Economic Snapshot for G7 Countries

February 27, 2019

Global economic growth moderates in Q4 as uncertainty heightens

Global economic growth continued to cool in the fourth quarter of 2018, with aggregated growth hitting the lowest mark in two years. The global economy expanded 3.0% in the fourth quarter over the same period in the previous year according to an estimate produced by FocusEconomics. The print was a notch below the 3.1% expansion forecast in the previous month and Q3’s 3.1% increase.

Looking at the economic performance of G7 economies, Q4’s slowdown was mostly led by a sharp deceleration in the Euro-area, which expanded at the weakest pace in over four years in annual terms. Although a detailed GDP breakdown is still missing for the common-bloc, available data suggests that a downturn in the industrial sector and deteriorating economic confidence likely hit domestic demand, while a cooling global economy could have led to a deterioration in the external sector. In Japan, economic growth rebounded in seasonally-adjusted annualized terms (SAAR) in Q4 as the impact of a series of natural disasters in Q3 dissipated. Low business confidence and Brexit uncertainty kept growth subdued in the United Kingdom. Regarding the United States, GDP figures for Q4 have not yet been disclosed due to the government shutdown in December 2018 and January 2019. However, available data for the quarter suggests that growth moderated in SAAR terms in Q4 on the back of less robust private consumption.

Data for the first quarter paints a rather gloomy picture for the global economy, with moderating demand impacting industrial activities. Labor markets, however, seem relatively robust worldwide, which should buffer domestic demand.

On the political front, President Donald Trump stated on 24 February that the U.S. will extend the 1 March tariff hike deadline on USD 200 billion of Chinese imports, while officials from both countries cited substantial progress in bilateral talks. That said, President Trump did not propose a new deadline and there is widespread skepticism about the depth and scope of the progress, particularly how to ensure compliance with the deal. In the eyes of U.S. government officials, China’s industrial subsidies and alleged espionage, the large trade surplus that the Asian giant holds against the U.S. and intellectual property rights violations in China are the key sticking points.

While the China-U.S. trade spat appears to be on track for a successful resolution in the near future, the winds of protectionism are gathering strength. On 17 February, U.S. Commerce Secretary Wilbur Ross recommended imposing tariffs on global imports of cars and auto parts; President Trump now has 90 days to decide whether to do so, which could amount to tariffs of 25%. Meanwhile, on 26 February, Theresa May pledged in parliament to allow MPs to vote on whether to delay departure if no deal has been reached by mid-March. MPs will debate the next steps on 27 February; crucially, one amendment likely to be debated could also force the government to request an extension of Article 50

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Global economic outlook takes a respite this month

The economic outlook was stable this month following last month’s downgrade. While the global economy has entered a soft patch this year, robust labor markets worldwide and supportive fiscal policies are expected to shore up economic growth. Moreover, the U.S. Federal Reserve’s decision to pause its tightening cycle will allow central banks to adopt more accommodative monetary policies. 

Nevertheless, risks to the global economic outlook are clearly skewed to the downside. Despite President Trump’s plan to delay additional tariffs on Chinese goods, trade tensions between China and the United States remain elevated. Furthermore, the U.S. administration has already threatened its trade partners that new tariffs, this time on cars, are on the table. Meanwhile, China’s economy continues to slow, adding downward pressure on global demand, while uncertainty surrounding Brexit shows no sign of abating.

FocusEconomics Consensus Forecast panelists expect the global economy to expand 3.0% in 2019, which is unchanged from last month’s estimate and below the 3.2% increase projected for 2018. The panel sees global economic growth inching down to 2.9% in 2020.

This month’s stable growth prospects for the global economy reflects unchanged growth prospects for the United Kingdom and the United States. Conversely, our analysts downgraded their view for Canada, the Eurozone and Japan.

Among developing economies, growth prospects in Asia ex-Japan remained stable on hopes that China and the U.S. will be able to clinch a trade deal in the coming months and that policy stimulus will avoid an economic downturn in China. In Latin America, while economic dynamics are expected to improve in 2019, the slow pace of economic reforms in Brazil and widespread political risks are dragging on overall regional growth. Economic growth in Eastern Europe will slow due to headwinds in Turkey, subdued economic activity in Russia and moderating dynamics in the European Union—the region’s main trading partner. Despite bolder fiscal support in the Middle East and North Africa, economic growth will moderate in the region owing to OPEC+ oil production cuts. The economic recovery in Sub-Saharan Africa will continue this year, although macroeconomic imbalances and geopolitical risks will suppress growth at low levels.

UNITED STATES | Economy appears to be slowing following 2018’s strong showing

The economy likely decelerated at the end of 2018, and momentum appears to remain on a downwards trajectory in Q1 2019. In December, the ISM manufacturing index posted its steepest monthly decline in a decade. Moreover, consumer confidence tanked in the month, retail sales unexpectedly contracted and existing home sales fell to an over three-year low. This suggests private consumption softened in Q4, which was likely compounded by a sharp fall in equity prices in December. Looking at Q1, falling consumer confidence in January indicates private spending will be modest, while a fall in industrial production in the month signals weakness in manufacturing. Meanwhile, recent trade talks reportedly yielded some concessions from China on intellectual property rights, market access and technology transfers, prompting President Trump to postpone new tariff action past the March 1 deadline.

