Downside risks seen in five major economies this year and next
How will the five largest economies in the world perform over the next few years? If there is a surprise to the GDP growth forecasts for this year and next, the participants of a recent survey expect that to be tilted to the downside.
This will be followed by a more balanced growth environment in 2021. But participants seemed to lean towards a more balanced-risk assessment on headline inflation from 2019 through 2021, with the exception of the eurozone, where a modest majority view greater disinflationary risks in 2019 and 2020.
These were among the results of the inaugural SKBI Big5 survey released on Sept 11 by David Fernandez, director of the Sim Kee Boon Institute for Financial Economics at the Singapore Management University (SMU), and Thomas Lam, principal researcher at SKBI.
Of the five economies studied, the eurozone appeared to be most at risk in the multiyear outlook. This was followed by Japan, the US, China and India, whose economy the participants thought were least at risk.
The five economies were chosen by researchers because, in collective terms, they have a purchasing power parity of more than 55% of global GDP.
Participants thought China’s real GDP growth for 2019 would be a mean of 6.2% compared with 5.9% in 2020; 1.1% in the eurozone for this year and next; 6.8% for India this year and 6.9% in 2020; and 0.9% for Japan this year and 0.5% in 2020.
SKBI is a think tank within the university for applied financial research in financial markets that is driven by industry and societal needs in Singapore and the region.
The multi-year survey on the “Big 5” economic indicators was conducted last month. Participants were the Bank of Singapore, DBS Group Holdings, GIC, ING Bank, Moody’s Investors Service, TD Securities, UBS Group and United Overseas Bank.
Lam said his read of the survey was that while the tone is generally cautious, it is not necessarily gloomy. “Although there are downside risks to growth, there is also room for policy measures to potentially offset any surprises.”
On monetary policy, all participants expected China, India, the US and the eurozone to have a looser approach this year, but they were evenly split on whether Japan would loosen its monetary policy or keep it on hold.
For next year, the majority of participants expected to see monetary policy still remain loose in China, the US and the eurozone, while Japan keeps it on hold. Participants were evenly split on whether India would keep it on hold or loosen it next year. For 2021, China, Japan, the US and the eurozone are expected to keep their monetary policy on hold, while India should either hold or tighten.
Participants also seemed to think that these economies were more likely to make changes to monetary policy instead of fiscal policy, indicating they did not think any slippages in growth would be significant or both levers would be used instead of just leaning on monetary policy.
When it came to business cycles, six out of eight participants expected to see a recession in the eurozone by 2021, while only three thought so for the US and four for Japan. The outlook is expected to worsen in 2022, with six out of seven predicting a downturn in the US and the eurozone, while four out of seven expect that for Japan.
On the contrary, the outlook for China and India is brighter. Six out of eight did not expect to see a sharp slowdown in 2021. Participants also defined the “sharp slowdown” by real GDP growth as a decline by roughly one percentage point in China and less than two percentage points in India, while a smaller number defined this as less than one percentage point in China, and roughly two percentage points in India.
Researchers also noted that perhaps in the light of reduced policy leeway, participants anticipate that policymakers in Japan will be generally more reluctant to pursue additional policy stimulus, both monetary and fiscal. Although participants appear to view eurozone policymakers as less hesitant on fresh stimulus measures, policy efficacy might be an increasingly crucial issue. E