World Economy
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Global Growth Getting Dull

Debt levels are starting to rise and with central banks increasingly moving in the direction of tightening, it could start to act as a brake on economic activity
Economists say the United States, eurozone, Japan, Germany, France and China will all grow more slowly in 2019 than at present.Economists say the United States, eurozone, Japan, Germany, France and China will all grow more slowly in 2019 than at present.

For all the talk of world economies rising in sync, there does not seem to be an abundance of optimism about how long it will last.

Tucked away in Reuters latest quarterly economic poll series is a projection that growth rates in nearly all of the world's largest economies will fall over the next two years. Inflation, meanwhile, will remain benign and in some cases below target.

Both findings would suggest that the current caution of central bankers is warranted. As the European Central Bank's Mario Draghi said in the past week: "We aren't there yet."

The Reuters polls of economists around the world—looking at 46 economies—have been prescient in past years. If they prove right again, it means the United States, eurozone, Japan, Germany, France and China will all grow more slowly in 2019 than at present. Britain will be growing at this year's rate—but only after a 2018 Brexit-related hammering.

James Knightley, chief international economist at ING, reckons the projected growth slowdown is a natural maturing of the economic cycle, exacerbated by the gradual tightening of monetary policy measures adopted following the financial crisis.

"Consumers are getting to the point now when debt levels are starting to rise, and with central banks increasingly moving in the direction ... of tightening, then that could start to act as a brake on economic activity," he said.

There will be growth. But it will be fairly humdrum.

Consider the eurozone, currently running at a projected 1.9% growth rate. That will drop to 1.5% in 2019, according to the economists. Japan will see its 1.4% growth rate today halve to 0.7%. The US economy will be down slightly, to 2.1% from 2.2%, way below the historical trend of above 3%.

Mild Rebound

It may come as a surprise to the average person in many of these economies that the growth cycle is maturing. In many cases it has been a very mild rebound from the Great Recession triggered by the financial crisis a decade ago.

As Stephen King, senior economic adviser at HSBC, noted this month: "Economic records are there to be broken. The US is on the cusp of breaking two simultaneously. Within weeks, the US may have delivered both the longest and the weakest economic upswing in post-war history."

The new normal—post-crisis and with big emerging economies having matured themselves—may well be for less robust growth, although the Reuters polls project the world economy to grow at around 3.5% annually over the next three years.

That is pretty much the average since 1961, according to World Bank statistics, although that of course is dragged down by the Great Recession and the big slump around 1980.

This all goes some way to explaining the extreme caution of central banks in rolling back their unprecedented monetary stimulus. They do not, as the ECB's Draghi admitted openly this past week, want to commit a policy error.

Their dilemma is that they want to normalize monetary policy as much as possible without killing what growth trillions of dollars of stimulus have helped achieve.

So data releases are even more crucial to policymakers than usual.

Snapshots Coming

The coming week will give them a snapshot of monthly business activity, culminating in the first real look at what happened in the second quarter.

Flash purchasing managers' indexes for Japan, Germany, France, the eurozone and the United States are released on Monday. All have been in expansion mode. That should continue, but Reuters polls suggest some easing.

Britain announces it’s preliminary second quarter growth figures on Wednesday. There is a strong consensus that it will tick up to 0.3% from 0.2% quarter-on-quarter, but slip to 1.7% from 2% year against year.

Arguably the biggest data release comes on Friday with advance US GDP numbers. An annualized rate—that is, roughly speaking the quarterly number times four—is seen at 2.7%, a large jump from the previous 1.4%.

Despite reflation optimism, financial repression remains in place and Allianz Global Investors’ long-term view is that global growth can be expected to remain dull, says the firm’s global strategist Neil Dwane. However, the good news is that a recession is not likely.

 

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