World economic outlook 2019: The global economy in 2018 was characterized by numerous political uncertainties: the future development of the trade disputes between the USA and China, the negotiations on the forthcoming Brexit, the Italian budgetary policy, the economic and political development in Turkey and much more. Unfortunately, these insecurities will not diminish in 2019. Global economic growth could therefore be weaker in 2019 than in 2018.
U.S.: Growth impulses from economic policy diminish
According to the International Monetary Fund (IMF), the U.S. economy is currently growing faster than most other Western industrial economies (see Table 1, as of October 2018). One reason for this strong growth is the combination of tax cuts and increases in government spending. Tax cuts stimulate private consumption and corporate investment. Higher government spending raises the demand for goods. The high demand for goods is causing production and employment in the U.S to rise. The U.S. economy is booming.
However, the high and rising demand for goods cannot be met by domestic companies. This is why imports to the USA are increasing. The US trade deficit is thus growing – although Donald Trump is imposing punitive tariffs that should actually reduce the American trade deficit.
The growth stimuli resulting from tax cuts and higher government spending have their strongest effect in the year in which they are implemented. Growth in U.S. real gross domestic product (GDP) will therefore be lower in 2019 than in 2018. Economic growth in the U.S. is expected to decline further in 2020 (see Table 1).
In addition, tax cuts combined with increases in government spending are resulting in an increase in U.S. public debt. Further credit-financed economic stimulus packages are therefore becoming increasingly difficult to implement. This also weakens growth in the American economy.
As a result, this implies: The U.S. economic boom should slow in 2019 and continue to weaken in 2020.
Feel free to also take a look at our post 11 Major Events that Could Change the Global Economy in 2019.
Europe: All major economies are growing more slowly
In Europe, economic growth is slowing noticeably in all major economies. Growth in Germany, France, Italy and the United Kingdom (UK) was already lower in 2018 than in 2017. The reasons for this are often political:
- All European economies are suffering from increasing protectionism, which is reducing their export opportunities. Export-dependent economies such as Germany suffer the most from trade restrictions.
- Uncertainty about the future economic relationship between the UK and the European Union (EU) is unsettling investors across Europe.
- In Italy, public debt is rising under the populist government. Confidence in Italy’s creditworthiness is declining. Interest rates are on the rise. This has a negative impact on investment. The associated uncertainty among capital providers and investors could quickly spread to other highly indebted EU countries.
- In France, reform efforts have come to a standstill for the time being due to protests against the government. The protests have also caused economic costs in the billions.
Poorer export opportunities and investor uncertainty are leading to a slowdown in economic growth throughout Europe.
The two major growth risks: Growing protectionism and political uncertainties
I believe that the greatest risk currently posed to the world economy is the threat of the escalation of world trade disputes: The credit-financed economic growth of the U.S. is leading to a high demand for goods from abroad. The high American trade deficit will therefore continue to rise in 2019. This development could prompt Donald Trump to take further protectionist measures. If the trade partners affected by this respond with protectionism, there is a risk that the global trade conflicts will escalate.
The second largest threat to global economic growth is a worsening of the existing numerous political uncertainties. Here is just one example: It could happen that there will be an UK’s withdrawal from the EU without an agreement between the parties (the so-called “hard Brexit”). The resulting uncertainty among all economic players has a negative impact on investment and consumer spending across Europe. The consequence would be lower demand for goods and services, which would then reduce production and employment.
In addition to these effects on the real economy (decline in production, employment and GDP), higher political risks could also have consequences for the financial markets. The massive increase in the global money supply by the central banks has led to signs of speculative bubbles in the markets for assets (shares, securities, real estate, etc.).
Political uncertainties can be a trigger that bursts a speculative bubble. The result would then be an economic crash – just like after the Lehman bankruptcy.
Still no danger to growth: Rising interest rates
In contrast to the political risks outlined above, there are also some rays of hope for the real economy. These include, above all, the still low interest rates, which facilitate investments.
In the U.S., the central bank has already raised key interest rates several times since December 2015, most recently on 19 December 2018 to a range of 2.25 to 2.50 percent. This should be the largest interest rate hike by the U.S. Federal Reserve. It is unlikely that interest rates in the U.S. will rise to more than three percent in 2019.
The European Central Bank is not expected to implement its first slight interest rate hikes until autumn 2019.
Growth engine Asia
Asia is another glimmer of hope for the global economy. The IMF forecasts growth rates of 5 percent and more for the major Asian economiesin 2019 and 2020 (see Table 2).
As a result, I assume that from a purely real economic perspective there is no reason why the global economy should grow weaker in 2019 than in 2018. We have low interest rates and global economic growth, especially in the US and Asia.
However, the many political risks in the U.S. and Europe are leading to uncertainty among investors. This alone will result in a slight decline in investment and production in 2019. The stock market turbulence in December 2018 is another source of uncertainty.
The economic outlook published by the IMF in October 2018 could therefore be too optimistic. The Kiel Institute for the World Economy, for example, consequently forecast lower growth rates for 2019 and 2020 in December 2018 than the IMF (see Table 3). Nevertheless, we can still expect real GDP to increase in 2019 – both for the global economy as a whole and for the major industrial nations.
The great uncertainty regarding the economic development for 2019 is, in my opinion, to be found in the political sphere. Should unexpected escalations occur, the economic development will be much more uncomfortable than expected.
If you enjoyed reading this post feel free to also take a look at our post globalization report 2018 and find a complete study on the topic to be downloaded for free.