Growth should slow this year due to multiple headwinds, notably fading fiscal stimulus and lower global growth, while additional rate hikes could also weigh on momentum. The trade war with China remains a key downside risk, while a large fiscal deficit and high levels of personal and corporate debt present added vulnerabilities. FocusEconomics panelists see GDP expanding 2.4% in 2019, which is unchanged from last month’s estimate, and 1.7% in 2020.

EURO AREA | Q4’s soft momentum carries over into Q1

Flash estimates revealed that the Eurozone economy remained stuck in a low gear in the fourth quarter. Growth was unchanged from Q3’s pace, which had marked the slowest expansion in over four years. While a detailed breakdown of the drivers is not yet available, soft domestic dynamics likely hobbled the economy amid a downturn in the industrial sector and deteriorating confidence. Available data for this year tells a similar story. Economic sentiment dropped to an over two-year low in January, and the manufacturing PMI fell into contractionary territory in February for the first time since June 2013. A high degree of uncertainty also continues to plague the growth environment. A confidential report by the U.S. Commerce Department released in February is expected to have cleared the way for President Donald Trump to levy tariffs on EU automobiles if a favorable trade agreement is not struck. Meanwhile, the Brexit deadline inches ever closer without a clear plan for the UK’s exit.

A soft end to 2018, weaker economic sentiment and ongoing problems in the manufacturing sector are dampening the outlook for the Eurozone this year. Sluggish global trade and geopolitical uncertainty are also seen dragging on growth in 2019, although a tight labor market and accommodative monetary policy should provide some relief. FocusEconomics analysts expect growth of 1.4% in 2019, which is down 0.1 percentage points from last month’s forecast. In 2020, growth is seen stable at 1.4%.

JAPAN | Economy recovers in Q1; external sector set to limit growth in Q1

The economy returned to growth in the fourth quarter following a short-lived contraction in Q3 when a series of natural disasters disrupted business and consumer activities. Domestic demand drove Q4’s recovery, while external demand remained relatively weak despite rebounding. Available data for this year suggests that growth momentum remains frail. Global trade uncertainty, the economic slowdown in China and a downturn in the global tech cycle are weighing on the external sector. This, in turn, hurt manufacturing activities, as reflected by the manufacturing PMI which hit a nearly three-year low in February. Moreover, the lack of progress made in Prime Minister Shinzo Abe’s strategy to boost wages is gradually eroding consumer confidence, keeping private consumption subdued.

Economic growth will accelerate slightly this year. Frontloaded consumer spending ahead of the planned sales tax hike in October, coupled with solid investment—partially due to works related to the Tokyo 2020 Olympic Games and solid corporate earnings—will propel growth. However, risks are skewed to the downside, with rising trade protectionism and China’s slowdown leading the pack. FocusEconomics panelists see the economy growing 0.9% in 2019, which is down 0.1 percentage points from last month’s forecast, and 0.6% in 2020.

UNITED KINGDOM | Brexit uncertainty continues to dampen economic growth in Q1

Economic growth slid sharply in Q4 2018 according to recent figures. The deceleration was driven by a contraction in fixed investment, as firms curtailed spending amid elevated Brexit uncertainty. In contrast, private consumption growth was steady, likely supported by a firm labor market; in October-December employment figures and real wage growth were strong. Turning to the first quarter of 2019, signs are largely gloomy. In January, both the services and manufacturing PMIs dropped, with the services PMI hovering only just above the 50-threshold separating expansion from contraction. Although retail sales perked up somewhat, this was partly due to discounting by stores. On the political front, the government has yet to solve the Brexit impasse, and several Labour and Conservative MPs have defected. The lack of certainty will hamper GDP in Q1.

The economy is set to perform poorly in the first quarter as Brexit uncertainty hamstrings private investment. Looking further ahead, everything hinges on the outcome of Brexit; leaving the EU with a deal, or remaining in the EU, would likely unleash pent-up investment and boost consumer sentiment, while leaving with no deal could cause a serious economic shock. Our panelists expect GDP growth of 1.4% in 2019, unchanged from last month’s forecast, and 1.5% in 2020.

INFLATION | Global inflation declines further in January

Global inflation fell from 2.6% in December to 2.4% in January, according to an estimate produced by FocusEconomics. Low oil prices in January compared to the same period in 2018, subdued demand pressures and relatively stable financial conditions are keeping inflationary pressures in check.

Against this backdrop, the U.S. Federal Reserve decided to keep its federal funds rate unchanged at 2.25%–2.50%. Moreover, the Fed softened its tone and suggested a marked slowdown, if not a complete halt, to interest rate hikes in the year ahead. Similarly, the Bank of England (BoE) maintained its Bank Rate stable at 0.75% at the 6 February meeting. The BoE, however, slashed its growth forecasts for this year and next due to the significant uncertainty revolving around the outcome of the Brexit process.

Weakening global growth and relatively low energy prices are expected to keep price pressures at bay this year. FocusEconomics panelists expect global inflation to be 2.8% in 2019, which is unchanged from last month’s forecast. The FocusEconomics panel projects that global inflation will edge down to 2.7% in 2020.

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Oliver Reynolds

Economist