 2020, in other words an economic recession (Figure 4). The developments in financial markets are a good indicator of the probability of a US recession, and according to our calculations this probability lies somewhere between 60 and 70 percent. We are also seeing the first cracks in the well-oiled US machine, which appear to be linked to the interest rate hikes by the US central bank (Federal Reserve, Fed) in recent years. The percentage of defaults on car loans has risen to 4.5, which is almost as high as it was at the beginning of the financial crisis 10 years ago. Private housing investment has also contracted each quarter since the beginning of 2018, which indicates that the financial position of households has been deteriorating. Contracting investment in the housing market has often been an indicator of recessions a couple of quarters later.

Figure 4: There is currently a 60% to 70% chance of a US recession in 2020
Figure 4: There is currently a 60% to 70% chance of a US recession in 2020Source: Macrobond, Rabobank

Accordingly, we are currently discounting a relatively mild recession in the US of -0.8 percentage points in two quarters, driven by a negative contribution by private consumption, business investment and net exports (Figure 4). Should the US economy slow down more rapidly in the coming period, a policy response by the US government will be likely. However, the government’s fiscal metrics seem to offer little room for accommodative policy and the Federal Reserve’s ‘dot plot’ currently still shows two interest rate increases in 2019 and one in 2020. We think that the Fed’s plans to push ahead with these hikes will not be feasible. However, before the Fed fully changes course to a policy of interest rate cuts, it will most likely fall behind the curve, as has recently been the case. In the coming period, we will focus closely on the factors that could worsen any potential US recession, such as vulnerabilities in the US financial system and the associated risks of contagion to other parts of the US economy and the global economy.

The Eurozone is also facing economic weakness

The economic outlook is also looking increasingly less rosy on this side of the Atlantic. Economic growth has been disappointing in the Eurozone in the past quarters and it looks as though growth will remain moderate in the near future. The economic situation in Italy is the biggest headache within the Eurozone and our expectation is that the Southern Europeans will not emerge from this period of economic weakness in the near future. The outlook for growth in the United Kingdom is of course highly dependent on the development of Brexit. Currently, we are still expecting a so called ‘soft’ Brexit, meaning that the EU and the UK will ultimately reach a deal to work on a permanent trade agreement. But the uncertainty surrounding this process and the possibility of a delay to the official timing of Brexit is already a factor leading to restrains in business investment.

The picture is the same in the developed economies on the other side of the world. In Japan, growth will slow in the coming years because production capacity limits have been reached and the contribution from net trade will continue to decline. Lower Japanese export is mostly due to lower demand from China. Despite the accommodating fiscal policy, the VAT increase planned for October ­2019 is fueling anxiety that Japan will be hit by a recession early 2020, mainly because previous increases in VAT also resulted in economic problems. For Australia, we expect the domestic economy to slow due to declining private consumption and housing investment as a result of the cooling housing market.

Headwind in emerging markets

Growth has been disappointing in the main emerging economies in the last couple of quarters. India, the world’s fastest-growing economy, posted a significant slowdown in the past two quarters, from 8.2 percent in the second quarter of 2018 to 6.6 percent in the fourth quarter. However, we expect the Indian economic growth to rebound in the coming months on the back of government stimulus in the run-up to the elections in May 2019, favorable monetary policy and a higher growth contribution of infrastructure investment, which start to gain traction in the second half of this year.

In China, the average GDP growth of 6.6 percent in 2018 is the slowest rate of growth posted in the last 28 years. Lower domestic growth has become more clearly visible and targeted measures by the government and the central bank should offset this a certain extent. The initial figures for 2019 show a mixed, but weak picture so far. If the US and China are able to strike a deal over trade, this would boost the outlook for exports. But any promises by China to significantly increase its imports from the US would on balance not be sufficient to improve the net growth contribution from trade.

The economy in Brazil is showing a poor performance. We have adjusted our forecast for 2019 downward on the back of weaker than expected growth in the fourth quarter of 2018. For now, we are maintaining our forecast of GDP growth of close to 3 percent for 2020. This is mainly due to planned reforms that should lead to better prospects and a recovery led by investment. Other emerging economies, such as Turkey and Argentina, are doing significantly worse. The economic outlook is gloomy for both these countries, due to the currency crisis last year, high inflation[2] and a sharp increase in policy interest rates.

On balance therefore, we expect economic growth to decline in most of the developed and emerging economies. The big question in this situation is what will happen if the slowdown is more serious than expected, or if political developments turn out differently than expected.

What if the situation gets worse?

Despite the global economic slowdown and the fact that some individual emerging markets are currently not in the best shape, some of the uncertainties have certainly abated since 2018. First of all, the Federal Reserve has temporarily ceased its trajectory of monetary tightening. Consequently, capital flight from emerging markets has grinded to a halt and even reversed, which resulted in a recovery of emerging market currencies to some extent. Secondly, both the US and China seem willing to work towards an agreement which should put an end to the trade conflict which started in 2018. This agreement will most likely include a commitment from China to import more products from the US (e.g. agricultural products, LNG, autos and aircraft) and to close the substantial bilateral trade surplus that China runs with the US of approximately USD 350 billion annually. China even seems prepared to introduce more structural reforms, such as opening up various markets to foreign competition and lowering subsidies to state-owned enterprises (SOEs). In an attempt to avoid a hard Brexit, the Brexit deadline will probably be extended, which would give the UK parliament more time to reach an agreement on a deal with the European Union.

But the risks have mainly been postponed

As stated above, the US central bank is still planning to hike interest rates twice in 2019 and once in 2020. If the Fed is too slow to adjust its monetary policy, we can expect a negative effect on the US economy and renewed turbulence in the financial markets as well. We also have doubts if a deal between the US and China will hold up, as it will difficult or even impossible for China to keep its end of the bargain on implementing structural reforms. Large SOEs in China are very inefficient, dependent on government support and are burdened with high levels of debt. The question is whether these businesses, which are the backbone of the Chinese economy, will be able to cope with more international competition. And finally, the risk of a hard Brexit of a hard Brexit is a key additional downward risk. All in all, there is no reason to be very optimistic at the current point in time, since the risk that things will turn sour in one of the areas mentioned is far from over.


[1] US trade data for December 2018 is not available due to the government shutdown. The Netherlands Bureau for Economic Policy Analysis (CPB) has accordingly assumed growth of 0 percent in this specific month.

[2] In Argentina, inflation has averaged 37 percent over the past 12 months, while Turkey has seen inflation of 17 percent.

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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