Davos 2019: The Risks That Could Derail Global Growth This Year
Nariman Behravesh thinks trade conflicts, political environment and tightening financial conditions area risk to global growth.
Trade conflicts, unstable political environment and tightening financial conditions across the world will mean that global economic growth will fall further in 2019, with even a slight risk of recession in the next few years.
That’s what IHS Markit’s Chief Economist Nariman Behravesh has predicted. “One major risk in the coming year is the sharp drop-off in world trade growth, which fell from a pace of above 5 percent at the beginning of 2018 to nearly zero at the end,” Behravesh wrote in a new note. “The risk of an escalation in trade conflicts remains elevated. If such an escalation were to occur, a contraction in world trade could slow the world economy even more.”
Besides, he said, that the equity and commodity sell-off coupled with removal of accommodation from central banks is set to tighten financial conditions.
Combined with heightened political uncertainty in many parts of the world, these risks point to the increased vulnerability of the global economy to further shocks and the greater probability of a recession in the next few years—although still relatively low in 2019.Nariman Behravesh, Chief Economist, IHS Markit.
Behravesh noted that 2018 started on a strong note with synchronised growth but the momentum faded as the year progressed, with growth trends diverging among nations. While Europe, China, U.K. and Japan weakened, U.S. growth persisted due to the fiscal stimulus.
Here are the 10 economic predicitions for 2019 by Behravesh:
U.S. Growth To Remain Above Trend
The impact of the fiscal stimulus, that includes tax cuts and spending increases, in U.S. had propelled the economy to a 2.9 percent growth in 2018. That is set to continue in 2019 with a “diminishing potency”, Behravesh wrote.
Europe's Expansion Will Slow
Eurozone growth will decline to 1.5 percent in 2019 from 1.9 percent in 2018. “A number of adverse economic and political factors will negatively impact growth, including less accommodative credit conditions, heightened trade tensions, the deceleration in world trade growth, and the appreciation of the euro.”
Japan's Weak Recovery
Japan grew at 0.8 percent in 2018. It will grow at 0.9 percent in 2019, according to Behravesh. “While monetary policy continues to be ultra-accommodative, there are two big drags on Japanese growth: the slowdown in China's economy and the hit to trade growth owing to the fallout from trade tensions between the United States and China.”
China's Deceleration
China's economic expansion will slow further to 6.3 percent in 2019. However, since policymakers have already “unleashed” a series of monetary and fiscal measures to tackle the decline, stock market rout and impact of U.S. tariffs, it may help support growth. Only to a modest extent, though.
Emerging Markets To Slide
Behravesh predicts that emerging market growth has already topped out and will decline to 4.6 percent in 2019. “Going forward, emerging markets face a number of headwinds.”
This includes weaker trade due to slowing advanced economies, tighter global financial conditions, stronger dollar and volatile commodity prices. The ones with the highest debt burden are under the most risk.
Significant Downside In Volatile Commodity Markets
Commodity markets will face a challenging 2019. “Nevertheless, demand growth next year still looks strong enough to provide markets with support, making the kind price collapse seen during 2015 unlikely,” he wrote.
Oil markets will also be not spared the continuing volatility. IHS Markit expects oil prices to rise in a bit in the near term and average around $70 a barrel in 2019. “That said, the risks to prices of oil and other commodities are predominantly on the downside, given slowing demand growth and rising supply.”
Muted Inflation
Inflation will not rise much, if at all it does. Global consumer price inflation will remain close to 3 percent in 2019. There will be upward pressure in many economies as output gaps close and unemployment rates fall but there are downward pressures as well as growth outside U.S. is weakening. “Moreover, relative to 2018, commodity prices will be relatively flat, on average, in 2019.”
Central Banks Will Diverge More
U.S. Fed is likely to raise rates thrice in 2019. Bank of England, Bank of Canada, Central Bank of Brazil, Reserve Bank of India and Bank of Russia, too, may raise rates.
However, the Bank of Japan, European Central Bank and People’s Bank of China are unlikely to raise rates this year.
Dollar Will Remain Strong
The U.S. dollar will continue to hold at the current elevated levels for a large part of 2019. “On the other hand, high and rising levels of political uncertainty in Europe could be very negative for the euro and sterling. We expect that the euro/dollar rate will end 2019 at around $1.10, compared with $1.14 at the end of 2018.”
Higher Risk Of Policy Shocks
Policy mistakes, potential missteps by central banks and simmering trade conflicts are big risks to global growth even after 2019. That's because they could “easily escalate and get out of control”.
“On the other hand, IHS Markit believes that the risks of damage from policy mistakes will rise in 2020 and beyond, as growth slows further,” Behravesh wrote.