The global economic upswing continues to strengthen but US policy uncertainty and a potential trade war could quickly darken the bright skies.
Editorial
A bright sky: that is what springs to mind when we consider the current state of the global economy. Data confirm that 2017 marked a year of acceleration in GDP growth, which grew 0.6 percentage points faster than the year before. 2018 promises to be another year of strong growth, with GDP growth pushing up to 3.2%. That would be the highest level since 2011. Trade growth is buoyant and investments are finally recovering. Energy and commodity prices rejoice in an upswing, supporting investments. Activity abounds. Growth, moreover, is broad-based and includes advanced as well as emerging economies. Even Latin America, notably Brazil, is dragging itself out of a long period of economic backlash. And while there is no shortage of political developments, they have thus far found no place in which to cast a shadow.
Not yet, at least. In our November Economic Outlook, we argued there was no time for complacency and that it was the right time for policy action. Now, six months on, we may cautiously conclude that policymakers – especially those in the US – have taken this advice perhaps a bit too literally.
The first policy is the USD 1.5 trillion tax cuts that were enacted in the US Tax Cuts and Jobs Act. That is believed to provide a growth stimulus of 0.5 percentage points over the next two years. It is obviously not this outcome, as such, that worries us. What does, is that such stimulus should not take place when the economy is already producing at full capacity. Unemployment is at a 17-year low. The tax stimulus may only create inflationary pressures that will be difficult to control. That is precisely what we do not need. It may trigger unguided rate hikes or unguided balance sheet reductions by the Fed, creating turmoil in the financial markets. This could lead to reduced household and business spending. The tax cuts, therefore, are a risk, it is an ill-timed economic experiment.
The second, and even less wanted, policy action has been the protectionist bend the US administration has taken since early this year. Emboldened by the political success of the Tax Cuts and Jobs Act the administration has targeted trade policy. In early March, tariffs on steel and aluminium imports were announced and implemented, albeit with wide exemptions. It triggered a muted retaliation from China, followed by the US announcement of a list of imported goods from China with a total value of USD 60 billion that would be subject to tariffs. China immediately responded. While neither the US nor the Chinese measures have been implemented yet, the picture of a trade war between the two largest economies on the planet has started to loom. Such a war may not happen, and – as we argue in this Outlook – it is not our main scenario. But if it does, there will be a large-scale impact on the global economy.
Since our November Outlook the global economy has further improved and we look forward to that continuing. However, at the same time, the chances of it improving for a longer period are deteriorating, especially due to the protectionist bend of the US administration. The sky is bright for now, so enjoy it while it lasts.
John Lorié, Chief Economist Atradius
Executive summary
The global economic upswing, underway since H2 of 2016, is continuing to strengthen. Recoveries are broadening into more emerging markets and global trade and investment activity have finally been picking up. At the same time, risks to the outlook have increased substantially since the November Economic Outlook. US policy uncertainty and a potential trade war could quickly darken the current bright skies.
- Global GDP growth is forecast to accelerate to 3.2% in 2018, the strongest annual expansion since 2011. Growth is expected to remain strong in 2019 but moderate slightly to 3.0%.
- The US economy is outpacing other advanced markets, with growth set to expand 2.8% this year before easing to 2.4% in 2019. After a very strong year, the eurozone economy is forecast to expand a solid 2.2% this year before easing further to 1.8% in 2019. Growth is also easing in Japan while it stays resilient in the UK.
- GDP growth across emerging market economies as a whole is picking up strongly. Latin America is set to see the strongest acceleration, to 2.0% in 2018 and 2.9% in 2019. Eastern Europe is expected to see some momentum easing from 3.0% this year to 2.5% next year. Emerging Asia will continue to enjoy the strongest growth, but a gradual slowdown in China is forecast to increasingly drag on regional growth, bringing it down to the still respectable 5.8% in 2018 and 5.5% in 2019.
- The global upswing has translated in further improvements in the insolvency environment. After a 4% decline in corporate failures across advanced markets in 2017, Atradius forecasts a further 3% decline this year. Insolvencies are also on a downward trend in key emerging markets.
The key trends underpinning the global economic upswing as well as the underlying risks are discussed in Chapter 1 of this Economic Outlook. Global growth is increasingly broad-based, with recoveries in trade and investment underway, as well as oil and commodity prices. We highlight the significant increase in the risk of a trade war. However, there are also positive developments on trade that should not be ignored: at the global level, more policies are implemented to facilitate than to restrict trade and some countries are now accelerating trade liberalisation negotiations.
Naturally, US protectionism now tops our list of risks to the global economic outlook’s bright sky. The second highest risk we identify also stems from the world’s largest economy: misguided Fed policy. The remaining risks are (3) a hard landing in China, (4) a financial market correction, (5) heightened geopolitical risk, and (6) oil price volatility.
In Chapter 2, prospects and risks in developed economies are presented. The US outlook is revised up from the previous Outlook, as a loosened fiscal policy adds fuel to the economy that was already going strongly. The fiscal stimulus could increase the risk of misguided Fed policy and will reduce the policy tools to combat the next downturn in the US. Policymaking uncertainty, especially related to trade, may bring on that downturn more quickly than expected. The eurozone will continue to enjoy loose monetary policy and tightening labour markets but some momentum will ease as export growth slows. The UK is expected to remain resilient while Advanced Asia loses some momentum alongside slowing Chinese growth.
The outlook for emerging markets is discussed in Chapter 3. Special attention is paid to EMEs’ vulnerability to global trade developments and initiatives undertaken to increase trade, in an effort to mitigate these risks. China’s dominance in Asia and extensive investment activities across emerging markets, especially in Sub-Saharan Africa and Asia, are also causing more opposition and a possible threat to debt sustainability in some EMEs.
The bright sky foreseen for the global economy in 2018 is further reflected by the modestly positive insolvency outlook presented in Chapter 4. A 3% decline is forecast in aggregate corporate bankruptcies across advanced markets this year. The UK is the only real exception to the positive outlook. In Advanced Asia, Japan’s insolvencies are expected to stabilise at historically low levels while corporate failures in other markets decrease strongly despite rising headwinds from China. Steady declines are also forecast for key emerging markets with available data – especially in Brazil as it bounces back from a deep recession.
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