“The outlook for the global economy has darkened. Global financing conditions have tightened, industrial production has moderated, trade tensions remain elevated, and some large emerging market and developing economies have experienced significant financial market stress. Faced with these headwinds, the recovery in emerging market and developing economies has lost momentum.” (World Bank, Global Economic Prospects, January 2019)

The US Federal Reserve, the World Bank, the IMF and other forecasting groups are all predicting that US economic growth will decelerate in 2019 and 2020.

The projected American slowing reflects that substantial monetary policy support has already been removed, and as well, that the recent economic growth boost from the fiscal stimulus will soon fade and become a drag on growth. The possibility of continued tariff wars is also expected to dampen the American economy, particularly in terms of exports and investment spending.

However, investors recently became a bit less concerned about the future course of interest rates due to Fed Chairman Powell’s late January decision to hold rates constant because of an updated outlook of slower global growth.

US economic growth is projected to slow this year to 2.5% and slow further to 1.8% in 2020. The 2020 growth rate is roughly in line with estimates of potential growth.

Recently nominal wage gains in the US began to outpace inflation, resulting in modest real wage gains. Although, long-term inflation expectations may have edged up a bit recently, nonetheless inflation expectations in the US continue to be rather low and stable.

The Euro Area’s economic outlook has been negatively affected by a variety of factors -- Brexit, worries about trade wars, a surprising growth slowdown in Germany and a technical recession in the Italian economy.

Euro growth softened last year to an estimated 1.8% because of an earlier appreciation of the euro combined with a slowing in its external markets. While the unemployment rate continued to drop last year, inflation remained stubbornly low. At the start of this year the pace of core inflation was around 1%, and long-term inflation expectations continued to hover around 1.6%.

The European Central Bank (ECB) halted its net purchases of bonds at the end of last year and is expected to maintain its negative interest rate policy until at least mid-2019. While headline inflation has recently risen to target, this was largely due to a temporary acceleration in energy prices.

The Euro Area economy is expected to continue to grow slowly, expanding 1.6% in 2019 and 1.7% in 2020. We should expect some slackening in the growth of new jobs this year and some fiscal policy tightening next year.  

Japan’s economy grew 0.9% in 2018 and is expected to advance 1.1% in 2019 and then to slow sharply to 0.5% in 2020.

The Bank of Japan will continue to provide a supportive monetary policy by keeping long-term rates near zero and expanding its balance sheet, even as the government’s fiscal deficit narrows. While the government currently runs a primary budget deficit, it has announced the introduction of a temporary stimulus package to offset the short-term impact of a VAT hike to be introduced later this year.  

China’s rapidly growing economy, which is grappling with its effort to curb excessive debt financing, has been slowing for some time. China’s recent growth has also been harmed by the trade fight with the United States. Indeed, the combined effects of both of these constraints are projected to slow China’s economy to 6.2% growth this year and 6% in 2020.

China’s slowdown is not the only risk the advanced economies face in 2019 and 2020. Other potential negative shocks include a disorderly British exit from the European Union and a new financial crisis in debt-ridden Italy which recently slipped into a technical recession.

Although it is impossible to accurately predict the outcome of the Brexit debacle, assuming a hard exit does not occur, the UK economy could grow 1.5% in 2019 and 2020.

The Major World Economies at A Glance: 2018-2020

(Real GDP, Annual % Rates of Change)

 * 12 months % change and annual change

Slowing Became More Noticeable At The End Of Last Year, Though Employment Strong

As of the third quarter of 2018, the world’s economy was expanding at a 3.7% annual pace, with the emerging market economies growing 5.2% and the advanced economies, excluding the US, expanding at a 1.4% rate of growth.

The US led all of the advanced economies in terms of growth last year, expanding at a 3% rate in the third quarter.  

However, signs of a slowing in industrial production and trade emerged in the early months of 2018.

Purchasing mangers intention surveys across the globe signalled a declining trend ahead in the production of both manufactured goods and services.