–US, Euro Growth Projections Trimmed a Tenth, China Revised Up Two Tenths; India the Big Loser
WASHINGTON (MaceNews) – The International Monetary Fund Monday issued an updated World Economy Outlook, seeing global growth this year improved to a 3.3% rate, a tenth less than had been seen in October.
The update said there are signs manufacturing and trade could be “bottoming out,” but worse U.S.-EU trade relations could spoil the picture while better U.S.-China relations could help. Meanwhile the major factor in the downgrade was India, now seen growing at a 5.8% rate, 1.2 points less than expected in October.
The U.S. growth rate expectation was trimmed a tenth of a point to 2.0% this year, down from 2.3% in 2019. The Euro area growth was projected to be 1.3%, up slightly from 2019’s 1.2% but a tenth lower than seen in October. For China, the WEO update saw 6.0%, bucking the trend by being revised up two tenths from the last WEO.
The following is the IMF WEO update summary, with boldfaced emphasis added;
·Global growth is projected to rise from an estimated 2.9 percent in 2019 to 3.3 percent in 2020 and 3.4 percent for 2021—a downward revision of 0.1 percentage point for 2019 and 2020 and 0.2 for 2021 compared to those in the October World Economic Outlook (WEO). The downward revision primarily reflects negative surprises to economic activity in a few emerging market economies, notably India, which led to a reassessment of growth prospects over the next two years. In a few cases, this reassessment also reflects the impact of increased social unrest.
·On the positive side, market sentiment has been boosted by tentative signs that manufacturing activity and global trade are bottoming out, a broad-based shift toward accommodative monetary policy, intermittent favorable news on US-China trade negotiations, and diminished fears of a no-deal Brexit, leading to some retreat from the risk-off environment that had set in at the time of the October WEO. However, few signs of turning points are yet visible in global macroeconomic data.
·While the baseline growth projection is weaker, developments since the fall of 2019 point to a set of risks to global activity that is less tilted to the downside compared to the October 2019 WEO. These early signs of stabilization could persist and eventually reinforce the link between still-resilient consumer spending and improved business spending. Additional support could come from fading idiosyncratic drags in key emerging markets coupled with the effects of monetary easing. Downside risks, however, remain prominent, including rising geopolitical tensions, notably between the United States and Iran, intensifying social unrest, further worsening of relations between the United States and its trading partners, and deepening economic frictions between other countries. A materialization of these risks could lead to rapidly deteriorating sentiment, causing global growth to fall below the projected baseline.
·Stronger multilateral cooperation and a more balanced policy mix at the national level, considering available monetary and fiscal space, are essential for strengthening economic activity and forestalling downside risks. Building financial resilience, strengthening growth potential, and enhancing inclusiveness remain overarching goals. Closer cross-border cooperation is needed in multiple areas, to address grievances with the rules-based trading system, curb greenhouse gas emissions, and strengthen the international tax architecture. National-level policies should provide timely demand support as needed, using both fiscal and monetary levers depending on available policy room.
Recent Developments and Implications for the Forecast
Trade policy uncertainty, geopolitical tensions, and idiosyncratic stress in key emerging market economies continued to weigh on global economic activity – especially manufacturing and trade – in the second half of 2019. Intensifying social unrest in several countries posed new challenges, as did weather-related disasters – from hurricanes in the Caribbean, to drought and bushfires in Australia, floods in eastern Africa, and drought in southern Africa.
Despite these headwinds, some indications emerged toward year-end that global growth may be bottoming out. Moreover, monetary policy easing continued into the second half of 2019 in several economies. Adding to the substantial support the easing provided earlier in 2019, its lagged effects should help global activity recover in early 2020. As discussed below, the 2019 global growth estimate and 2020 projection would have been 0.5 percentage point lower in each year without monetary stimulus.
