Debate flares over health of global economy

The OECD and IMF have kept their forecasts for the global economy largely intact to date, with just slight downgrades to their projections, writes Oliver Mangan.

However, last week saw other official forecasters bite the bullet and scale back their European growth projections sharply for this year.

The European Commission slashed its 2019 GDP forecast for the eurozone economy to 1.3% from 1.9%, with particularly large downward revisions for Germany, Italy and the Netherlands. It cited fading support from the global economy for its exports, partly related to the increased uncertainty around trade policies as a result of rising protectionism.

It also noted specific domestic factors at work in some eurozone economies, such as political uncertainty and the disruption to car production caused by new emission standards.

Meanwhile, the Bank of England lowered its growth forecast for the UK to 1.2% from 1.7% previously. It noted that uncertainty about Brexit is holding back both consumer spending and business investment.

The UK economy grew by just 0.2% in the final quarter of 2018. The latest survey data suggest that the weakness in activity has extended into 2019. Interestingly, though, both the European Commission and Bank of England kept their forecasts for 2020 largely unchanged.

The commission expects growth in the euro area to pick up again and average 1.6% next year.

Meanwhile, the Bank of England is forecasting growth of 1.5% for next year and 1.9% in 2021, on the assumption of a relatively smooth Brexit.

Thus, official forecasters believe that we are in the midst of a temporary slowdown in activity rather than something more prolonged.

They cite very low interest rates, slightly expansionary fiscal policies as well as improving labour markets and household incomes as reasons to expect global growth to regain momentum.

Bond investors do not seem as convinced, though, with yields falling to their lowest level since 2016 in the past week in some markets. Ten-year German bond yields have fallen to just 0.1%, while 10-year Japanese yields have turned negative.

Meanwhile, market expectations for rate hikes this year have evaporated. Futures contracts show that markets now expect all the main central banks to keep rates on hold during 2019.

Markets are concerned that after a weak finish to 2018, the global economy appears to have lost further momentum in early 2019.

Notably, the key Global Composite Purchasing Managers Index, a good measure of economic activity, has continued to decline.

It fell to 52.1 in January from 52.7 in December, its lowest level since September 2016 and well below its recent peak of 54.8 reached a year ago.

This is the year of the pig in the Chinese calendar, which may well prove apt, given the likely weak performance of the global economy in 2019. For those who are superstitious, it will be followed in 2020 by the year of the rat. In Asian cultures, rats are considered auspicious symbols of good fortune in business, so maybe the more upbeat forecasts for 2020 will prove correct.

Oliver Mangan is chief economist at AIB

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