12 April 2019

A Global Economic Slowdown is Coming

The global economy has maintained an incredibly steady rate of growth in recent years.  In fact, never in recorded economic history has the overall rate of global economic growth fluctuated so little over a seven-year period as it has over the past seven years.  Between the years 2012 and 2018, global economic growth for any given year was never lower than 3.3% and never higher than 3.8%, a fact that gives the impression that the past seven years have been one of remarkable economic stability.  Of course, this is far from the truth.  In fact, there have been many ups-and-downs for the world’s leading economies over the past seven years, and the impact of the global financial crisis is still being felt around the world.  In the early part of this seven-year run of steady global growth, it was emerging markets that were generating most of this growth, as developed economies, especially Europe and Japan, were mired in deep slumps.  Later, many emerging markets ran into trouble, while developed economies staged a recovery.  In recent months, concerns have mounted that this run of steady global economic growth is in jeopardy and that a major downturn is forthcoming.  This is now the focus of many of the world’s economic policy-makers and the primary concern for many businesses and investors.

A Downturn in Sync: In fact, nearly all of the world’s leading economies are showing signs of weakness at the moment,  Moreover, most of the world’s leading economies are forecast to grow at a slower pace in 2019 than they did in 2018, something known as a “downturn in sync”.  Currently, we are forecasting slower growth in 2019 than in 2018 for ten of the world’s twelve largest economies.  Such a coordinated downturn has not occurred since 2009, when the global economy was being shaken to its core by the worst financial crisis since the Great Depression. Worse, no single economy or group of economies appears to have the capability to offset the weakness in other major economies, as was the case over the recent seven-year period of stable global economic growth.  In fact, many of the world’s leading economies are to blame for the rising risks facing the global economy today.

China: One economy that is now a cause for concern is China.  China’s remarkable economic progress over the past 40 years has transformed that country from a backwater to the leading driver of global economic growth in the world today.  In fact, more than a quarter of the world’s annual increase in economic output is now generated by China alone.  During the first 30 years of this 40-year economic transformation, official Chinese economic growth data was largely accurate, or at least reflected the longer-term levels of growth in that country.  However, over the past decade, it is generally accepted that official economic growth figures from China have overstated the true level of economic growth in that country.  In fact, this overstating of growth really came into focus in the second half of last year, when the actual rate of growth in China is estimated to have been somewhere around just 2%, rather than the 6.5% official GDP growth rate for the last six months of 2018.  Looking ahead, there are many indicators that suggest that the Chinese economy will continue to struggle in the coming months, including very poor trade data and slower consumer spending growth.  As such, the leading driver of global economic growth will likely generate less growth than in previous years.

Asia-Pacific: Outside of China, most other Asian economies had been expecting to maintain relatively high levels of growth over the next couple of years, but there are growing concerns about their near-term outlook.  While these economies have also been impacted by weaker export demand in recent months, they are still generating solid levels of growth due to rising levels of domestic demand.  As wealth levels rise in these countries, domestic demand growth is forecast to remain high.  Nevertheless, there are growing fears that a further deterioration of the external situation will weaken growth in many Asian economies in the coming years.  In the meantime, Japan, the world’s third-largest economy, continues to record very low levels of economic growth, due in large part to that country’s demographic decline that saw Japan’s population decline by a whopping 449,000 people last year.

Europe: No region’s economic outlook has deteriorated more in recent months than that of Europe.  After three recessions in years following the global financial crisis, Europe had managed to stage a tentative recovery between 2014 and the first half of 2018.  However, growth has slowed across the board in Europe in recent months and the outlook for many of that region’s leading economies is worsening.  Germany, the region’s largest economy, nearly fell into a recession in the second half of last year and recent indicators suggest that 2019 will be a tough year for the German economy.  Meanwhile, the region’s leading generator of economic growth over the past 25 years, the United Kingdom, is mired in uncertainty due to the chaos surrounding its impending withdrawal from the European Union. Elsewhere, France and Italy continue to generate any growth, while Spain, the region’s fastest-growing large economy, is forecast to see a significant slowdown over the next two years. In fact, there are growing fears that Europe as a whole could fall into a recession in 2019 or 2020, as domestic demand remains weak and the external situation worsens.

Commodity Exporters: Economies that rely on commodity exports for much of their economic growth are also unlikely to realize any significant jump in economic growth over the next year or two, as commodity prices are not forecast to increase significantly during this period.  Since the sharp fall in most commodity prices almost five years ago, most commodity exporters have struggled to generate any economic growth and have been forced to make drastic cuts in public spending to offset the loss of commodity revenues.  This has had a dramatic impact on major economies in regions such as the Middle East, Africa and Latin America, holding down growth across these regions.  Furthermore, most of these major commodity exporters have failed to develop major middle classes, thus preventing the establishment of a domestic market that could help offset the loss of export revenues during times of lower commodity prices.  Thus, the next two years could prove challenging for each of these regions.

New World Economies: “New World’ economies are also not immune to external pressures, despite their wealthy domestic markets and more favorable demographic situations.  For example, after growing by nearly 3% last year, economic growth in the United States is forecast to decline by half a percentage point in both 2019 and 2020 as the impact of the Trump Administration’s tax cuts wears off and as labor shortages worsen.  Canada and Australia, two of the world’s most successful economies in recent decades, are also experiencing a higher degree of turbulence that has resulted in lower rates of economic growth in recent months.  Looking ahead, the demographic advantages that countries such as the United States, Canada and Australia enjoy will slowly shrink without higher levels of immigration, reducing domestic market growth in these countries.  Nevertheless, even with lower growth rates on the horizon, these “New World” economies will continue to grow at a faster pace than most other developed economies in the years ahead.

For the global economy, these next few months could prove to be pivotal.  Consumer, business and investor confidence levels are on the decline in almost all major economies, and fears are rising the increasing levels of protectionism could lead to a major decline in trade and investment in the coming years. Politics also remains a concern, as populist leaders and political parties on both the right and the left of the political spectrum are gaining support around the world.  The question is not whether or not there will be a slowdown, but rather, how far will economic growth fall over the next two years. Since the financial crisis, there have been faster-growing economies that have helped to offset slumping economies, enabling global economic growth to hold remarkably steady in recent years. However, nearly all major economies are forecast to either stagnate or slow over the next two years, poising a major challenge for the global economy in 2019 and 2020.  In fact, given all of the risks facing the global economy today, a major economic slowdown sometime in the next two years cannot be ruled out.