Economic Snapshot for G7 Countries

May 29, 2019

Global economic growth is still seen dipping this year

Despite better-than-expected Q1 GDP outturns for many countries, global growth is still seen dipping this year due to softer dynamics among developed economies. However, the global economy should be supported by tight labor markets and accommodative monetary policy. The U.S.-China trade dispute is the key downside risk.

The global economy is projected to expand 2.9% in 2019, unchanged from last month's forecast. For 2020, the global economy is projected to expand 2.9% again.

United States Economic Outlook

Although growth accelerated rapidly in Q1, the reading was distorted by past front-loading of imports and a build-up of inventories due to the trade war. Moreover, private consumption and fixed investment both weakened markedly. Turning to Q2, the trade war will likely muddle the reading again, as importers scramble to avoid possible new tariffs on USD 300 billion of Chinese goods. Thus, inventories—and imports—of newly-targeted products will likely surge in Q2, while existing stockpiles should unwind. On the flipside, consumption should largely recover—despite weak April retail sales—as solid labor dynamics, shutdown rebound effects and robust confidence buttress private spending. Nevertheless, heightened uncertainty since 10 May, when President Trump increased tariff rates, may weigh on business investment and exacerbate the weak manufacturing momentum observed in the April ISM reading.

Growth will slow this year, with higher interest rates, fading fiscal stimulus and lower global growth weighing on activity. However, a strong labor market and solid wage gains should support private spending. An all-out escalation of the trade war with China is by far the largest downside risk, with trade uncertainty likely to persist even if a deal is reached going forward.

FocusEconomics panelists see GDP expanding 2.4% in 2019, which is unchanged from last month’s estimate, and 1.7% in 2020.

Euro Area Economic Outlook

Flash estimates revealed that growth surpassed expectations in the first quarter of the year, reviving after last year’s sharp slowdown. Although a breakdown by components is not yet available, solid household spending likely supported the result as consumers benefitted from a tightening labor market. In addition, a relatively mild winter may have bolstered the construction sector, while the manufacturing sector is expected to have improved somewhat as one-off issues fade. That said, monthly data still points to soft activity overall and it remains to be seen if momentum will keep pace in Q2. Economic sentiment dropped for the 10th consecutive month in April and the composite PMI continued to point to a two-speed economy in May. Meanwhile, the European parliamentary elections revealed increasing divisions within the union. The vote suggests that the European project will likely remain stuck: with little appetite to move forward or backwards with integration and reforms.

Activity is seen slowing in 2019 as a tougher external backdrop dents exports and hinders investment. That said, the continuation of ultra-accommodative monetary policy, some fiscal loosening and growing wages will act as a buffer. Downside risks loom from an escalation of trade tensions, a slowdown in China, market volatility and lingering weakness in the manufacturing sector.

Our panel left the Eurozone’s outlook unchanged this month after six downgrades, taking a wait-and-see approach after the positive Q1 outturn. Growth is seen at 1.2% in 2019 and 1.4% in 2020.

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United Kingdom Economic Outlook

The economy gained steam in Q1 as government consumption growth edged up and fixed investment rebounded, although this was likely influenced by stockpiling in preparation for a possible no-deal Brexit. More encouragingly, private consumption picked up pace, supported by solid wage gains and a multi-decade low unemployment rate. On the other hand, the external sector weakened on a surge in imports—again tied to stockpiling. Turning to Q2, growth is likely ebbing as the stockbuilding effect unwinds. In April, the manufacturing PMI declined, while the services PMI was weak despite crawling back into expansionary territory. However, retail sales in April were better than expected. On the political front, Theresa May announced she would resign as Conservative leader on 7 June, paving the way for a new Conservative prime minister. This increases the likelihood of both a no-deal Brexit and a further extension to Article 50. 

This year, the economy will be restrained by tepid business investment and ebbing momentum in key trading partners such as the EU and U.S. However, the robust labor market should support private consumption, while the fiscal stance will turn more expansionary. The highly uncertain outcome of Brexit remains the key risk to the outlook.

FocusEconomics panelists expect GDP growth of 1.3% in 2019, which is unchanged from last month’s forecast. For 2020, panelists see the economy expanding 1.4%.

Japan Economic Outlook

Although economic growth accelerated in the first quarter of the year, this was entirely driven by a sharp contraction in imports of goods and services, while exports and domestic demand both deteriorated from Q4 2018. Turning to Q2, consumer confidence fell to its lowest point in over three years in April, which does not bode well for household spending going forward. In further bad news, weak global demand continued to weigh on exports in April, while rising trade tensions between China and the United States cloud the outlook for Japan’s external sector as well as prospects for manufacturing activity. Meanwhile, Japan and the United States are also still thrashing out a deal in attempts to avert a trade war. Particularly, the U.S. is trying to gain greater access for its farm exports to Japan and using tariffs on Japanese car imports as a means to leverage pressure.

Weak global demand and rising trade protectionism will weigh on economic growth this year. While October’s sales tax increase will likely have a negative impact on the economy towards the end of the year, most of the pain will be felt in 2020. Whether or not the U.S. will impose tariffs on Japan’s all-important automotive industry is a key downside risk.

FocusEconomics panelists see the economy growing 0.8% in 2019, which is up 0.1 percentage points from last month’s forecast, and 0.5% in 2020.

Global Monetary & Financial Sector News

Global inflation rose to 3.1% in April from 2.8% in March, according to a FocusEconomics estimate which excludes Venezuela. Inflation for 2019 as a whole is expected to be below 2018, largely on weaker growth momentum in developed economies and lower average oil prices.

Central banks in the U.S. and UK left rates unchanged in May, amid mild inflation and underlying dynamics which were less positive than headline GDP figures suggested. Looking ahead, global interest rates are seen declining this year, as generally contained inflation and an on-hold Fed should allow emerging-market central banks to loosen their stances.

The JPY gained ground against the USD over the last month thanks to the currency’s safe-haven status following the breakdown in U.S.-China trade talks, as did the CAD. In contrast, the GBP weakened somewhat, weighed on by Brexit uncertainty, while the EUR was largely stable.

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