You will be redirected back to your article in seconds
Skip to main content

New Report Says Financial Volatility Latest Threat to Global Growth

As the global economy wobbles, vulnerability from hot button issues such as trade tensions and oil prices are rising.

According to the November “Forecast Flash” from Global Insight by IHS Markit, with the exception of the U.S., all key economies in the world have experienced slower growth in 2018 compared to the previous year. And the U.S. economy is on borrowed time.

IHS Markit chief economist Nariman Behravesh, and Sara Johnson, executive director of Global Economics, who authored the report, said these economies “will continue to see weak or even weaker growth during the next two years.”

“The unsynchronized acceleration in U.S. growth is almost entirely due to fiscal stimulus,” Behravesh and Johnson wrote. “This stimulus will wear off by late 2019 and early 2020, and the U.S. economy will join the others in seeing a significant loss of speed.”

Several factors have contributed to this darkening global picture, according to the report, including the gradual removal of liquidity in these economies, higher oil prices and the elevated level of trade tensions, notably between the U.S. and China.

There could be some relief on oil prices, however, which fell on Tuesday after four days of gains. Brent crude, the global benchmark for oil prices, declined $3.41, or 5.1 percent, to $63.38 a barrel, hitting an eight-month low. On a consumer level, a gallon of gas at the pump in the U.S. was $2.61 on Tuesday compared to $2.86 a gallon a month ago and $2.53 a year ago, according to the American Automobile Association.

“Even without a full-blown bear market, the combined effects of policy uncertainty and large financial gyrations are hurting business sentiment and capital spending,” the economists said.

Related Stories

In the U.S., real gross domestic product (GDP) grew at a 3.5 percent annual rate in the third quarter, following 4.2 percent growth in the second quarter, marking the best two-quarter performance in four years.

The 10 percent tariffs on $200 billion of imports from China that went into effect in late September and could increase to 25 percent in January are boosting the near-term inflation forecast, but should only have only a small negative impact on real growth, IHS said. While President Trump has indicated those additional tariffs might be averted, apparel industry experts have said the uncertainty has already set in, causing sourcing shifts and rising costs.

On the plus side, the fiscal stimulus from recent tax cuts and spending increases should fuel growth in the next several quarters, the report said. IHS Markit looks for U.S. real GDP growth to reach 2.9 percent this year before slowing to 2.7 percent in 2019, 2.1 percent in 2020 and 1.6 percent in 2021.

In China, Behvaresh and Johnson said, “A determined government response will limit the damage from U.S. tariffs. China’s government has responded to weaker third-quarter growth–6.5 percent year-to-year compared with 6.7 percent in the second quarter–and U.S. tariffs (actual and threatened) by relaunching fiscal and monetary stimulus.”

The report noted that indications of more-relaxed government fiscal policy, such as personal income tax cuts for middle- and low-income households, new nontraditional state financing flows and a surge in local government debt issuance, are a positive. IHS’s forecast for real GDP growth for China is 6.6 percent this year, 6.1 percent in 2019 and 6 percent in 2020.

European economies are seeing “weaker growth and rising political uncertainty,” the report noted. Real GDP growth slowed to just 0.2 percent quarter on quarter in Q3, the slowest pace since the second quarter of 2014.

“The Eurozone faces multiple headwinds–slowing export growth and rising political uncertainty,” which includes the budget standoff between the European Union and Italy, and the uncertain governing coalition in Germany, the report said.

As a result, Eurozone real GDP growth is expected to slow to 1.9 percent this year from 2.5% in 2017, and continue to weaken to 1.5 percent next year and 1.2 percent in 2020. Economic growth in the U.K. is projected to slow to 1.3 percent in 2018 and 1.1 percent in 2019 after 1.7 percent growth last year. However, the mounting turmoil around Brexit could further curtail growth.

As for the rest of the world, the report said, “Autonomous growth will not be strong enough to help.”

“In recent months, emerging markets have been battered–some more than others–in part because of developments outside of their control,” IHS said. “Monetary conditions are beginning to tighten around the world. Interest rate increases in the United States, Canada, and United Kingdom have put downward pressure on emerging-market currencies. Meanwhile, global growth has peaked and oil prices are significantly higher than a year ago, hurting oil importers.”

In addition, some of the problems for emerging-market countries are a result of poor governance, lack of structural reforms, political uncertainty and an increase in debt.