Bill Witherell is Cumberland Advisors' chief global economist. He joined Cumberland after years of experience at the Organisation for Economic Co-operation and Development in Paris. The views and opinions expressed in this piece represent only those of the author and are not necessarily those of S&P Global Market Intelligence.
Last week the spring meetings of the International Monetary Fund and the World Bank brought together in Washington the world’s finance ministers, central bankers, financial experts and economists, other government officials, and invited representatives from the private sector, academia, and civil society organizations. A central issue for discussion at these meetings is the outlook for the global economy, based on the projections and analyses of the IMF. The economic projections and the views reportedly expressed by participants were largely encouraging for investors; but risks in the outlook, particularly for the medium-term years following 2019, rightly received a lot of attention.
The IMF is projecting world economic growth for both this year and 2019 at 3.9%, somewhat higher than the already-robust 2017 pace of 3.8%. Growth was particularly strong in the closing half of 2017, with upside surprises for advanced, emerging-market and developing economies alike. In the advanced economies the acceleration was due largely to stronger investment spending, whereas for emerging-market and developing economies the main boost came from private consumption. Also, a rebound in trade was particularly helpful for Asian economies. A recovery in commodity prices was due primarily to rising prices for oil and natural gas and was thus a strong positive for exporters of those commodities.
The global economy appears to have lost some momentum in the first quarter of this year. The JPMorgan Global Manufacturing and Services Purchasing Managers Index (PMI), published by IHS Markit Ltd., indicates that global growth slowed to a 16-month low in March. The average reading for the quarter was the best since 2014, due to the strong beginning of the quarter. The global pullback in March was notable in the Eurozone Composite PMI (manufacturing plus services), where the numbers were the weakest since the start of 2017. Unusually cold weather was a factor, but fears were expressed that Europe and even the global economy may be headed for a slowdown. A decline in new export orders in Japan as the stronger yen began to affect exports, along with sluggish household spending in the U.S., contributed to those fears. Economic growth in both the euro area and the U.S. appears to have slowed to less than 2% in the first quarter, compared to fourth-quarter 2017 rates of 2.9% and 2.4%, respectively.
While there are risks, our base forecast anticipates that the first quarter’s weakness will prove to be short-lived. The IMF does not provide quarterly projections, but their strong annual forecast implies this. Most early indicators are consistent with some acceleration of economic activity. The Markit Flash U.S. PMI for April indicates faster growth for both manufacturing and service sector firms. New order growth is the strongest since March 2015. The Nikkei Flash Japan Manufacturing PMI for April revealed stronger growth in output, new orders, and employment, along with improved business confidence. The Markit Flash Eurozone PMI for April was less positive, unchanged from the March pace, showing solid growth but continuing to be weaker than it had been earlier in the year. Demand has weakened, and supply chain constraints remain widespread. The rate of employment growth has risen, however. Another positive signal is the solid private sector growth in Germany after it eased in March to an eight-month low.
The strong expansion projected for the global economy in 2018 and 2019 includes growth by the advanced economies of 2.5% this year, easing back to the 2017 rate of 2.2% in 2019. Central to these projections is the expectation that the world’s largest economy, the U.S., will advance by 2.9% this year and 2.7% in 2019. The expected macroeconomic impact of the December 2017 tax reform, particularly the lower corporate tax rate and the temporary full expensing of investment, together with increased government spending, will begin to be felt in the second quarter and emerges as a powerful fiscal stimulus in the remainder of the year and in 2019. The temporary nature of some provisions will have a negative effect further ahead, beginning in 2022.
Economic growth for the eurozone is also projected to be above trend, 2.4% this year and 2.0% in 2019, supported by continued monetary stimulus, improving labor markets, and healthy external demand. Domestic demand also is expected to remain robust. The problem of capacity constraints together with high corporate profitability should encourage business investment and job creation.
The Japanese economy is projected by the IMF to moderate from its strong above-trend growth of 1.7% last year to a still above-trend 1.2% this year and then further, to 0.9%, in 2019. Our projections are somewhat stronger, 1.5% for this year and 1.1% for 2019, but the trend is the same. The continued strength of the Japanese yen is hurting exports and export profitability. Political uncertainty in Japan is high, with the future of Prime Minister Shinzo Abe and his economic policies currently at risk. Japan, like many other countries, also faces the risk of a growing protectionist trend that would impact global trade.
Emerging-market and developing economies as a group are projected to experience buoyant growth at rates of 4.9% this year and 5.1% in 2019, up slightly from 4.8% growth last year. The largest Asian economies are central to these estimates, with China’s growth moderating from 6.9% last year to 6.6% this year and 6.4% in 2019, and India’s growth accelerating from 6.7% last year to 7.4% this year and 7.8% in 2019. China will continue to rebalance its economy from investment and industry toward private consumption and services. In India the transitory effects of the currency exchange and the imposition of the national goods and service tax will diminish while private consumption is expected to be robust. Economic activity accelerated in March, signaling stabilization after weaker performance earlier in the year. Both China and India also face great uncertainty about future trade relations.
Latin American and Caribbean emerging and developing economies are projected to continue a gradual economic growth recovery from the effects of the fall in commodity prices during from 2014 to 2016. Following last year’s 1.3% advance, growth in 2018 is projected at 2.0% and in 2019 at 2.8%. Brazil’s recovery from a deep recession and its significant structural reforms program are central to the region’s projected improved performance.
The IMF cites a number of risks to their optimistic outlook for the next two years, risks that are more concerning for the medium term (2020 and beyond) that include geopolitical strains, a sudden and severe tightening of monetary policies, waning popular support for global economic integration, and a move toward protectionist trade policies that would impact global trade. The latter issue was debated at the annual spring meetings, with many participants stating that the growing number of trade disputes, if not resolved, could deteriorate into tit-for-tat imposition of trade barriers that would derail the global economy. U.S. Treasury Secretary Steven Mnuchin complained about persistent trade surpluses and stated “We urge the IMF to speak out more forcefully on the issue of external imbalances, including by providing clear policy recommendations for countries with large surpluses, in support of more balanced global growth.”
We have stated our concerns about the current administration’s rejection of multilateral approaches to trade issues. Trump’s rejection of a possible return to the Trans Pacific Partnership on the eve of Prime Minister Abe’s recent visit was a lost opportunity to strengthen U.S. trade relations in the Asia-Pacific region and to open markets for U.S. firms and farmers. The jury is out on whether Trump’s unilateral threats of tariffs will result in successful trade negotiations. There have been some promising signals that have reduced investor concerns. Clearly, failure would have serious implications for the global economy and financial markets.
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