Global Quarterly Economic Forecast

Global Outlook

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• Economic growth around the world has evolved in line with our expectations, keeping our 2019 forecast unchanged at a subdued 3.1% (Chart 1). However, the recent escalation of trade conflicts suggests more downside risk to our 2020 view, which we have edged down to 3.3% (from 3.5% previously).
• Underlying this forecast is an assumption of a more muted rebound in global economic activity in the second half of this year. Trade policy uncertainty is likely to remain elevated even if a deal is struck between the U.S. and China. A number of indicators are signaling that momentum is starting to turn the corner, but it is too early to gauge the robustness of the rebound. 
• After rising through the first four months of the year, world oil prices have pulled back considerably over the past month, as worries of softening demand have increased. Other commodity prices, including base metals, have been similarly weak, reflecting soft demand and more ample supplies. 
• Risk appetite and global financial market conditions have improved since early 2019, but have come under pressure as trade conflicts have escalated. However, recent rate cuts by some central banks, and the prospect of Fed cuts later this year, have helped to lift market sentiment (Chart 2). 
• Consumer and business sentiment surveys have stabilized or edged up from recent lows in most major economies, suggesting greater confidence in the near-term outlook. However, some question marks linger on the European outlook.
• While remaining at low levels, industrial production appears to be stabilizing in many parts of the world, as are global trade volumes.
• Real wage growth and job gains have remained healthy in advanced economies, supporting a firming outlook for domestic demand.

• China’s economic indicators are showing early evidence of responding positively to stimulus, which could alleviate some pressure on key trade partners.
• Given the precarious state of the global economy, the last thing it needs is an escalation in trade tensions. However, this did not stop the U.S. administration from raising its tariff rate on $200 billion in imports from China to 25% from 10%, and initiating the process to levy a 25% tariff on the remaining $300 billion in imports from China. The first tranche of increased tariffs is likely to shave a bit more than 0.1 percentage points off U.S. growth in the year ahead, with a similar amount hitting back on China.
• While the economic impacts of the recent escalation may be small, further escalation to apply a 25% tariff rate on the remaining $300 billion would reduce U.S. growth by about 0.3 percentage points over the next year or so, with a similar negative impact estimated for China (Chart 3). Critically, the impact on market sentiment is the wildcard in these estimates. 

• China has announced an increase in tariffs of up to 25% (from the previous 5-10% rate) on $60 billion in U.S. goods effective June 1st. Chinese authorities have responded by allowing the renminbi to depreciate as a means to offset the cost of U.S. tariffs. Authorities are also increasing domestic subsidies to the most-affected sectors, and are continuing to impede the activity of U.S. businesses operating in China.
• As we’ve seen previously, the direct impacts of tariffs (Chart 4) are dwarfed by the indirect impacts that can flow through deterioration in market sentiment and heightened business uncertainty. This is the true wildcard, particularly since we are at an early phase of global recovery after having buckled from past trade action. 
• Trade negotiations between the U.S. and the EU and Japan are in their early stages. The U.S. administration has threatened to impose tariffs on $11bn in EU goods, and continues to weigh levying auto tariffs. Should negative trade action take place with Europe and/or Japan while issues remain unresolved with China, the stability of the global economy becomes more threatened via the sentiment channel. In addition, both Europe and Japan have a very thin growth-cushion to absorb additional shocks.
• Growth is expected to remain dichotomous between advanced and emerging market economies. Once again, the U.S. is positioned to outperform its peers this year. At around 2.6%, growth will be slightly softer than last year, but still gap with other advanced economies. This should keep the U.S. dollar well-bid.

