World economy risks returning to sync, this time to the downside

By: |
New Delhi | November 04, 2018 9:58 PM

The world’s major economies that entered 2018 accelerating in sync risk entering 2019 decelerating in sync.

imf, economyInternational Monetary Fund

The world’s major economies that entered 2018 accelerating in sync risk entering 2019 decelerating in sync.

The shift is being led by China, where the economy’s weakest performance since 2009 is set to worsen unless a peace can be struck in the trade war with the U.S. Factory readings from Asia already show a fallout, with Taiwan, Thailand and Malaysia slipping into contraction territory.

The euro-area too is losing momentum, expanding in the third quarter at half the pace of the prior three months as Italy and Germany stagnated. That comes just as inflation is picking up, setting up a complex 2019 for European Central Bank policy makers who have pledged to dial down monetary support.

The question is whether the U.S. can resist the downdraft, providing ballast for the rest of the world. While a tightening labor market gives reason to hope it can, most economists forecast growth will ebb a bit in 2019 on the back of protectionism, higher interest rates and the fading support of tax cuts.

“The story is that we will probably re-synchronize,” said Joachim Fels, global economic adviser at Pacific Investment Management Co. “But this time on the downside.”

It’s a marked turnaround from April, when the International Monetary Fund declared the world was enjoying the most united upswing since 2010. Its mood changed in October when cut its global outlook for the first time in two years and said growth had plateaued.

There are other signs the peak has passed for the global economy. IHS Markit’s purchasing manager indexes for China and the euro area all retreated last month to drive the overall reading to an almost two year low, while the U.S. gauge was little changed. Most countries have now seen their PMIs decline over the last three months.

“The latest data strongly supports the view that the best days in the post-2008 financial crisis growth cycle have been seen,” said Alan Ruskin, global co-head of foreign-exchange research at Deutsche Bank AG.

A global reversal could add further jitters to financial markets and eventually pressure central banks such as the Federal Reserve to slow their exit from monetary stimulus, although so far there’s scant sign the Fed is for turning.

What Our Economists Say…

“Global growth started 2018 strong and convergent. Heading toward 2019, the strength in the U.S. is still there, for much of the rest of the world it is not. A key question for the year ahead — the size of the trade war drag and the magnitude of the Chinese policy response. An effective stimulus from China would take a lot of the concern about global growth off the table.”– Tom Orlik, chief economist, Bloomberg Economics

Circuit breakers could include a breakthrough in the trade dispute. Bloomberg reported on Friday that Trump wants to reach a deal with Chinese President Xi Jinping later this month.

Other tonics could include a slower-than-expected pace of Fed rate hikes, which would also ease pressure on borrowers and emerging markets. As would a soothing of political tensions over Britain’s plan to leave the European Union or concerns about Italy’s huge debt pile.

The growth wobbles have already hit markets, and the moves have been significant enough that they could have economic consequences. October marked one of the worst months for the bull market in U.S. stocks, contributing to selloffs around the world that erased some $8 trillion in wealth.

A further 20 percent fall in global equity markets could lower average advanced economy gross domestic product in 2019 and 2020, according to an estimate by Oxford Economics.

The U.S. is already forecast to slow, with growth tipped to cool to 2.7 percent in the fourth quarter, versus 3.5 percent in the third and 4.2 percent in the second, according to the median forecasts of economists tracked by Bloomberg.

“You can argue that global growth is synchronizing again now that the U.S. is seeing growth decelerate,” said Megan Greene, chief economist at Manulife Asset Management. “This was absolutely to be expected as developed countries converged back toward their potential GDP growth rates.”

Do you know What is Cash Reserve Ratio (CRR), Finance Bill, Fiscal Policy in India, Expenditure Budget, Customs Duty? FE Knowledge Desk explains each of these and more in detail at Financial Express Explained. Also get Live BSE/NSE Stock Prices, latest NAV of Mutual Funds, Best equity funds, Top Gainers, Top Losers on Financial Express. Don’t forget to try our free Income Tax Calculator tool.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Next Stories
1Linkedin’s findings :Covid: Workforce confidence of women, Gen Z dips
2Bad bank guarantee: Finmin to seek Cabinet nod for Rs 31,000 cr-plan
3Reforms boost, states borrowed Rs 1L cr extra: PM