Macroeconomic Scenario for 2018-2019: “And yet it moves”
No lack of genuine causes for concern.
Whether multi-form, limited or diffuse, many of these causes for concern derail our certainties. They include the challenges to multi-lateralism, the waning of the European project, the rise of US protectionism, increased geopolitical tension (especially in the Middle East), Brexit (where we are still no closer to any real idea as to how it will work) and, more ‘prosaically’, the tightening of US monetary conditions. Some threats are looming over us, and it is difficult – possibly illusory – to assign a probability to them and give them tangible consistency. Others have already taken shape.
US monetary tightening, which is in line with expectations, and the deterioration in market conditions related to the (legitimate) rise in risk-aversion have already created victims among emerging countries. One obvious example of this is Argentina, where a less clement financial climate has triggered a currency crisis and highlighted the contradictions in an ambitious but incomplete policy mix, doomed to failure from the start. Another is Turkey; facing the sort of financial crisis to which it is now accustomed – although it is hard to imagine that it will rush into the arms of the IMF – the political and geopolitical risks that undermine investor confidence in Turkey are subject to an upward revision.
US sanctions against Iran are also translating into a dearth of oil supply in a market that is already trying to cope with the decline in Venezuelan production and shipping difficulties in the US; the market will therefore need OPEC to achieve equilibrium in 2019, meaning the oil price could top USD100/bl, at least temporarily.
This is not to mention US protectionism and the tariffs imposed on China, with the probability that in 2019 they will apply to all Chinese exports. The trade war is likely to erode US households’ purchasing power marginally and translate into an increase in the fed funds rate (only) slightly more marked than currently suggested by the Fed’s dot-plot. The tariffs are likely to subtract 2ppt from Chinese growth, fully offset by Beijing's ‘all-out’ stimulus plan, which should keep the growth rate unchanged at around 6.5% in 2019.
“And yet it moves”, to quote Galileo, despite the undeniable multiplication of areas of risk.
The global economy is still proving resilient. In the United States – which continues to see the same sort of growth in 2018, itself a repeat of earlier strong growth of 2.9%, which is still only slightly inflationary given the strength and longevity of the trend – the prospects for 2019 look good. Growth is still being boosted by the fiscal programme, which should deliver close to half a percentage point in additional growth (after 0.8ppt in 2018). Growth is forecast to remain at a solid level of 2.5% in 2019, despite the continued monetary tightening, which – gradual as ever and accompanied by shrewd guidance – is not propelling long-term rates to anxiety-raising heights.
In the Eurozone, the dip in growth should not be interpreted as heralding an imminent downturn. It is a fact that growth is set to slow, from around 2.1% in 2018 to 1.8% in 2019, but this decline is natural. Household consumption is holding up well and, above all, the recovery in investment is dispelling fears of an early interruption to a still-virtuous cycle. Domestic demand should continue to consolidate, therefore. Concerns about a labour shortage – leading first to localised and then more widespread wage increases, and generating a significant acceleration in inflation and bringing a premature end to growth – are unfounded. Only Germany faces a lack of labour supply. Wage pressures continue to be very measured and explain why core inflation is itself very moderate.
Thus, in both the US and the Eurozone, we are unlikely to see any uncontrolled surge in inflation, no rushed monetary tightening, and no unhealthy rise in long-term interest rates. However, even before the threats mentioned have a tangible influence on the real economy, their effects are already being felt in financial variables and expectations.
Risk-aversion translates into periods of severe turbulence and increased volatility. It justifies the fact that core long-term rates are not picking up significantly, despite upbeat growth in the US, satisfactory nominal growth in Germany and a strong USD. Risk can also, obviously, lead to a downward revision to growth forecasts and negatively affect investment behaviour.
Thus, things could prove delicate in 2020, with a widespread downswing in growth. In the US, when the fiscal stimulus has largely run its course and the fed funds rate is in restrictive territory, growth will inevitably slow sharply. The Eurozone, for its part, will need to cope with significantly more difficult times without having built up the kind of room-for-manoeuvre needed to boost dangerously flagging growth.
To find out more about our macroeconomic scenario, see our latest publication Perspectives Monde