Perspectives

Global growth slowdown intensifies

th  
2
EcoPerspectives // 4 quarter 2019  
economic-research.bnpparibas.com  
Editorial  
Global growth slowdown intensifies  
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 a high concern about recession risk and the US yield curve inversion adds to the unease.  
However, the picture provided by a broad range of leading indicators is, at least for the time being, less bleak.  
Slowdown gathers pace  
1- Economic uncertainty is pervasive  
The declining pace of economic growth has become a truly global  
phenomenon. Chinese growth continues to outpace the  
performance in the Western world to a very significant degree, but  
at 6.2% in the second quarter, it is getting close to the  
psychologically important 6.0% barrier. The trend towards slower  
growth should continue in the short run on the back of a cautious  
policy stance in boosting growth and a difficult international  
environment. The pace of growth is also slowing in the US, where  
corporate investment is weakening, although household  
consumption is resilient. As a welcome exception, Japanese growth  
has been stronger than expected early on this year, supported by  
domestic demand. Exposure to China, a subdued outlook for  
international trade and the fall-out from the VAT increase on  
consumption paint a challenging picture for the near term. In the  
eurozone, the good performance in the first quarter (+0.4% growth)  
has been followed by a meagre 0.2% growth in the second quarter.  
Private consumption has been resilient, underpinned by declining  
unemployment and dynamic wage growth. Investment has slowed,  
in part due to the high level of uncertainty. Within the eurozone, the  
divergence has increased. Germany, where the manufacturing  
sector is under intense pressure, is in a technical recession,  
whereas the French economy is very resilient. Another divergence  
is between industry and services, with the former suffering more  
given its higher exposure to international trade and to trade  
uncertainty.  
Economic Policy Uncertainty Index  
US 10-year rate, % [rhs]  
3
3
2
1
1
60  
00  
40  
80  
20  
3,6  
3,0  
2,4  
1,8  
1,2  
0,6  
0,0  
6
0
0
2
014 2019  
2015  
2016  
2017  
2018  
Source: Economic Policy Uncertainty, Datastream, BNP Paribas  
2
- Central bank policy rate, %  
US Fed Funds, target rate  
ECB's deposit facility rate  
3,0  
2,5  
2,0  
1,5  
1,0  
0,5  
0,0  
-
0,5  
Central banks have reacted but doubts about the  
effectiveness  
-1,0  
2014  
2015  
2016  
2017  
2018  
2019  
As a consequence, the Federal Reserve and the ECB have reacted  
by easing policy. This represents probably the biggest sea change  
compared to expectations about the world economy at the start of  
the year. Their reaction is very much proactive. In the US, the policy  
rate is being cut whilst the unemployment rate is at a 50 year low. In  
the eurozone, the labour market is still robust but concerns about  
the phase of soft growth lasting longer than expected, which in turn  
weighs on outlook for inflation and its convergence towards the  
target, have led the ECB Governing Council to a comprehensive  
easing package. Critics of this stance have become more vocal  
considering that the asset purchase program has been resumed.  
This has led to expressions of disagreement by Governing Council  
members. The introduction of state-dependent forward guidance,  
which implies that current policy is maintained (or eased further) as  
Source: Federal Reserve, ECB, BNP Paribas  
long as inflation hasn’t converged sufficiently, and in a lasting way,  
to the target has also met criticism in some circles because it  
implies interest rates will remain very low and, for some, even  
negative for quite some time. A priori, this should support growth.  
Whether this will show up in the numbers depends in particular on  
confidence, i.e. on a much needed decline in uncertainty.  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
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