Recently, a number of signs have emerged that the global economy, which had been running hot over the past few years, is cooling off. One of the latest comes in the form of a Jan. 21 quarterly report from the International Monetary Fund, which has lowered global economic growth projections by 0.2 percent for 2019 and 0.1 percent for 2020.
A 0.4 percent downshift in growth expectations over a six-month period marks a significant adjustment. As Stratfor laid out in the 2019 Annual Forecast, geopolitical risks abound for the global economy, a forecast that is running true thus far. But despite the indications and the continued adjustments in the IMF outlook, Stratfor still believes that the global economy will avoid a crisis. Although "there is cause for concern," as we put it, we do expect a soft landing for the economy in 2019. Nevertheless, certain regions face a heightened risk of economic trouble, and we will continue to watch many of them closely.
Economic headwinds are buffeting China, the European Union and the United States, three main pillars of the world's economy. Economic growth for each in 2019 is being adjusted downward. While it is not likely that crisis will emerge in any of the three, concerns about lower growth are mounting, carrying with them global implications.
In areas of Europe in particular, the IMF update indicated a more significant decline in expected growth ahead. It dropped its 2019 outlook by 0.6 percent for Germany and by 0.4 percent for Italy. Added to that is the raft of weaker economic data coming out of the China and the partial U.S. government shutdown, which by White House calculations, could cut domestic economic growth by 0.13 percent for each week that it continues.
European Trouble Signs
Several issues are troubling the European economy, and a mild recession in some areas cannot be ruled out at this point as three of the Continent's four largest economies – Germany, Italy and the United Kingdom – struggle through stressful starts to the year.
The disastrous vote for Theresa May in which Parliament roundly rejected her government's Brexit proposal has heightened uncertainty surrounding the United Kingdom's long-term future relationship with the European Union. While we do not necessarily anticipate a no-deal Brexit in March, May's so-called Plan B proposal released this week made no substantial changes from the one that went down in flames. She could not rule out a hard Brexit, and she rejected softer Brexit terms than what she's already agreed to, including remaining in the EU customs union or its single market. We've now entered a period where British lawmakers are proposing amendments to her plan, with the exact outcome of this process as yet unclear. Nevertheless, all signs point to both sides agreeing to extend the March 29 deadline to get a deal, and with that, the period of uncertainty and constant market-moving statements from both the European Union and the British government will linger.
In Southern Europe, several pressure points are contributing to Italy's economic fragility, including a weak banking sector and high public debt. Its slowing economy will leave Prime Minister Giuseppe Conte's populist government with little room to maneuver over its 2019 budget, which was written based on the assumption of high economic growth rates that appear unlikely to materialize, once again raising questions about Italy's financial situation. The end of the European Central Bank's quantitative easing bond-buying program has certainly not helped boost demand for securities issued by Italy or other weak European economies. Italy's inherent fragility means that it will be at particular risk if external factors (a hard Brexit, weak global economy or trade war engulfing Europe and the United States) send the European economy into recession, with little room to operate.
In the meantime, withering global demand has taken its toll on Germany's economy, weighing heavily on its export-dependent sectors. Manufacturers of autos, aircraft and other industrial goods have been hit hard as factory orders plunged in the second half of 2018. Germany appears to have narrowly avoided a fourth-quarter recession by showing "slight" growth, although official data has not been released. Nevertheless, trade tension between the United States and Europe – particularly Germany – is soon set to increase. The U.S. Commerce Department's review on the national security impacts of auto imports is due Feb. 17. The report is expected to recommend that the United States place tariffs on a significant amount of auto imports. The White House is likely to delay the initial imposition of tariffs as it negotiates with the European Union over a comprehensive trade deal. However, the priorities for those talks laid out earlier this month by both sides do not bode well for reaching an accord, meaning that vehicle tariffs – which would hit Germany particularly hard – are an ever-present risk this year.
The best-case scenario for the global economy would be that the U.S.-China trade showdown does not intensify substantially.
The Tariff Question
There remains the question, however, of whether U.S. President Donald Trump wants to escalate his various tariff threats around the world. U.S. stock markets have rebounded from lows late last month. Nevertheless, the White House tariff assault that increased uncertainty for investors helped trigger the stock selloff, and the further use of tariff threats as negotiation leverage against EU auto producers, or as trade talks with China continue, could cause another slide. All signs point toward Trump wanting to reach some sort of an agreement with China by the end of their mutual cease-fire on tariffs on March 1. But as we noted before, competition between the United States and China is rising on all fronts, not just trade. While there may be an extension of talks or a temporary agreement, a comprehensive deal between Beijing and Washington to reduce both the tariffs that the United States has placed on Chinese goods since July 2016 and China's reciprocal tariffs is simply unrealistic over the coming year. The best-case scenario for the global economy would be that their trade showdown does not intensify substantially. In any case, the U.S. economy will continue to slow as the stimulus fueled by 2018 tax cuts fades, even if that slowdown is not particularly risky.
Finally, any further strain on the Chinese economy by external forces will also continue to complicate Beijing's attempts to manage its own slowing economy. Its growth declined to 6.6 percent in 2018, the slowest pace that it's seen since the year after the Tiananmen Square protests. The manufacturing and real estate sectors and investment levels are all declining as China manages household and corporate debt bulges as well as sluggish growth in domestic consumption as it tries to rebalance its economy. China may have the tools to manage its slowdown in the short term, but as its economy is now the second-largest in the world, any deceleration will send out global ripples.
While it is likely that China, Europe and the United States will all avoid major economic crises – even if Italy or Germany slip into short recessions – the three pillars of the global economy are all simultaneously showing signs of a slowdown. And that has global and geopolitical ramifications for all the countries in between, whether it be how it affects Prime Minister Narendra Modi's re-election chances in India, OPEC's decision-making when plotting its strategy to prop up oil prices or pressure on Turkey, where trust among investors, the central bank and the government is fragile at best. It will be all of these forces together that define the global economy in 2019 and cause flashpoints that could even spark an economic crisis or two.