Major Economies Economic Outlook December 2018

Major Economies: Economic Snapshot for G7 Countries

November 21, 2018

Global growth dims in the third quarter

The global economy lost steam in the third quarter following the second quarter’s strong showing. A comprehensive GDP estimate for the global economy put year-on-year growth at 3.2% for Q3, down 0.1 percentage points from last month’s preliminary estimate and below Q2’s 3.4% increase.

The U.S. economy continued to motor ahead according to recent data, with private consumption boosted by rock-bottom unemployment and elevated consumer confidence. In a similar vein, growth in the UK was supported by solid consumer spending, with government consumption and net exports also contributing to growth.

In contrast, the Japanese economy lost momentum, with adverse weather hampering the external sector. Moreover, growth in the Eurozone ebbed, dragged down by regional powerhouse Germany as the economy’s mighty export sector faltered. In Canada—the only G7 economy yet to report Q3 GDP figures—growth in SAAR terms likely moderated to a more sustainable pace following a surge in the second quarter.


Looking at emerging markets, economic dynamics Asia (ex-Japan) were fairly solid, supported by strong labor markets and robust internal demand. That said, a slowdown in China—on rising trade war concerns, and weaker industrial production and fixed investment growth—did drag on the region’s performance somewhat. On the whole, Eastern Europe likely posted a robust quarter supported by wage gains and EU investment, although the sharp downturn in Turkey will have dragged on the performance. In Latin America, despite spillovers from solid U.S. growth, still lingering weaknesses in Argentina, Brazil and Venezuela will have dampened activity. Meanwhile, the Middle East and North Africa region should have benefited from higher oil prices, notwithstanding the sharp deterioration in Iran due to the impact of sanctions, while the Sub-Saharan Africa region was likely aided by higher prices for key commodity exports.

On the political scene, in mid-November the UK and EU reached a Brexit withdrawal agreement. However, approval by the UK parliament is by no means a forgone conclusion. Of particular concern, the possibility of a no-deal Brexit lingers, which would likely cause severe economic uncertainty and considerable disruption to trade between the UK and the EU. 

In the U.S., the midterm elections resulted in the Democrats retaking the House, while the Republicans retained control of the Senate. As a consequence, President Trump will have difficulty enacting key policy priorities, such as further tax cuts, immigration reform, or social security reform.

Looking to Q4, global growth should remain healthy. The U.S. economy should continue to be supported by the more expansionary fiscal stance and strong private consumption. Turning eastwards, Japan is set to recover slightly as temporary factors fade, while Chinese growth will likely be propped up by greater government support. FocusEconomics panelist see global growth steady at 3.2% in Q4.


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Global economy to continue dipping next year, risks are skewed to the downside

Global economic growth is set to dim next year on decelerations across many developed economies, Eastern Europe and Asia. Growth in the U.S. will slow following the stimulus-induced expansion in 2018, while dynamics in China—while remaining robust—will likely dip somewhat, which will weigh on the performance of Asia’s other economies. In contrast, Latin America will likely gain momentum on improved dynamics in Brazil and Argentina, while the Middle East and North Africa region should benefit from more expansive fiscal stances. The Sub-Saharan African region should benefit from recoveries in regional giants, Nigeria and South Africa.

Escalating trade tensions between the United States and the rest of the world—especially China—represent the main downside risk to the outlook, with U.S. tariffs on around USD 200 billion of Chinese imports set to rise to 25% from 1 January 2019. Moreover, the Federal Reserve will likely continue to hike rates next year, which will tighten global financial conditions and could trigger further emerging-market capital outflows and currency depreciation.

In Europe, political risks remain elevated in the form of a potential no-deal Brexit, a populist government in Italy and weakened German leadership. In China, high debt levels could pose a concern to economic stability going forward.

FocusEconomics Consensus Forecast panelists expect the global economy to expand 3.3% this year, which, if confirmed, would represent the strongest expansion in seven years. Panelists see global growth decelerating to 3.1% next year, which is down 0.1 percentage points from last month’s estimate, and weakening further to 2.9% in 2020.

This month’s lower 2019 growth forecast for the global economy is the result of downgrades to the growth forecasts of the Euro area, Eastern Europe, Latin America and Sub-Saharan Africa.

UNITED STATES | Private consumption powers growth in the third quarter; midterm elections lead to political gridlock

The economy maintained a solid pace of growth in the third quarter following Q2’s four-year high reading, underpinned by private outlays and a replenishment of inventories. Despite the robust headline print, all was not rosy: Exports contracted for the first time in nearly two years, business investment decelerated significantly and residential investment continued its decline. That said, private consumption should remain buoyant in Q4, thanks to strong job gains, rising wage growth and near-record consumer confidence as of October. Meanwhile, the midterm elections on 6 November saw Democrats recapture the House, which will likely frustrate the Trump administration’s legislative agenda. On the trade front, President Trump’s scheduled meeting with Chinese President Xi Jinping on 30 November might help to thaw relations between the two countries. However, an imminent deal seems highly unlikely, as reflected by the conflict-ridden Asia Pacific Economic Cooperation meeting held on 17–18 November, and President Trump’s continual threats to impose tariffs on the remaining USD 257 billion of Chinese imports, in addition to raising the existing levies rate to 25% on 1 January.

