Perspective - Managers' views
2019 will be the inflection point of global growth
Looking ahead, we have become more optimistic on growth.
Looking ahead, we have become more optimistic on growth. Although we have cut our 2019 global growth projection, we have not extended downgrades into 2020. Instead we are looking at the easing in US-China trade tensions, more flexible central banks and the benefits of lower oil prices to stabilise activity later this year and support an upgrade in our global growth forecast for 2020.
Upgraded forecasts for 2020
We have revised down our forecast for global GDP growth in 2019 to 2.8% (from 2.9%), but increased our projection for 2020 to 2.7% (from 2.5%). The downgrade for this year is driven by cuts to our forecasts for the Eurozone, UK and Japan which offset a small increase to our China forecast. In 2020, the upward revision is across the board with, for example, the US upgraded to 1.6% (previously 1.3%), Japan to 0.4% (previously 0%) and China nudged up to 6.1% from 6%.
Meanwhile, our inflation forecasts have been reduced for this year and next with reductions across all regions except Europe. The forecast has been largely driven by the decline in oil prices which are now expected to be significantly lower over the forecast period than at the time of our last outlook in November 2018. US inflation is also lower as a result of a smaller rise in core inflation (CPI ex. food and energy) which peaks at a lower level before declining in 2020.
Weaker growth and lower inflation result in slightly easier monetary policy than in our previous forecast. The US Fed funds rate is now only expected to rise once more before falling in 2020, whilst we have pushed out rate increases in the UK and Eurozone with only one move from the European Central Bank (ECB) and Bank of England now expected this year. We also expect the Bank of Japan (BoJ) to leave policy unchanged rather than tightening its yield curve control policy further. China is expected to ease further through a lower reserve requirement ratio (RRR) which is now expected to reach 10% by end 2020 (previously 11%).
The US dollar (USD) is expected to remain firm in the near term, but to weaken later in the year as rates peak in the US whilst policy tightens in the Eurozone and UK. Sterling (GBP) is also boosted by our assumption that a deal is struck and the UK enters a transition period, rather than crashing out of the EU.
Reasons to be cheerful
Concerns over a recession will remain in the near term, but looking further ahead we have become more optimistic on growth as a result of three factors.
First, energy prices are lower and, whilst this is in part symptomatic of weaker global demand, it is helping to bring down inflation which is boosting real incomes worldwide. The US consumer tends to see the full benefits of this due to the relatively low level of tax on gasoline and when combined with a pick up in pay, real wages are now growing at 2% in the US the fastest for three years. The same is true in Europe and Asia and the consumer is a mainstay of growth in our forecast.
Second, the US and China are moving closer to a trade deal with President Trump announcing that he will extend the deadline for raising tariffs on $200bn of Chinese imports from 10% to 25% beyond 1 March following ‘substantial progress’ in the talks with China. He is expected to meet President Xi later in March to sign a deal. The deal should help reduce uncertainty and bring some clarity to businesses who have put spending plans on hold whilst reviewing the future for their international supply chains.
Third, monetary policy is easier. This is partly a reflection of lower inflation but it also marks a shift in Fed policy making where the central bank has become more responsive to financial market conditions. Although our baseline rate forecast is only 25 basis points lower than before with a peak at 2.75% rather than 3%, long rates have declined and risk assets have rallied thus loosening monetary conditions. Furthermore, the Fed has signalled an earlier-than-expected end to quantitative tightening (QT), the process of reducing its balance sheet which is now expected to be completed by the end of the year.
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