The boom is over – what’s next?
The economic boom is over. In fact, not everybody noticed it taking place. However, this year the global economy grew at its fastest pace since 2011.
That surge, powered by Donald Trump’s spending spree, an overdue recovery in the eurozone and benign financial conditions across much of the world, is coming to an end.
Will it be a gentle slowdown or a much-feared ‘‘hard landing’’? The modest pace of expansion means most forecasts are for an equally modest slowdown. Yet risks abound.
From rising interest rates in the US and the trade war, to emergingmarket currency crises, Italy’s permanently threatening economics and politics and China’s heavy debt burden, hazards exist everywhere.
A recession is not an impossibility. In such a fraught environment a sharp turnaround in sentiment could drain confidence from the system, prompting households to save instead of spend, and businesses to batten down the hatches instead of investing.
Here is the outlook for the world economy in 2019.
Flashing red
Overall the world economy is set for a slowdown. GDP will grow by 3.5 per cent next year, the Organisation for Economic Co-operation and Development (OECD) predicts, down from 3.7 per cent.
The US, which had led the upswing, will slow from 2.9 per cent to 2.7 per cent. China, a long-term driver of global growth, is also set for a softer year at 6.3 per cent, down from 2018’s 6.6 per cent.
US growth has surged in part because of tax cuts and spending hikes which are expected to fade. At the same time the trade war is hurting.
‘‘This trade aggression hit the Chinese economy at a point when growth was already slowing rapidly,’’ says Karen Ward at J P Morgan, warning that the effect is spreading to much of the rest of the world.
Amber glow
Germany and France represent beacons of relative stability. Both are forecast to maintain growth rates of 1.6 per cent in 2019.
Germany may be vulnerable to a dip in exports but a bit more government spending alongside very low unemployment will offer support. French growth is harder to predict as the gilets jaunes (yellow vests) protests have shaken confidence and forced President Emmanuel Macron to offer extra spending and lower taxes.
Macron’s popularity is tumbling, German Chancellor Angela Merkel is on the way out, and the Italian Government has struck a temporary truce with the European Union over its budget deficit.
Green is go
Among the global gloom it can be hard to see the positives, but they are there.
Some offer the faintest of silver linings – Argentina’s outlook is improving only because the intensity of its recession should lessen. GDP fell 2.8 per cent, the OECD estimates, but should drop by 1.9 per cent in 2019.
Elsewhere, growth is more impressive. Brazil should see growth almost double to 2.1 per cent. A perennial underperformer, its great potential has yet to be unleashed. Unemployment is edging down, business confidence is rising and financial conditions easing. With reforms to the country’s cripplingly expensive pensions system, economists hope growth will really take hold.
‘‘The economy can only sustain a faster growth pace if fiscal reforms are approved,’’ says Mario Mesquita, chief economist at Brazilian bank Itau. ‘‘If reforms are not approved, the perception of fiscal unsustainability will impact asset prices and tighten financial conditions, possibly jeopardising economic recovery.’’