A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK. To subscribe and/or view previous editions just google ‘Deloitte Monday Briefing’
Economists went into 2019 expecting global growth to slow modestly and that’s just what has happened. The slowdown is being driven largely by advanced economies, especially the euro area.
Despite a cooling in activity the US looks likely to be the fastest growing G7 economy, with economists expecting growth of around 2.4% this year. US growth looked shaky towards the end of last year, prompting the Fed (Federal Reserve) to row back from its long campaign of interest rate rises. The Fed’s dovish stance ignited an equity rally that has lifted US stocks by 18% this year. Recent readings for jobs, retail spending and consumer confidence suggest the US consumer is alive and spending, while business confidence remains well above long-term averages.
For now at least the US economy is enjoying a Goldilocks moment – with growth neither too fast nor too slow. In marked contrast to nervousness about US growth in December the Fed’s vice-chair Richard Clarida recently described the economy as being “in a good place”.
The same cannot be said for the euro area, the world’s largest economy. Germany, Europe’s economic powerhouse, has been hit hard by weakening Chinese demand, trade tariffs and disruption to car production caused by new emissions standards. This year Germany is forecast to grow by 0.8%, a slower pace than Brexit-embattled UK.
Italy is in its third recession in ten years and Italian growth is expected to stagnate this year, making it one of the weakest performers in the industrial world. Italy faces continued concern over the health of its banks which are heavily exposed to Italian government debt and a housing market that is yet to recover from the financial crisis. High levels of unemployment, especially for young people, illustrate the profound structural problems facing Italy.
Among the larger euro area economies Spain is doing relatively well. Structural reforms and declining labour costs have helped improve export performance which, in turn, has helped with job creation and raise incomes. Spain is forecast to grow at 2.2% this year, twice the euro area average.
But for the euro area as a whole 2019 is set to be a pretty mediocre year for growth. According to the International Monetary Fund the euro area is likely to contribute less to global growth than in any year since the euro crisis in 2012.
Despite Brexit-related worries the UK is expected to grow by 1.3% this year, a slight slowdown from last year’s 1.4%. Uncertainty over the nature and timing of the UK’s exit from the EU has hit corporate confidence and investment. This is reflected in downgrades to economists’ forecasts for investment and profit growth since last autumn. By contrast low unemployment and accelerating real wages have bolstered consumer spirits and delivered good growth in retail sales so far this year.
Elsewhere in the world activity in emerging economies as a whole is expected to slow slightly driven mainly by China.
Economists expect the Chinese economy to grow at 6.2% this year, its slowest pace in almost three decades. China is shifting from breakneck industrialisation driven by investment and exports to a new phase era characterised by a greater role for consumption, government spending and services. China growth has also been dampened by a shrinking working age population and trade tensions with the US.
Chinese policymakers have sought to reduce the risks of a hard landing by easing credit conditions and cutting taxes. Credit availability is improving for more productive, private businesses and there are signs that activity may be stabilising. Trade talks with the US have yet to produce an agreement but have raised hopes of an eventual easing of tensions. Chinese equities have responded positively, with the Shanghai Composite Index up 25% since the beginning of the year.
A slowing China means India has secured the crown of the world’s fastest growing major economy and is forecast to deliver a 7.3% rise in output this year. Among other major emerging economies, reforms and monetary easing are expected to boost Brazilian growth this year and improving fundamentals point to steady growth in Russia despite US sanctions.
Overall the outlook remains for a softening of global growth this year. Looser monetary conditions in the US, euro area and China have driven a rally in global equities and eased fears of a sharper slowdown. But plenty of risks remain. A soft landing for the global economy is not guaranteed.
PS: Political polarisation has been much discussed of late. Much of this has focused on right-wing populism, but the left is also seeing something of a renaissance too. In the US the interest and following created by politicians including Alexandria Ocasio-Cortez and Bernie Sanders testifies to the appeal of left-of-centre politics. According to a Gallup poll last year, 51% of 18 to 29-year-olds in the US have a positive view of socialism while the number with a positive view of capitalism stands at 45%.
PPS: Last week I mentioned that Vietnam ranks slightly ahead of the UK in the PISA league table of educational attainment at age 15. This prompted a powerful response from a student which, with their permission, I quote: “I am a student from Vietnam and have come to the UK to study A-levels. I am the product of the typical East Asian education: rigorous curriculum, heavy workload, paid tutors in extra classes and relentless exams…I don’t see any real gains from this, because learning is just for the sake of getting good grades in the exams, rather than to truly grasp everything…After knowing that Vietnam is one place ahead of the UK in the PISA league, I am really astounded since it never crossed my mind that our education could be compared to the UK’s, let alone ranked above it”. These comments elegantly highlight the difficulty of comparing the effectiveness of different education systems.
