ESADE report forecasts weak growth and downside risks in the global economy

The determining factors for the economy will be financial vulnerabilities and the trade war and policy imbalances between the United States and China. In Europe, growth rates will be influenced by 'Brexit' and fiscal and financial integration.

The determining factors for the global economy will be financial vulnerabilities and the trade war and policy imbalances between the United States and China. These are some of the key predictions for the second half of 2019 included in the ESADE Economic and Financial Report, written in collaboration with Banc Sabadell. Although the global and European economies have shown signs of recovering lost momentum in the first half of 2019, the report suggests that growth will once again slow down in the second half of the year. ‘This slowdown will be driven by the growing tension between China and the United States on the issue of trade, as well as the difficulty of reaching a deal on Brexit, which will also affect negotiations for the fiscal and financial integration of the eurozone,’ commented Josep Comajuncosa, Associate Professor in the Department of Economics, Finance and Accounting at ESADE.

The United States: the fastest-growing advanced economy

Most developed countries have closed their production gaps and are poised to grow at their potential rate. This is due to the negative effect of tensions over trade and the loss of the expansive effect of the Trump Administration’s fiscal measures on the economy of the United States and its trading partners.

Inflation will remain low, due to changes in the price of oil since October as well as additional underlying reasons. The weakness of demand will cause the underlying inflation to remain below the target level established by the central banks. Wages will rise moderately and productivity will increase.

Among the developed economies, the United States will experience the highest rate of growth – above 2% – as well as a record-low unemployment rate of just 3.8%. The Federal Reserve’s more expansive tone has offset the negative effect of government shutdowns and disappointment regarding the failure to implement previously announced fiscal measures. Nevertheless, thanks to strong domestic demand, the United States is currently one of just a few economies growing above their potential.

In contrast, the Japanese economy will continue to see weak growth, following its usual pattern over the last few decades. Japan’s economy will grow by as much as 1% in 2019 thanks to an expansive fiscal policy, only to slow down once again when the planned tax increases are implemented.

Slowdown in the eurozone and uncertainty regarding the UK economy

Although the eurozone grew somewhat more than expected in the first half of 2019, growth is expected to slow down in the second half of the year, falling from 1.8% in 2018 to 1.5% at the end of 2019. Spain will experience relatively strong growth of about 2%, while Germany will see more moderate growth – less than 1% – due to the weakness of the country’s domestic consumption and exports, as well as problems in industrial production. France will also see moderate growth – slightly above 1% – while Italy, affected by fragile domestic demand and financial problems, will inch towards recession. The peripheral economies of the eurozone, which have not yet closed their production gaps, will grow at a somewhat higher rate than the core countries.

As for the United Kingdom, which is seeing growth of just over 1%, Prof. Comajuncosa notes that it is difficult to make an adjusted forecast, given the great uncertainty surrounding the evolution of the British economy. If a Brexit deal allowing a gradual and orderly transition to the new situation is not reached in 2019, Prof. Comajuncosa warns, the United Kingdom’s economic growth will suffer in the short term.

A better outlook in the emerging countries, except China

According to Prof. Comajuncosa, the emerging economies will see similar growth levels to last year – 4.5% – but with significant disparities between countries. In China, the planned fiscal stimulus will not be enough to offset the decrease in exports caused by higher tariffs in the United States. Chinese growth will slide to just slightly above 6%. If growth decreases even further, it could create problems for many of Asia’s emerging countries, which provide raw materials and semi-finished products for the Chinese value chain.

Growth in India will remain strong, above 7% this year and 7.5% thereafter. The solid evolution of household consumption and business investment will contribute to India’s strong performance, as will the country’s somewhat expansive fiscal and monetary policies. The economies of Southeast Asia, meanwhile, will grow by more than 5%, with only Thailand, at 3.5%, seeing more moderate growth.

Average growth in Latin America will rise to nearly 1.5% by the end of 2019 and could subsequently reach 2%. Brazil, which grew by 1.1% last year, will reach just over 2% growth by the end of the year as a result of shifting perceptions of its economic policy. Argentina will also see positive growth in the second half of the year, thanks to an increase in disposable income and rebounding agricultural production after last year’s drought. Peru, Chile and Colombia will maintain the good growth rates seen in previous years, albeit with a somewhat downward trend. In Mexico, however, expectations will shift as a result of the government changing hands, driving growth of just below 2%.

This communication was first published 9 July 2019 by ESADE.