Major Economies Economic Outlook February 2019

Major Economies: Economic Snapshot for G7 Countries

January 30, 2019

Global growth was likely steady in Q4, although 2019 begins with economic clouds on the horizon


The global economy is expected to have grown 3.1% in the fourth quarter over the same period in the previous year according to an estimate produced by FocusEconomics. If confirmed, this would be unchanged from Q3’s figure, but below the elevated readings recorded in H2 2017 and H1 2018.


Looking at the economic performance of G7 economies, the U.S. likely led the pack thanks to healthy employment growth, elevated consumer confidence and solid wage growth. In addition, Japan should have gained momentum following a third quarter hampered by natural disasters, while Canada appeared to grow at a robust pace despite the headwind of lower oil prices, thanks to a strong labor market.


In contrast, the Eurozone and the UK likely expanded at a meager pace. The Eurozone’s composite PMI sank to a multi-year low in December, amid social unrest in France and weak momentum in powerhouse Germany. Meanwhile, service PMI readings and retail sales were depressed in the UK throughout the quarter as Brexit uncertainty held back activity.


Turning to emerging markets, growth in the Asia ex-Japan region was robust thanks to strong wage gains and labor markets, despite a likely slowdown in regional behemoth China and a less-favorable external environment for the region’s goods exports. The region should have continued to grow far faster than any other.


In contrast, growth in Eastern Europe dimmed amid meager activity in the Eurozone—the region’s key export market—and as the impact of Turkey’s currency crisis continued to ripple through its economy. In Sub-Saharan Africa, a recession in Angola and paltry growth in South Africa appeared to hold back activity, while the collapse in oil prices observed in Q4 will have hit activity in MENA, even though regional growth was likely propped up by government spending, solid non-oil sector activity and a supportive base effect. In Latin America, the expansion was held back by ongoing woes in Argentina and Venezuela, although Brazil appeared to gain steam thanks to an improving labor market.  


Early economic signs for Q1 are not overly encouraging for G7 economies. The Eurozone’s flash composite PMI tumbled to a fresh multi-year low in January, while the partial government shutdown in the U.S. likely hurt growth early in the quarter—although the shutdown was temporarily ended in late January after President Trump backed a short-term funding deal. Moreover, the continuing failure to secure a Brexit deal is likely hampering private investment and consumer spending in the UK.  


On the political front, trade negotiations between the U.S. and China are still underway, although a decisive breakthrough has yet to be made. If no agreement is reached, U.S. tariffs on USD 200 billion of Chinese goods will rise from 10% to 25% on 1 March. Avoiding such a scenario should support global business sentiment and growth.


 




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Global economic outlook downgraded, risks loom large


The 2019 economic outlook for the global economy was downgraded this month amid less encouraging signs from China, the EU and the U.S., marking the third such downward revision since the middle of 2018. Growth is set to ebb compared to last year, mainly due to less accommodative financial conditions worldwide and as some of the world’s largest economies approach the tail-end of their current economic cycles. Moreover, risks to the global economic outlook continue to be skewed to the downside. Despite the recent truce, both political and trade tensions between China and the United States remain elevated, fueling economic uncertainty. Meanwhile, the ongoing monetary tightening by central banks in advanced economies could spur further capital outflows from emerging markets, putting their financial markets at risk.


FocusEconomics Consensus Forecast panelists expect the global economy to expand 3.0% in 2019, which is down 0.1 percentage point from last month’s estimate and below the 3.3% increase projected for 2018. The panel sees global economic growth at 2.9% in 2020.


This month’s downgrade for the global economy reflects lower growth prospects for Canada, the Eurozone, the United Kingdom and the United States. Japan’s 2019 forecast was unchanged from the previous month.


Among developing economies, growth prospects in Asia ex-Japan remain strong on the back of solid domestic demand. In Latin America, while economic dynamics are expected to improve in 2019, structural economic imbalances will keep growth at modest levels. Economic growth in Eastern Europe will moderate due to continuing headwinds in Turkey, subdued economic activity in Russia and weaker dynamics in the European Union. In the Middle East and North Africa, economic growth will benefit from robust fiscal support, although the outlook for the region hinges on the evolution of oil prices and production levels. In Sub-Saharan Africa, the economic recovery is expected to gain traction this year thanks to a gradual recovery in South Africa amid the government’s growth-friendly economic agenda.


UNITED STATES | Private consumption should have supported growth in Q4; shutdown eats into prospects for Q1


Although economic growth likely remained robust in the last quarter of 2018, again buttressed by strong consumer spending thanks to rising wage growth and stellar labor market gains, all available signs point to a significant loss of momentum at the end of the quarter and into Q1 2019. Most notably, the December ISM Manufacturing index posted its worst monthly decline in a decade due to a sharp drop in domestic new orders. Consumers were also significantly less optimistic about the short-term outlook in December, suggesting private consumption might weaken in the first quarter. Furthermore, the partial government shutdown from 22 December to 25 January appears poised to dent Q1 GDP growth—though some analysts see a rebound effect occurring in Q2. In addition to the business disruptions caused by understaffed federal agencies, 800,000 federal workers were furloughed or working without pay in the period, while a significant number of federal contractors were left unemployed and without the prospect of back pay—both of which should hit private consumption in the quarter. Though the government could shut down again if no border security compromise is reached before 15 February, the scenario appears unlikely given the political pressure piling upon congressional Republicans.


