The last six weeks have provided evidence that the global economy is stuttering (Figure 1).
- Growth has slowed in China, due to economic reform policies and a curb in the growth of debt. And because China is an important destination market for emerging markets, their growth has slowed too.
- Emerging markets’ currency values have fallen relative to the U.S. dollar, which has made their imports more expensive and increased the servicing costs of their large stock of dollar-denominated debt. They are also suffering from the lagged impact of high oil prices earlier this year.
- The slowdown in China and the emerging markets, which together account for 40% of global GDP, has had a knock-on impact on exports from Germany and Japan, particularly for cars.
If we throw into this mix the slowdown in the U.S. housing market, the potential squeeze on U.S. corporate profits from the strong dollar and the uncertainty around Brexit, it is no surprise financial markets have suffered a loss of confidence.
What does it mean for growth in 2019?
The year will start more slowly than 2018, and investor confidence may wobble, but a recession is unlikely, and growth will pick up over the year. We expect the following trends to support growth:
- Global consumer confidence will remain high, and spending will be supported by real income gains and falling gasoline prices.
- China will introduce fiscal stimulus to ensure acceptable spending levels for its social programs to succeed. Tax cuts have already been made and more will follow. The fall in the value of the yuan will boost Chinese exports.
- Europe has a mild fiscal easing in the pipeline, and Japan is also likely to see more government spending.
- The Fed likely will pause its rise in the federal funds rate in March, and possibly also in June.
If a trade deal is made between the U.S. and China, and if there is an acceptable exit deal between the EU and the U.K., which are more likely than not, then the economic outlook for 2019 will brighten very quickly. We expect global growth of 3.4% in 2019, down from 3.7% in 2018. The risks are to the downside right now, but these should ease in the early part of next year.
We will provide more detail on our economic outlook and the detailed implications for real estate in our 2019 Global Real Estate Market Outlook, which will be released early in the new year. Click here to receive a copy.
Figure 1: Global Growth has Stuttered - Quarterly Annualized GDP Growth
Source: Macrobond, World Bank, Q4 2018.