Growth to hold below trend in most of the G7

• The outlook for the G7 economies is broadly similar to our outlook in March:
• The Euro Area is expected to grow at a 1.2% pace this year. First quarter growth proved a bit stronger than expected as consumer spending and net trade firmed up. However, ongoing weakness in the manufacturing sector may persist into the second half of the year, leaving growth stuck at around its 1.3% quarterly annualized trend pace.
• The Brexit saga continues, with the exit date pushed to October 31st. This month marks three years of uncertainty about the UK’s future trading relationship with its most important partner. This extended period of uncertainty will continue to weigh on the UK economy for several more quarters. Business and residential investment are expected to remain subdued despite healthy domestic fundamentals. This places the UK growth outlook at just 1.2% in 2019. It will be important to look through the noise in the incoming data. Looming Brexit deadlines drove a surge in imports and inventories at the start of the year that is expected to unwind in the coming quarters.

• Advanced East Asian economies will continue to face headwinds related to the fallout from escalating U.S.-China trade tensions. Exports of technology goods from Japan, South Korea, and Taiwan have all been affected by the trade spat. With a ramping up in trade tensions, it’s difficult to see growth tick up in Japan to an above-trend pace. As such, Japanese growth is expected to remain choppy this year even before the VAT tax hike is introduced this fall.
• Oil production curtailments and recent domestic weakness have dampened economic growth in Canada for several quarters. However, recent data support some firming in domestic demand in the March-April period. This is consistent with our view that Canada should be able to produce roughly 1.3% growth this year on strengthening momentum. 
• Soft inflation and the growth-sapping impacts of escalating trade disputes ensures that G7 central banks will remain on the sidelines in the coming months as they monitor incoming data. The one exception is the Federal Reserve, which has the most room to cut. The Fed is likely to adopt a risk management approach and cut rates later this year.

Hope for an EM rebound

• Economic activity is slowly improving within emerging market economies. Although highly volatile, capital flows have stabilized, and domestic financial conditions have loosened. Moreover, the reemergence of disinflationary pressures ensures that some countries may be able to undertake more stimulus measures, such as policy rate cuts and/or fiscal initiatives. 
• Emerging East Asian economies with the largest supply chain links with China have slowed in line with expectations at the start of the year. However, forward-looking manufacturing surveys signal a rebound is beginning to take hold on improving domestic demand and Chinese stimulus measures. 
• There are some signs that Chinese demand is rebounding after slumping in the second half of last year. Past economic stimulus measures are likely playing a role, as are promises by authorities to boost infrastructure spending and help households purchase consumer durables. Manufacturing activity is expanding once again, while consumer and business sentiment is recovering. As a result, we maintain our forecast of 6.2% growth for China’s economy this year, roughly the midpoint of the 6-6.5% range announced by authorities in March. 

Downside risks persist

• Late cycle dynamics, a build-up in financial vulnerabilities and heightened economic uncertainty have made forecasting more difficult than usual over the past few quarters. Concerns about growth and trade wars have driven down global bond yields back to 2017 levels (Chart 5). Despite early evidence of a pick-up in underlying economic indicators, the pace of economic growth remains lower than in recent years. This leaves many countries with a thinner cushion to absorb economic shocks, be it from trade or geopolitical developments. This places more focus on the potential for additional monetary and fiscal stimulus, and the ability of countries that are already near the zero lower bound and running budget deficits to deliver it (if need be). Rate cuts by the Fed should help cushion some of the downside threat to growth via looser global financial conditions, but are not expected to extinguish the drag on investment and trade from the prolonged period of elevated uncertainty.
• As the unprecedented and rising amount of negative yielding debt attests (more than US $11tn), monetary policy is still far from normal. Even so, a failure of either economic growth or inflation to increase would hasten pressure for additional stimulus before key advanced economies have lifted rates off the zero lower bound. Europe, with its ailing banks and little room to lower interest rates, is most at risk of falling into recession if demand were to falter. Moreover, fiscal space in the Euro Area is limited to a handful of economies, including Germany, but coalition governments are hesitant to deploy fiscal stimulus. Any missteps by policymakers could result in a sudden repricing of global risk that could derail the global recovery.