This year, the economy is poised to cool from 2018’s high, with a number of headwinds combining to dampen activity. Though the Federal Reserve is seen slowing its tightening, higher interest rates should nonetheless put a lid on growth, while the stimulus of the 2017 tax cut is set to fade. A still-likely escalation of the trade war with China is the main downside risk and would amplify the ongoing global growth slowdown. A large fiscal deficit and high corporate debt levels are also main medium-term vulnerabilities. FocusEconomics panelists see GDP expanding 2.4% in 2019, which is down 0.1 percentage points from last month’s estimate, and 1.7% in 2020.


EURO AREA | Economy ends 2018 on a limp note


Downbeat data continues to ebb in surrounding the Eurozone economy, suggesting that a slower growth path remains in play after a solid 2017. A downturn in the industrial sector in the third quarter due to supply-side constraints and tepid demand appears to have persisted into the fourth quarter, with industrial production contracting at the sharpest pace in over two years in November and the composite PMI falling in December. Moreover, economic sentiment deteriorated notably throughout 2018, ending the year at an almost two-year low. That said, a tightening labor market is providing some relief to the economic narrative, with the unemployment rate falling to a fresh multi-year low in November. In the political arena, the scene is also troubling. The possibility of a hard Brexit has increased somewhat after policymakers in the UK rejected Prime Minister Theresa May’s withdrawal agreement in mid-January and remain deeply divided on how to proceed with the country’s exit from the European Union. FocusEconomics panelists remain divided on how events will unfold, although most think some sort of agreement will be struck. In addition, the threat of new U.S. tariffs continues to loom large, while at home, fragile governments in Italy and Spain could present legislative challenges or spark snap elections. 


FocusEconomics panelists shaved 0.1 percentage points off the Eurozone’s growth forecast this month, and now see GDP expanding 1.5% in 2019. Sluggish global trade and downturns in key trading partners will likely weigh on exports growth this year, and this could be aggravated further if threats of rising global protectionism play out. Next year, growth is seen stable at 1.5%.


JAPAN | Economic momentum recovers in Q4, but uptick may not last


The Japanese economy likely rebounded in the fourth quarter following the third quarter’s dismal performance when a series of natural disasters severely disrupted economic activity. Industrial production was much stronger in October and November than the Q3 average, mainly due to solid domestic demand. Moreover, the unemployment rate likely remained at low levels in Q4, supporting private consumption. Looking forward, however, economic activity appears to be losing steam. The manufacturing PMI stalled in January, with new export orders dipping further as external demand started to falter. Moreover, Keidanren, Japan’s largest business organization, has not called for wage hikes this year as it did in 2018. This could compromise Prime Minister Shinzo Abe’s strategy of pinning hopes on strong consumption in order to ensure Japan doesn’t reexperience deflation.


Although the economy will expand at a broadly similar pace this year as in 2018, risks are clearly skewed to the downside. A planned sales tax hike in October is expected to hit growth by the end of the year, while an uncertain global trade outlook will dent the all-important external sector. FocusEconomics panelists see the economy growing 1.0% in 2019, which is unchanged from last month’s forecast, and 0.6% in 2020.


UNITED KINGDOM | Growth softens in Q4; parliament rejects Brexit deal


Recent data suggests the economy performed poorly in the fourth quarter. GDP growth in September–November was the slowest in six months on the back of a contraction in the manufacturing sector, while the services PMI was only just in expansionary territory in December amid soft new business. Moreover, retail sales were limp in the final quarter, which came against a backdrop of worsening consumer sentiment amid rising Brexit uncertainty. Weakness within the retail sector also came despite the robust labor market, which remains the economy’s bright spot: In September-November, employment surged and nominal wage growth topped 3%. On the political front, in mid-January the government’s Brexit withdrawal agreement was rejected by an overwhelming majority in parliament. The government has announced its intention to tweak the existing deal, although an end to the impasse does not appear imminent.


Private investment and household consumption will likely remain subdued over the next few months due to the lack of clarity over Brexit. However, company stockpiling in preparation for a no-deal scenario could provide temporary support to GDP growth in Q1. 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, down 0.1 percentage points from last month’s forecast, and 1.5% in 2020.


INFLATION | Global inflation declines in December on lower oil prices


Global inflation fell from 3.0% in November to 2.8% in December, according to an estimate produced by FocusEconomics. The reading reflected lower price pressures in most advanced and developing economies due to the recent decline in global oil prices.


At its January meeting, the Bank of Canada left rates unchanged and significantly downgraded its growth forecast for this year on the back of the recent tumble in crude prices, making it less likely to raise rates in the near-term. The European Central Bank also kept interest rates and its forward guidance unchanged at its January meeting, although it struck a more downbeat tone given recent weak economic data. Meanwhile, Jerome Powell, chairman of the Federal Reserve, made some dovish comments early in the month about the future evolution of U.S. rates, promising to be “patient”. Our panelists now see the Fed tightening its monetary stance this year by significantly less than in 2018. Lastly, the Bank of Japan left its monetary policy scheme unchanged in January, while it downgraded its inflation projections.


Against a backdrop of ebbing global growth, the recent fall in oil prices and tighter financial conditions, FocusEconomics panelists expect global inflation to fall from a 3.1% average in 2018 to 2.8% in 2019, which is down 0.1 percentage points from last month’s forecast. The FocusEconomics panel projects that global inflation will edge down further to 2.7% in 2020.


 




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Oliver Reynolds


Economist

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