Growth may cool but sharp slide unlikely

World economy forecast to grow by 3.5% in 2019,

Growth may cool but sharp slide unlikely

The latest economic update from the Organisation for Ecomomic Co-Operation and Development (OECD) has seen it revise down its forecasts for global growth for the second time in a couple of months.

It is now forecasting that the world economy will grow by 3.5% in 2019. In its mid-year assessment, it was forecasting 3.9% growth for next year.

This also represents a slower pace of growth than in 2018, with both the OECD and IMF estimating that the world economy will expand by 3.7% this year.

Growth would have been lower in 2018 but for a marked strengthening of activity in the US due to the loosening of fiscal policy by the Trump administration via both tax cuts and spending increases.

By contrast, growth has decelerated this year in the eurozone, the UK, Japan and China.

Global growth has peaked, then, and the consensus view is it will ease gradually in 2019 and 2020. It is anticipated macroeconomic policies will become less supportive of activity, while headwinds from trade tensions and tighter financial conditions are expected to continue.

However, with interest rates remaining very low in most economies and real incomes rising, it is expected a sharp slowdown in activity can be avoided.

The OECD warns, though, that an intensification of the major downside risks facing the world economy could see growth weaken much more substantially than forecast over the next couple of years.

It highlights some early warning indicators of weakening global activity that need careful watching, such as a sharp fall-off in new export orders in all the major economies and declining container port traffic.

Meanwhile, the global composite purchasing managers’ index (PMI), a good indicator of world economic activity, fell to two-year lows in September and October.

Preliminary data from a number of countries suggest there may have been a further fall in November, suggesting the world economy is ending the year on a weak note.

A close eye will need to be kept on PMIs and other leading indicators of activity in the early part of next year to see if this weakening trend has extended into 2019, which would be a concern.

Financial markets are becoming quite worried about signs of slower growth in the world economy as well as the heightened uncertainty about the economic outlook.

This has seen increased risk aversion and marked falls in equity markets over the past two months.

What would really help restore confidence would be a lasting end to trade disputes, a lowering of geo-political tensions and better international co-operation.

The G20 gathering in Argentina made some progress on this front, but this will need to be built on in 2019.

Oliver Mangan is chief economist at AIB

More in this section