After a promising start, economic momentum slowed gradually in 2018. In particular, political issues – such as the trade dispute between the US and China, Brexit or the budget dispute between the new Italian government and the EU – have put a lasting strain on corporate and household sentiment, weakening investment growth, exports and private consumption guided. This development is now affecting most industrialized and emerging economies. Only the US has been able to avoid it. The slowdown can still be seen as economic normalization, but should the dispute between the US and China escalate, a stronger economic setback threatens in 2019.
After the surprisingly strong growth of the global economy in 2017, we expected this positive development to continue at least at the same pace in 2018. But far from it. Already at the beginning of the year, sand got into the gears of the economic engine that had been running until then. At first, it looked as though special factors were responsible for the weaker economic growth, as it later turned out that this was not just a temporary phenomenon. There was no appreciable recovery in the following years either. Instead, the sharpening tones from the White House on the topic of trade caused a steadily increasing uncertainty among the global companies. As a result, important leading indicators, such as those of the OECD or the global purchasing managers’ indices from the manufacturing and service sectors, have been steadily weakening since the beginning of the year.
If the trade dispute widened into a trade war, this would have unforeseeable consequences for the world economy. A much stronger economic downturn could be the consequences – even as the global recession looms. However, this does not have to come to the fore if politics makes sense. More than ever before, politics is therefore the key factor that significantly influences the development of the global economy. This leads to greater uncertainties in the forecasts for the next year than usual.
Emerging Markets: Heterogeneous economic development continues
2018 was a year of many crises in various emerging markets. Argentina and Turkey in particular were in distress, but also South Africa, Venezuela, Brazil and Iran caused negative headlines. According to the IMF, emerging economies will remain stable at 4.7 percent next year. The growth of the Chinese economy has slowed somewhat this year. Real gross domestic product is expected to grow by 6.6 percent over the previous year (2017: 6.9 percent). So far, the introduced trade restrictions have had little effect. Therefore, the pressure of the US government to negotiate a “deal” with China in the trade dispute will remain high. If China does not move in the direction desired by the US, the trade dispute could turn into a trade war. In this case, not only will the psychological effects on the world economy remain so far, but more significant signs of global trade and global economic growth will be needed. Although in such a case, the Chinese government would counteract with a more expansionary fiscal policy and the central bank would ease monetary policy, we expect the growth of the Chinese economy in 2019 to slow to just under six percent.
For the largest emerging markets of India, Brazil, Russia and Mexico after China, the IMF expects slightly higher growth rates in 2019. Whether this is a realistic assumption will depend crucially on the question of how the trade conflicts continue. As long as there is no agreement between the US and China, we expect that this will also affect the exports of other emerging economies. Although economic data have been relatively robust in most economies, apart from the crisis countries mentioned above, growth in exports has slowed almost everywhere. Among the major emerging economies, India’s growth prospects are the most favorable next year. This is because important economic reforms have been implemented in recent years that have improved the stability of the economy. Moreover, with its young and growing population of 1.3 billion people, India is less dependent on foreign trade than on domestic demand. The improvement in purchasing power due to the fall in the price of oil suggests that the Indian economy will grow at a slightly faster pace of 7.5 percent next year than it will probably do in 7.3 percent in 2018.
By contrast, we consider the environment for Brazil and Russia to be more difficult. Both countries are heavily dependent on the development of commodity prices. Both the sharp decline in the price of oil and the weakening economic growth in China are having a negative impact. Necessary economic reforms have been postponed by both countries in the past, so that no growth impulses can be expected from this side. Unlike the IMF, which expects growth in Brazil to accelerate from 1.4 to 2.4 percent, our own assessment remains more cautious with real GDP up 1.8 percent. For Russia, unlike the International Monetary Fund, we expect a slight decline in economic momentum in the coming year. The Russian economy will grow by 1.7 percent in 2018, and by 2019 we expect the growth to slow to 1.5 percent (IMF: 1.8 percent). This is mainly due to the decline in the price of oil and the ongoing economic sanctions.