A tight labor market buttressing private consumption, coupled with heightened government spending, should continue to support growth. Despite this, the economy looks set to slow in 2019 and 2020 as the fiscal stimulus fades and steady interest rate hikes drag on growth. Moreover, a further escalation of the trade war with China could weigh heavily on investment and the trade sector in the medium-term. FocusEconomics panelists see GDP expanding 2.5% in 2019, unchanged from last month’s estimate, and 1.7% in 2020.

EURO AREA | The economy loses traction in Q3, political uncertainty simmers

The Eurozone economy lost momentum in the third quarter, with GDP growth recording the worst result in over four years. Although a breakdown by components has not been released yet, sluggish private consumption as higher oil prices dented households’ purchasing power and weak industrial activity, partly due to one-off factors which held back automobile production, likely drove the result. While the economy is expected to bounce back somewhat in the fourth quarter, the economy has clearly entered a lower cruising speed this year. Available data for Q4 suggests that activity remained downbeat, with economic sentiment and the composite PMI both sliding in October. The political arena, meanwhile, remained turbulent. In November, the populist Italian government mostly stuck to its guns over its expansionary 2019 budget, defying calls by the European Commission to rein in spending and setting the stage for a protracted conflict with the institution. Moreover, although EU leaders and  UK Prime Minister Theresa May finally struck a deal on the UK’s withdrawal from the European Union, political turmoil in the UK is casting a shadow over whether the agreement will receive the greenlight in parliament.

A tightening labor market and solid investment should buttress activity next year. However, less accommodative monetary policy and slower global trade will cause growth to slow, while rising global protectionism and turbulent internal politics remain the key risks to the bloc’s forecasts. FocusEconomics panelists downgraded their view of the Eurozone economy this month, taking into account the recent downbeat data and stark external backdrop. The panel now projects growth of 1.7% in 2019, which is down 0.1 percentage points from last month’s forecast, and 1.6% in 2020.

JAPAN | Economy loses steam in Q3, but rebound likely in the final quarter

The economy stumbled again in the third quarter, registering its second contraction this year mainly due to lower private consumption and a sharp decline in public investment. In addition, economic growth was hampered by several natural disasters in the quarter, which weighed on business activity and disrupted the country’s export capacity. The economy nonetheless appears poised to rebound in the fourth quarter, although its growth momentum may depend on external demand, notably from China, which has recently shown signs of weakening amid the Sino-American trade spat. In October, the manufacturing PMI edged up on a rebound in foreign demand and higher output—partly compensating for September disruptions—but manufacturers’ confidence weakened to a nearly two-year low, while consumer confidence also deteriorated in the month.

Stronger domestic demand, buttressed by a tight labor market which may finally support wages, should help the economy broadly maintain its growth momentum next year, while investment should get a boost from the 2020 Tokyo Olympics. Lower external demand amid a regional and global slowdown as well as a planned sales tax hike in October are the main downside risks. FocusEconomics panelists see the economy growing 1.1% in 2019, which is unchanged from last month’s forecast, and 0.6% in 2020.

UNITED KINGDOM | Growth is robust in Q3, but slowdown likely in Q4 as Brexit uncertainty reaches its zenith

The economy grew strongly in the third quarter according to recent figures, supported by private consumption, public spending and net exports. Moreover, real earnings growth accelerated notably, as the tight labor market fed wage pressures. Employment growth, however, softened in quarter-on-quarter terms, possibly on rising Brexit uncertainty. Looking to Q4, signs are less positive. In October, both the services and manufacturing PMIs fell, while annual retail sales growth slowed considerably and consumer sentiment worsened. On the fiscal front, the government recently presented an expansionary budget, which should support growth next year thanks to higher spending and tax cuts. In mid-November, the UK and EU reached a preliminary agreement on Brexit withdrawal terms. Its ratification would support business confidence and investment, although there are serious doubts over whether the UK parliament will give the green light to the deal as it currently stands.

Growth should be fueled next year by the looser fiscal stance and higher wages boosting private consumption. However, private fixed investment will likely remain subdued until there is greater clarity on the Brexit front. A failure to seal a withdrawal deal with the EU before the UK departs the bloc in March 2019 is the key downside risk. Our panelists expect GDP growth of 1.5% in 2019, up 0.1 percentage point from last month’s forecast, and 1.5% again in 2020.

INFLATION | Global inflation edges up in October

Global inflation rose from 3.0% in September to 3.1% in October, according to an estimate produced by FocusEconomics. The reading reflected higher price pressures in the U.S. and the Euro zone.

Most major central banks which held meetings over the last month—including the Federal Reserve, European Central Bank, Bank of Japan and Bank of England—left rates unchanged. However, the Bank of Canada tightened its stance in October, driven by robust economic activity and an expected uptick in wage growth going forward.

Global inflation is expected to reach 2.9% in 2019, which is up 0.1 percentage points from last month’s figure, but still ebbing slightly from 2018’s projected 3.1% as global demand growth slows and monetary policy tightens. The FocusEconomics panel projects that global inflation will inch down to 2.7% in 2020.


Ricard Torné

Head of Economic Research

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