Tentative signs of stabilization at a sluggish pace
In the third quarter of 2019, growth across emerging market economies (including India, Mexico, and South Africa) was weaker than expected at the time of the October WEO, largely due to country-specific shocks weighing on domestic demand. The advanced economy group slowed broadly as anticipated (mostly reflecting softer growth in the US after several quarters of above-trend performance). Despite continued job creation (in some cases, in the context of unemployment rates already at record lows), core consumer price inflation remained muted across advanced economies. It softened further across most emerging market economies amid more subdued activity. Weak demand lowered metals and energy prices, which kept a lid on headline inflation.
High frequency indicators for the fourth quarter tentatively suggest momentum stabilized at a sluggish pace, helped by the broad-based shift earlier in the year toward accommodative monetary policy and fiscal easing in some countries (including China, Korea, and the United States). Temporary factors that had slowed global manufacturing—auto sector adjustments to new emissions standards, a lull in the launch of new tech products, and inventory accumulation—appeared to fade. Business sentiment and the outlook of purchase managers in the manufacturing sector ceased deteriorating, but remained pessimistic overall. Importantly, the new orders subcomponent of the surveys picked up, particularly in emerging market economies. Consistent with the surveys, world trade growth appeared to be bottoming out. Service sector activity on the other hand weakened somewhat but remained in expansionary territory, supported by still-resilient consumer spending—which, in turn, helped maintain tight labor markets, low unemployment, and modestly rising wages.
Supportive financial conditions
The early signs of stabilization reinforced financial market sentiment already shored up by central bank rate cuts. Markets appeared to have internalized the outlook for US monetary policy and the Fed’s shift to “on hold” forward guidance following three rate cuts in the second half of 2019. Intermittent favorable news on US-China economic relations and diminished fears of a hard Brexit supported investors’ risk appetite. Equities continued to advance in the large advanced economies over the fall; core sovereign bond yields rose from their September low; and portfolio flows to emerging market economies strengthened, particularly to bond funds. Currency movements between September and early January reflected the general strengthening of risk sentiment and reduced trade tensions as the US dollar and the Japanese yen weakened by about 2 percent, while the Chinese renminbi gained about 1½ percent. The most notable movement across major currencies was the appreciation of the British pound (4 percent since September) on perceptions of reduced risks of a no-deal Brexit. Financial conditions thus remain broadly accommodative across advanced and emerging market economies
The main considerations for the global growth forecast from the backdrop of recent developments include: carryover from weaker-than anticipated second half outturns for 2019 among key emerging market economies; signs of tentative stabilization in manufacturing in the fourth quarter, but some weakening in still-resilient service sector activity; accommodative financial conditions; and uncertain prospects regarding tariffs, social unrest, and geopolitical tensions.
Global Growth Outlook: Modest Pickup in 2020
Global growth, estimated at 2.9 percent in 2019, is projected to increase to 3.3 percent in 2020 and inch up further to 3.4 percent in 2021. Compared to the October WEO forecast, the estimate for 2019 and the projection for 2020 represent 0.1 percentage point reductions for each year while that for 2021 is 0.2 percentage point lower. A more subdued growth forecast for India (discussed below) accounts for the lion’s share of the downward revisions.
The global growth trajectory reflects a sharp decline followed by a return closer to historical norms for a group of underperforming and stressed emerging market and developing economies (including Brazil, India, Mexico, Russia, and Turkey). The growth profile also relies on relatively healthy emerging market economies maintaining their robust performance even as advanced economies and China continue to slow gradually toward their potential growth rates. The effects of substantial monetary easing across advanced and emerging market economies in 2019 are expected to continue working their way through the global economy in 2020. The global growth estimate for 2019 and projection for 2020 would have been 0.5 percentage point lower in each year without this monetary stimulus. The global recovery is projected to be accompanied by a pickup in trade growth (albeit more modest than forecast in October), reflecting a recovery in domestic demand and investment in particular, as well as the fading of some temporary drags in the auto and tech sectors.
