World – Macroeconomic Scenario for 2019-2020: prevention better than cure
The strong, synchronised cycle of global growth has ended. Alongside hopes that the US–China trade negotiations will result in a deal and that Chinese growth picks up – but not deceiving ourselves about China’s ability to drive the world economy – we are seeing signs of flagging, although not a collapse. The major economies will mainly rely on the strength of their domestic demand to achieve a soft landing that is close to potential growth rates. And, preferring prevention rather than cure, cautious central banks have opted for more accommodative monetary policy than expected.
Everyone agrees that the fundamentals of growth are holding up, with the end of a cycle of strong growth, largely devoid of inflation, and a decline in the synchronised vigour of the leading economies. That said, the slowdown in the manufacturing sector and the diminishing contribution from net foreign trade are already having an impact on growth.
It is clear that economies are being affected unevenly, depending on their exposure to world trade and the space which their industrial sectors* occupy: contrast the US, which is closed and not a centre of manufacturing, with Germany, which is largely open and still a manufacturing economy.
The US and the Eurozone (like Japan) are therefore experiencing different fortunes and – even supposing that the US–China trade dispute can be resolved and that Chinese growth will pick up (without deceiving ourselves as to China’s ability to drive the world economy) – are unlikely to follow the same growth path.
In the US, the strength of the labour market (where the unemployment rate is at an all-time low despite the fact that the participation rate is not falling) has finally led to a rise in average wages, which, without any increase in inflation, will eat into firms’ margins and productive investment. The contribution from net external demand is likely to be only very slightly negative, enabling growth to edge down ‘gently’ towards its potential level of 2%.
In the Eurozone, a marked drop in foreign demand is behind the sharp slowdown in growth. The slowdown has triggered fears that Eurozone growth, which came late to the phase of swift expansion, could brutally and prematurely drop off. But, as wages take up the slack from jobs, demand from households (consumption and housing investment) is proving resilient. Firms’ high margin ratios and continued easy access to financing are conducive to investment. On the other hand, the outlook for any recovery in external demand is uncertain, and it is the incentive for investment that is giving way. Failing any recovery in exports, growth seems unlikely to exceed 1.2% in 2019.
Under the auspices of central banks (which are almost astonishingly benevolent, especially the US Federal Reserve), the resilience of domestic demand means it is still possible to outline a scenario of an ‘orderly’ decline in growth rates towards the potential rate. However, this would be subject to the dual condition that US–China negotiations end with an agreement and that Chinese growth picks up.
We should not count excessively on China’s ability to carry the rest of the world along in its wake, however. There are signs that Chinese growth is gathering pace, suggesting that it might be only just slightly less than 6.5% in 2019. But, while the rate of growth is important, so is its profile. However, the Chinese authorities’ stimulus plan is not ‘rustic’, like previous plans, which involved public investment, infrastructure projects and aid for state-owned enterprises. In addition to monetary easing, it aims, in particular, to stimulate private demand (ie, households and small businesses) by cutting taxes and VAT. It could, therefore, prove effective but percolate more slowly and may in the short term prove less import-intensive.
While we cannot count on a recovery in world trade, we can, however, be sure that monetary conditions will remain accommodative: the idea is to avoid the end-of-cycle monetary misstep that actually triggers its end. Pointing to the global slowdown, the US Federal Reserve has led the way and softened its guidance at an amazing lick, due to implicit fears of renewed intense financial pressures as seen at the end of 2018. The Fed now says it is inclined to be patient and has not taken things to the end of its course of expected normalisation. The ECB, for its part, has put an early stop to the normalisation, which had only timidly begun.
Thanks to the economic slowdown and virtually non-existent inflation, central banks intent on managing the slowdown to promote a soft landing (and not spooking the financial markets by showing a benevolent face), and the still-uncertain international political and economic climate subject to rushes of risk-aversion, risk-free long-term rates will continue to be sought and will edge up only slightly, just like the EUR’s appreciation against the USD.
Catherine LEBOUGRE – email@example.com
For more information, consult our publication World – Macroeconomic Scenario for 2019-2020: prevention better than cure and our video Scenario: prevention rather than cure
* Foreign trade (exports + imports of goods) as a % of GDP (source: World Bank): United States 20%, Japan 28%, China 34%, Eurozone 70% (of which Germany 71%, Italy 50%, France 45%); Industry (including energy) as a % of GDP (source: OECD): Germany 26%, Japan 24%, Eurozone 20%, Italy 19%, United States 16%, France 14.5%.