The bright outlook presented in May has proven true but clouds are quickly gathering on the horizon. In an increasingly uncertain environment, there is no room for policy mistakes.
Following a robust expansion in 2017, global economic momentum has been more or less maintained in 2018 but is set to increasingly lose steam through 2019. Risks to the outlook continue to mount, especially stemming from the unfolding US-China trade war. In a more challenging global environment, it is increasingly clear that the room for policy mistakes is limited. Poor policymaking has already translated to crises in several emerging economies and potential for policy missteps such as trade policy in the US and populist policies in Italy could have global ramifications.
The global macroeconomic environment is presented in Chapter 1 of the Economic Outlook. The positive global growth outlook is increasingly clouded by downside risks, especially the unfolding trade war between the US and China. Rising uncertainty could strain global investment, a major determinant of global trade. As such, global trade to ease from a remarkable 4.6% expansion in 2017. We forecast 3.7% growth in 2018 and further slowing to 3.0% in 2019.
Our global outlook is cautious though as downside risks continue to mount. The most prominent risk is that of a global proliferation of the US-China trade war. The second highest risk remains misguided Fed policy which would put a brake on US economic activity and cause financial turbulence largely at the expense of EMEs. The remaining risks are (3) a financial market correction, (4) the rapid continuation of the upward trend in the oil price, (5) a hard landing of the Chinese economy, and (6) geopolitical risk.
Prospects and risks for advanced economies are assessed in Chapter 2. Another slight upward revision to the US outlook confirms the strength of the domestic economy and effectiveness of fiscal stimulus. However the economy is expected to cool in 2019 and policy missteps, whether monetary or in trade policy, could cause that deceleration to come on much more rapidly. Policy uncertainty in the eurozone is also increasingly clouding its steady outlook, stemming from the new populist government in Italy and Brexit negotiations with the UK. The UK’s outlook is sluggish but resilient but could be thrown off track if a deal is not reached before its departure from the EU. Advanced Asia is losing momentum as growth in China and global trade eases.
Chapter 3 outlines the outlook for emerging markets. In general, prospects for EMEs remain bright over the forecast period, but idiosyncratic weaknesses and ongoing vulnerability to external developments continue to cloud individual countries’ outlooks. Capital outflows and currency depreciations experienced this year are highlighted as evidence of this. As global trade conditions deteriorate, these markets are more dependent on strong domestic economies and stable policymaking. In line with the heterogeneity of countries, the consequences of the unfolding trade war and domestic policy differ greatly.
The momentary bright sky that has characterised the global economy translates to a relatively benign insolvency environment, explored in Chapter 4. Business risks continue to grow though as trade and monetary policy move in a less accommodative direction for firms. As such global insolvencies are forecast to stabilise in 2019.
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