Letter IEDI n. 921–The World Economic Scenario
The International Monetary Fund published its updated scenario for the global economy for 2019 and 2020 in April's edition of the World Economic Outlook. It is not good news, especially for Brazil, whose economic recovery has been giving repeated signs of weakening. Once again, the IMF reduced world GDP growth expectations for 2019: from +3.7% in Oct/18 to +3.3% this April. That is, 2019 should be worse than 2018 for both GDP (+3.6%) and international trade (+3.4% versus +3.8%).
The likelihood of this scenario is reinforced by the fact that other international organizations also expect a slowdown. The OECD’s forecast, released in March this year, also points to a growth rate of +3.3% in 2019; and the World Bank’s estimate, published in its Jan/19 Global Economy Prospects, is even more pessimistic: +2.9%.
For 2020 the scenarios diverge, suggesting that there are still important uncertainties on the horizon. The World Bank (+2.8%) and the OECD (+3.4%) predict a performance very close to 2019's. The IMF is more optimistic, projecting a more significant increase in world GDP growth: +3.6%.
According to the Fund, the main determinant of the global slowdown is the deceleration in the advanced economies ongoing since the second half of 2018, which accounted for more than 2/3 of the global loss of momentum. In 2019, this group of countries is expected to grow only +1.8% versus the +2.2% of 2018. Two factors behind this had already been incorporated into earlier scenarios: the effect of increasing tariffs and the reduction of the positive impact of the US fiscal stimulus package on the American economy itself and on its trading partners.
Additional factors in the updated outlook were the shutdown of some US government services between Dec/18 and Jan/19, followed by the successive failures of the Brexit agreements; the "yellow vests" protests in France and the negative impact of the revised diesel emission standards on German automobile production. They all deepened the cyclical deceleration of the advanced countries.
For emerging and developing economies, the IMF's growth projection for 2019 has also been revised down again, from +4.7% in Oct/18 to +4.5% in Jan/19 and then to +4.4% in April. That is, instead of surpassing the result of 2018 (+4.5%), dynamism in these economies should actually be lower.
The main determinant of this review is the recession in Turkey. According to the IMF, GDP growth in emerging Europe should not exceed +0.8% in 2019, which is well below the +3.6% of 2018. Due to this result of emerging Europe, Latin America will leave its position as the "tailender" in the world panorama. The IMF estimates a +1.4% economic expansion in 2019, better than 2018's (+1%), but well below previous estimates (+2.2% in Oct/18 and +2% in Jan/19).
The worsening in April was mainly due to the reduction in expected growth rates for the region's two largest economies, coupled with adjustments in the assessment of the policy orientation of the new governments. In the case of Brazil, predicted growth fell from +2.5% in Oct/18 to +2.1% in Apr/19. In the case of Mexico, the cut was even higher, with the forecast going from +2.7% in Oct/18 to +1.6% in Apr/19. Recession estimates for Argentina and Venezuela contributed to the worse predictions, too.
Asia, for its part, will continue to be the main contributor to emerging and developing countries' pace of expansion (+6.3%). The IMF expects that the change in the profile of this region's growth, which was already observed in 2018, will continue in 2019, with India (+7.3%) growing more than China (+6.3%).
In the Chinese case, in addition to the increase in domestic consumption vis-à-vis investments, the recent loss of pace also stems from the imposition of US customs duties on Chinese exports in a context of low world trade dynamism. Meanwhile, Indian economic growth is anchored in investments and domestic consumption, benefiting from a more expansionary orientation of monetary and fiscal policies.
The balance of risks for 2019 and 2020 continues to be negative. The IMF highlights four major sources of risk, the first two being the more relevant:
1. Trade tensions triggered by the Trump government continue to threaten the performance of global trade, investment and output, although some recent events point to an alleviation of tensions (new agreement between US, Canada and Mexico; truce in the US-China tariff war). If these issues are not resolved, the high-tariff environment will further reduce world trade growth. The Fund forecasts trade volume to grow +3.4% in 2019 against +5.4% in 2017 and +3.8% in 2018.
2. Risks in economies that are classified as "systemic" by the IMF. In Europe, high spreads on Italy's sovereign debt and a "Brexit without agreement" (no-deal Brexit). In the United States, the change in the Fed's stance regarding the base interest rates (by announcing a pause in hikes in March) does not prevent a reassessment by the market and a rise in medium- and long-term interest rates, an appreciation of the dollar and more restrictive financial conditions for emerging and developing economies. In China, if trade tensions persist, economic activity may be weaker than expected in the baseline outlook.
3. Financial vulnerability (such as cyber attacks), which can threaten cross-border payment systems and global commerce itself. In addition, a reversal of the post-crisis financial regulation reforms and/or the continuation of relatively accommodative financial conditions may lead to the emergence of new outbreaks of vulnerability, especially if financial institutions intensify their quest for profitability in a low-growth environment.
4. Political uncertainties associated with the agenda of newly emerging governments, political conflicts in the Middle East, and tensions in Southeast Asia. A sequence of adverse events, coupled with trade tensions and more stringent financial conditions may increase risk aversion and have a negative overall impact.