Economic and Strategy Viewpoint - September 2019

Global economy: teetering on the edge

  • We are downgrading our forecasts for global growth as a consequence of the recent escalation of the trade wars between the US and China. We now expect 2.6% GDP growth this year and 2.4% next (previously 2.8% and 2.6% respectively). If the forecast is realised, global growth in 2020 would be similar to 2008, just before the great recession of 2009.
  • Interest rates are expected to fall faster and further around the globe, but we expect the lags from easier policy to stronger growth to be long as cautious banks and borrowers take time to respond. Both geopolitical risk and policy uncertainty are high and will not be shifted by a lower cost of credit.

Europe forecast update: batten down the hatches

  • The eurozone forecast has been downgraded significantly as the US-China trade war escalates further. Interest rate cuts and a return of quantitative easing (QE) will help at the margin, but are unlikely to stop the weakness in manufacturing spreading spread to other parts of the economy.
  • The UK economic outlook has also been downgraded as Brexit related inventory changes create volatility in economic data. Brexit is likely to be delayed until Q1 2020 due to parliamentary arithmetic, which means ongoing weakness in business investment. Despite this ongoing weakness and heighted risk of a no-deal Brexit, we do not expect the Bank of England to offer any help.

EM: an ill trade wind that blows nobody any good

  • An escalating trade war does not offer much scope for upgrading the outlook for emerging markets (EM). We downgrade the growth outlook across the BRIC economies this quarter, with weakness in 2020 driven by the trade war.
  • On a more positive note, we think there is now scope for more easing from EM central banks, with their DM counterparts sounding increasingly dovish.

Japan: BoJ prepares easing measures

  • A stronger-than-expected first half of the year drives an upgrade to the 2019 growth outlook but a worsening US-China trade war worsens the 2020 outlook.
  • Factoring in a weaker external outlook and further appreciation in the yen, we now expect easing measures from the Bank of Japan. This should double up as a domestic policy response to soften the blow from the consumption tax hike.

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Economic and Strategy Viewpoint - September 2019 27 pages | 822 kb