The slowdown of global growth has gathered pace, forcing the Federal Reserve to cut the federal funds rate on two occasions, whereas the ECB has announced a comprehensive easing package. Nevertheless, the slowdown is expected to continue. Uncertainty is pervasive. Companies question the true state of demand faced with slower growth, trade disputes, Brexit worries, geopolitical risk. Corporate investment suffers and may impact households via slower employment growth. The room to boost growth via monetary policy and, in many countries, fiscal policy has become limited, and this is another factor which could weigh on confidence. Surveys of US corporate executives point towards high concern about recession risk and the US yield curve inversion adds to the unease
The contraction in world trade, exacerbated by President Trump’s tariff offensive against China, has begun to spread to the United States. The economic slowdown, which can also be attributed to domestic factors, has prolonged throughout the summer of 2019, and business surveys do not suggest any improvements in the months ahead. Corporate investment will remain downbeat, while household consumption, which has been resilient so far, should begin to falter. In the face of this environment, the Federal Reserve -- which no longer provides forward guidance on upcoming policy moves – is bound to lower its key rates again.
Since Q2 2018, Beijing has let the yuan depreciate against the dollar each time the US has raised its tariffs on imported goods from China. Yet, exchange rate policy as an instrument to support economic activity should be used moderately in the short term. There is also little room to stimulate credit given the excessively high debt levels of the economy and the authorities’ priority on pursuing efforts to clean up the financial system, the public sector and the housing market. Torn between stimulating economic growth and deleveraging, the authorities’ dilemma could get worse if recent fiscal stimulus measures do not have the intended impact on domestic demand, or if the external environment were to deteriorate further.
Japanese GDP growth was stronger than expected in early 2019. Despite the current troubles in the export sector, for the moment domestic demand - both public and private - is picking up the slack. In the short term, two sources of concern loom over Japan’s macroeconomic scenario. First, Japan is highly exposed to the slowdown in both the Chinese economy and international trade. Second, the VAT increase in October will curb consumption during the year-end period and possibly in 2020 as well. Faced with these internal and external uncertainties, Japan will maintain accommodative monetary and fiscal policies, the effectiveness of which remains to be seen.
At its September monetary policy meeting, the European Central Bank delivered a strong message. Through the broad mobilisation of its unconventional monetary policy tools, it aims to fulfil its mandate and reach its inflation target. At the press conference following the meeting, Mario Draghi seized the occasion to reiterate his call on certain eurozone governments to increase their fiscal support. The ECB is entering a long period in which it will have to remain mute, passing on the baton to the member states with comfortable fiscal leeway. This new round of monetary support is welcome considering the economic troubles facing the eurozone, although there are some doubts about its effectiveness.
Weak data and business cycle indicators suggest that German economy would be in a mild technical recession. The weakness is mainly in the manufacturing sector and has hardly affected the rest of the economy. Despite calls from different quarters, the government is unlikely to launch a fiscal stimulus, beyond what is in the coalition agreement and the climate package. Simulations show that spill-over effects of a fiscal boost to other countries will be limited. Moreover, the implementation might be hampered because of long planning periods and bottlenecks in the labour market. Political tensions could increase after the SPD congress in December.
The French economy continues to show proof of resilience judging from the stability of its GDP growth?–?at an annualised rate of just over 1%?–?and the relatively strong showings of confidence surveys and of the labour market. Although prospects are still favourable, the horizon has darkened in recent months with Germany showing signs of recession, the escalation of trade tensions and lingering uncertainty over Brexit. We expect business investment and exports to decelerate sharply under the weight of a more uncertain, less buoyant external environment. Yet the slowdown is likely to be offset by the expected rebound in household consumption, supported by major fiscal measures to boost household purchasing power.
The new Government has approved the update of the economic and financial document, planning to raise the deficit to 2.2% of GDP in 2020. The 2020 Budget Law is estimated to amount to EUR 30 bn. Some measures contained in the budget, such as the cut of the fiscal wedge, are expected to sustain the economy with a positive effect on growth, despite an increasing uncertainty. In Q2, GDP increased by 0.1 y/y, as stocks negatively contributed to the overall growth, while exports continued to rise. Domestic demand suffered from the mixed evolution of labour market and the further delay of the full recovery of the housing market.
Spanish voters will be called back to the ballot box on 10 November, but there is no certainty that the election results will pull the country out of its current impasse. The political landscape is still too fragmented to produce a lasting coalition. The line to follow in the face of Catalan independentism only exacerbates the divisions and helps justify the lack of co-operation. Meanwhile, growth has slowed somewhat more sharply than originally expected, although it is still holding around 2%, a performance that would be welcomed by many of the other big European economies. The elaboration and adoption of the 2020 budget bill will have to wait until a new government is formed.
Belgian GDP growth is expected to come down from last year’s 1.4% to a mere 1% in 2019 and 0.7% in 2020. This reflects a further slowdown in international trade, which is only partially offset by resilient domestic demand. Despite a slowdown in job creation, a pickup in disposable income spurs on private consumption well into 2020. Public finance remains a key risk-factor with government debt in excess of 100% of GDP. Further fiscal slippage seems almost inevitable with government formation talks not yet near a conclusion.
After its electoral success in late September, the conservative party (ÖVP) is expected to form a new government. To obtain a majority, the party could turn again to the FPÖ (far right). In that case, policies should remain largely unchanged and focus on fiscal consolidation and the reduction of the tax burden. The next government will face a less favourable economic environment. GDP growth could decelerate to around 1.2% in 2020. Nevertheless, public finances have improved considerably, giving the government sufficient leeway to fight a recession, if necessary.
The economic slowdown has been very gradual so far, but it is expected to progressively spread during the second half of 2019 and in 2020. With unemployment at the lowest rate since 2002, households remain confident and have just renewed their confidence in Prime Minister Costa’s administration. After winning the legislative elections of 6 October with more than 36% of the vote, the Socialist party is preparing to form a new government with the support of the other left-wing parties.
Finnish growth had only just regained some momentum in 2015 before slowing again in 2018. GDP growth is expected to weaken further in the quarters ahead. The country’s openness to trade exposes it to the deterioration of the global economic environment. Slower export growth and uncertainty linked to protectionist policies will undermine investment. Households, in contrast, should benefit from stronger wage growth. The unemployment rate has fallen to the lowest level since year-end 2008, and should continue to decline despite the slower pace of job creations.
As we approach 31 October 2019, the latest deadline for the British exit from the European Union (Brexit), who can say where the UK is heading? Probably not the Prime Minister itself, Boris Johnson, who lost his majority in the House of Commons in an attempt to suspend discussions and fuelled scepticism among his European partners by presenting a take it or leave it ‘compromise’ on the Irish backstop that is hardly applicable nor acceptable. This would leave the Brexit end-point with no deal, although this has been prohibited by a law, or the more likely, but by no means guaranteed, outcome of a new extension accompanied by an early general election.
The Norwegian economy is expected to report robust GDP growth through the end of 2019, thanks to dynamic oil sector investments in Norway and abroad. Growth is expected to slow thereafter in a less favourable international environment. Moreover, investment in the Norwegian oil sector is expected to ease up in 2020. However household consumption should continue to grow at a relatively sustained pace, buoyed by wage acceleration. The central bank of Norway will not opt for any further rate increases in the quarters ahead. Inflation should hold near the central bank’s target of 2%, while external risks are on the rise.