Global Growth Momentum Is Slowing
October 2018 forecasts by the International Monetary Fund (IMF) projected that growth will slow across the developed markets and in China in 2019.
While the U.S. is farthest along in the economic cycle, and the risks to growth are tilted to the downside, a healthy private sector, strong consumer demand, and the lingering effects of the 2017 tax cut stimulus should continue to sustain the expansion through the first half of 2019, T. Rowe Price economists say.
European economies are earlier in the cycle, but growth has been slowing since the fourth quarter of 2017, Thomson notes. The UK economy continues to suffer from Brexit uncertainties. In the eurozone, the German labor market shows some signs of overheating, but unemployment is significantly higher in most other continental economies, curbing inflation pressures but also limiting income gains. Efforts by European households to rebuild savings could dampen eurozone growth in 2019.
Global Growth Is Slowing
Actual and projected real GDP growth
As of October 2018
The IMF forecasts that Japan, which saw economic momentum slow sharply in 2018, will decelerate further in 2019. On the positive side, Japanese corporate profitability is at an all‑time high, according to Thomson, suggesting the risk of deflation has eased.
CAN CHINA SHIFT BACK INTO HIGHER GEAR?
China’s economic outlook is a particular focus of concern, as official economic reports in late 2018 showed a slowdown in growth. Independent indicators of consumer demand, such as auto sales and Macau casino revenues, also have shown weakness, Thomson says. “What’s crucial is the extent to which China restimulates,” Thomson adds. “Beijing is trying to reduce indebtedness in its corporate sectors. But they do have scope for selective tax cuts in certain areas, or for reducing banking reserve requirements, which is a way of loosening policy as well.”
Overall, growth in the emerging markets (EM) is expected to remain stable in 2019, the IMF predicts, with the slowdown in China offset by recoveries in some other major EM economies.
HIGHER RATES, FLATTENING YIELD CURVE CREATE DOWNSIDE RISK
Although U.S. growth is slowing, T. Rowe Price economists expect the U.S. unemployment rate to continue to fall, putting upward pressure on inflation. Higher interest rates, plus a flattening U.S. yield curve, could increase the risk of a sharper economic slowdown in 2020.