The IMF estimate that global growth will fall from 3.7% in 2018 to around 3.5% in 2019, with emerging markets picking up the baton from a slowdown in developed markets. We went into 2018 with economic data and surveys that suggested the year would be a strong one and, arguably, given the length of the economic expansion, it was. Much of the damage was ‘self-inflicted’, with trade wars impacting on growth in China/Asia and the uncertainty of Brexit weighing on the UK economy. In the US, growth was boosted by the €1trn tax cut – this proved a significant stimulus but we may see a hangover in 2019 and beyond. President Donald Trump, mindful of the 2020 election, will not want to oversee a significant economic slowdown, so there remains potential for further measures to boost growth in the US.
The risks posed to global growth from the accumulation of debt, financed at incredibly low rates since the financial crisis, should not be underestimated. As interest rates continue to normalise, the cost of servicing this debt will increase and act as a brake on growth. Given the forward-looking nature of markets, pricing in a slowdown in economic growth and earnings growth is likely to happen long before the slowdown actually occurs; indeed, we may have already seen this in markets over the second half of 2018.
The good news is that governments globally are starting to recognise the impact of ‘austerity’ and the policies that have seen many household incomes fail to recover and grow in the aftermath of the 2008 financial crisis. This means more growth-stimulative policies are likely to be enacted across Europe.
Oil, which looked like it would impede growth earlier in 2018 when it reached over $80 per barrel, could actually now be a tailwind following the recent price falls to below $60 per barrel.
However, the key stimulus will have to come from China – this period is not dissimilar to the growth slowdown we saw in the mid-1990s and as recently as three years ago. In 2015, the Chinese authorities unleashed a significant amount of stimulus – something that boosted global growth. In 2018, the US tax cuts acted as a stimulus, and in 2019 we may well look to China once again to boost growth through a mix of fiscal measures. In the absence of stimulus, developed market growth, and growth in China, is likely to slow further.
While at this stage an economic shock or policy error would be needed to push economies towards recession, the risks appear skewed to the downside overall, not least until we get some clarity on whether the nascent trade war between the US and China/others will escalate in 2019.