We tempered our expectations for global growth materially back in the summer of 2018. In our view, developments over the intervening months corroborate those downgrades. Trade tensions have continued to build, growth has slowed further, global interest rates have risen, and skittish markets are pricing in the more challenging outlook.
Therefore, in this forecast round, we have not materially changed our growth and inflation profiles. We believe that global activity will slow to annualized rates of 3.7% for 2018, 3.4% in 2019, and 3.2% in 2020, with weaker growth seen across a range of developed and emerging economies.1 However, we think that there are emerging themes that have the potential to shift the trajectory for the global economy—for better or worse.
Our short-term growth indicators continue to signal a moderation in activity, marking another disappointing quarter over the first three months of 2019. On a more positive note, we feel that recession risks remain low in the near term, though they continue to creep higher down the road.
After the U.S. government applied a 10% tariff to US$200 billion of Chinese imports in September 2018, the two countries called a temporary truce on trade, with U.S. plans to hike tariffs delayed until March 2019 in exchange for promises from China to import more U.S. goods. This provides time for negotiations on issues such as forced technology transfers, intellectual property protection and non-tariff barriers. The terms of the ceasefire are vague and we are skeptical that the two nations can reach a compromise on these contentious issues over still short time periods. Therefore, we continue to believe that tensions may ratchet up, with the U.S. raising tariff rates in March and eventually broaden these to include all imports of Chinese goods. However, we are monitoring developments closely for signs that there is more willingness to defuse tensions further.
In the face of this tension, Chinese policymakers have loosened policy, cutting reserve requirement ratios, personal and corporate taxes, and introducing measures to support lending. In our view, the cumulative fiscal impulse is now likely to reach over 1% of gross domestic product (GDP).2 Our judgement is that this will cushion, rather than reverse, an ongoing slowdown. However, sequential growth could lift a little over the first half of 2019, and there are risks of an additional substantial loosening of the policy taps, in our view.
If this scenario materialized, we think that it would help other emerging markets (EMs), which face headwinds from slowing global economic growth, trade tensions and tighter U.S. monetary policy. Nevertheless, growth across EMs generally is still expected to slow in coming years without that support, albeit with meaningful divergences across markets.
The U.S. is leading developed-market growth, thanks to loose fiscal policy. As this stimulus fades through 2019, we believe that growth may slow notably. The Eurozone growth engine has sputtered, with some, but not all, of this weakness down to temporary drags. In the UK, Brexit is at a crunch stage.
As we look forward, global central banks are facing a challenging balancing act. In several developed-market economies, wage growth is picking up. While we still anticipate that underlying inflation will build only slowly, this would argue for a faster normalization in policy. However, at the same time, outbreaks of market stress are tightening financial conditions.
Financial conditions have therefore tightened, and are at the margin an additional headwind to global growth.
In our opinion, market disturbances currently do not look severe enough to push global central banks off course. We believe that the U.S. Federal Reserve (Fed) may hike interest rates four more times before ending its monetary policy tightening cycle in late 2019. Meanwhile, the European Central Bank and Bank of England meanwhile are still expected to tighten policy, albeit slowly in coming years. However, we think that there are risks on both sides of this forecast. If financial stress continues to build, policymakers will be under pressure to send more supportive policy signals. Indeed, the Fed’s tone has already become more cautious in recent weeks. On the flipside, any larger breakout in inflation would necessitate a faster policy adjustment, with clear negative implications for growth and markets.
1,2Forecasts and estimates are offered as opinion and are not reflective of potential performance, are not guaranteed and actual events or results may differ materially.
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