These outcomes depend to an important extent on avoiding further escalation in the US-China trade tensions (and, more broadly, on preventing a further worsening of US-China economic relations, including around tech supply chains), averting a no-deal Brexit, and the economic ramifications of social unrest and geopolitical tensions remaining contained.
Across advanced economies, growth is projected to stabilize at 1.6 percent in 2020–21 (0.1 percentage point lower than in the October WEO for 2020, mostly due to downward revisions for the United States, euro area and the United Kingdom, and downgrades to other advanced economies in Asia, notably Hong Kong SAR following protests).
·In the United States, growth is expected to moderate from 2.3 percent in 2019 to 2 percent in 2020 and decline further to 1.7 percent in 2021 (0.1 percentage point lower for 2020 compared to the October WEO). The moderation reflects a return to a neutral fiscal stance and anticipated waning support from further loosening of financial conditions.
·Growth in the euro area is projected to pick up from 1.2 percent in 2019 to 1.3 percent in 2020 (a downward revision of 0.1 percentage point) and 1.4 percent in 2021. Projected improvements in external demand support the anticipated firming of growth. The October 2019 WEO projections for France and Italy remain unchanged, but the projections have been marked down for 2020 in Germany, where manufacturing activity remains in contractionary territory in late 2019, and for Spain due to carryover from stronger-than-expected deceleration in domestic demand and exports in 2019.
·In the United Kingdom, growth is expected to stabilize at 1.4 percent in 2020 and firm up to 1.5 percent in 2021—unchanged from the October WEO. The growth forecast assumes an orderly exit from the European Union at the end of January followed by a gradual transition to a new economic relationship.
·Japan’s growth rate is projected to moderate from an estimated 1 percent in 2019 to 0.7 percent in 2020 (0.1 and 0.2 percentage point higher than in the October WEO). The upward revision to estimated 2019 growth reflects healthy private consumption, supported in part by government countermeasures that accompanied the October increase in the consumption tax rate, robust capital expenditure, and historical revisions to national accounts. The upgrade to the 2020 growth forecast reflects the anticipated boost from the December 2019 stimulus measures. Growth is expected to decline to 0.5 percent (close to potential) in 2021, as the impact of fiscal stimulus fades.
·For the emerging market and developing economy group, growth is expected to increase to 4.4 percent in 2020 and 4.6 percent in 2021 (0.2 percentage point lower for both years than in the October WEO) from an estimated 3.7 percent in 2019. The growth profile for the group reflects a combination of projected recovery from deep downturns for stressed and underperforming emerging market economies and an ongoing structural slowdown in China.. ·Growth in emerging and developing Asia is forecast to inch up slightly from 5.6 percent in 2019 to 5.8 percent in 2020 and 5.9 percent in 2021 (0.2 and 0.3 percentage point lower for 2019 and 2020 compared to the October WEO). The growth markdown largely reflects a downward revision to India’s projection, where domestic demand has slowed more sharply than expected amid stress in the nonbank financial sector and a decline in credit growth. India’s growth is estimated at 4.8 percent in 2019, projected to improve to 5.8 percent in 2020 and 6.5 percent in 2021 (1.2 and 0.9 percentage point lower than in the October WEO), supported by monetary and fiscal stimulus as well as subdued oil prices. Growth in China is projected to inch down from an estimated 6.1 percent in 2019 to 6.0 percent in 2020 and 5.8 percent in 2021. The envisaged partial rollback of past tariffs and pause in additional tariff hikes as part of a “Phase One” trade deal with the United States is likely to alleviate near-term cyclical weakness, resulting in a 0.2 percentage point upgrade to China’s 2020 growth forecast relative to the October WEO. However, unresolved disputes on broader US-China economic relations as well as needed domestic financial regulatory strengthening are expected to continue weighing on activity. After slowing to 4.7 percent in 2019, growth in ASEAN-5 countries is projected to remain stable in 2020 before picking up in 2021. Growth prospects have been revised down slightly for Indonesia and Thailand, where continued weakness in exports is also weighing on domestic demand.