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Trade Tensions, Slowing Growth Underline Top 10 Economic Predictions for 2019

Global economic growth will edge down to 3 percent in 2019 from a rate of 3.2 percent in 2018, according to the annual Top 10 Economic Predictions from business information provider IHS Markit.

While global growth will continue to decelerate, the economy will also become increasingly vulnerable to shocks.

“Policy mistakes remain the biggest threats to global growth in 2019 and beyond,” said IHS Markit chief economist Nariman Behravesh in a recent webinar. “Simmering trade conflicts are dangerous, not because they have done damage so far–they haven’t–but because they could easily escalate.”

Here are the top 10 global economic predictions for 2019, according to IHS Market.

1. U.S. economic growth will stay above trend

IHS Markit says the potential growth in the U.S. economy to be around 2.6 percent for 2019. In 2018, U.S. economic expansion was 2.9 percent compared to 2.2 percent in 2017, with the acceleration driven by fiscal stimulus put in place at the beginning of the year. The impact of this stimulus will still be felt in 2019, but with diminishing potency.

In the next year, Behravesh said there are likely to be countervailing pressures on growth, including a strong dollar, higher tariffs, tighter credit conditions and weak housing on the downside, and fiscal stimulus, lower oil prices and still low interest rates on the upside.

2. Europe’s expansion will slow even more

Eurozone growth peaked in the second half of 2017 and has since declined steadily. Growth in 2018 was 1.9 percent compared to 2.5 percent in 2017. IHS Markit predicts a further decline to 1.5 percent in 2019.

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Heightened trade tensions and a deceleration in world trade growth have hurt exports and the manufacturing sector, as has the appreciation of the euro against most currencies except the dollar. IHS said political risks have risen significantly and contributed to the decline in business sentiment. The continuing turmoil around Brexit will hurt U.K. growth, which is predicted to drop to 1.1 percent in 2019 after declining to 1.3 percent in 2018.

3. Japan’s recovery remains weak

Japanese economic expansion in 2018 is expected to come in at a much slower rate of 0.8 percent and inch up to 0.9 percent in 2019 after a rate of 1.7 percent in 2017. While monetary policy continues to be “ultra-accommodative, there are two big drags on Japanese growth: the slowdown in China’s economy, and the fallout from the trade tensions between the United States and China,” Behravesh said. “The expected rise in construction spending ahead of the 2020 Olympics will sustain growth in 2019, but the boost will fade by the end of the year.”

The Japanese government is expected to proceed with raising the sales tax to 10 percent from 8 percent, but “buy-in-advance behavior” will raise consumer spending growth before the tax hike in October.

4. China’s economy will keep decelerating

In the third quarter of 2018, China’s real gross domestic product grew at a year over year rate of 6.5 percent, the lowest since the financial crisis 10 years ago. On an annual basis, the pace of expansion has slowed from 6.9 percent in 2017 to 6.6 percent in 2018, and will fall to 6.3 percent in 2019.

“The underlying dynamic behind this deceleration is the government’s attempt to reduce ultra-high debt levels,” Behravesh said. “That said, the Chinese government is sensitive to a too-rapid decline in growth–6 percent growth is often referred to as the ‘line of defense,’ as well as the recent rout in the stock market and the trade conflict with the United States. In response, policymakers have unleashed a series of monetary and fiscal measures to help support growth and stabilize financial markets.”

5. Growth in emerging world will slide

At 4.9 percent, emerging-market growth in 2017 was the strongest since 2013, but it declined to 4.8 percent this year. IHS Markit expects another decline in growth during 2019 to 4.6 percent.

Economies like Brazil, India and Russia experienced a mild pickup in 2018, while others such as Argentina, South Africa and Turkey suffered recessions or near-recessions.

“Emerging markets face a number of headwinds,” Behravesh said. “Growth in the advanced economies is slowing, global financial conditions are getting gradually tighter, the dollar is expected to remain strong, commodity prices will be flat at best and political risks in key economies (Brazil and Mexico) are rising.”

6. Volatility in commodity markets presents downside risks

Weaker global growth, the gradual tightening of credit conditions and strength in the dollar will pose challenges for commodity markets in 2019, IHS said. However, demand growth in 2019 still looks strong enough to provide markets with support and avoiding the kind of price collapse seen in 2015 unlikely. IHS predicts that oil markets, in particular, will experience continued volatility.

7. Inflation will not rise much, if at all

In the near term, IHS Markit expects global inflation to remain close to 3 percent, and developed economy inflation close to 2 percent. As output gaps close and unemployment rates fall, there will be upward pressures in many economies. But there are downward pressures, too–“outside the United States, growth is weakening, commodity prices will be relatively flat and with the trade war in a temporary truce, the upward push from tariff increases will be on hold,” IHS said. Given these trends, IHS expects inflation in key markets to remain under control.

8. Fed stays the course

With the world’s key economies at different points in the business cycle, their central banks are moving at different speeds and in different directions, notably China. In the case of the Fed, IHS Markit expects three interest rate increases in 2019.

Other central banks that might increase rates in 2019 are the Bank of Canada, the Bank of England and a few emerging market central banks. “Meanwhile, we do not expect the European Central Bank to hike rates until early 2020 and we do not believe that the Bank of Japan will end its negative interest rate policy until 2021,” IHS said.

9. Dollar maintains strength against most currencies

After the dollar rose roughly 6.5 percent from the fourth quarter of 2017 to the fourth quarter of 2018, IHS expects the dollar to hold at current elevated levels for much of 2019, driven by above-trend U.S. economic growth and more rate hikes by the Fed.

“However, another big appreciation of the dollar seems unlikely and the potential for volatility remains high,” Behravesh said. “In particular, we expect that the euro-dollar rate will end 2019 at around $1.10 compared with $1.14 at the end of 2018. At the same time, we predict that the renminbi-dollar rate will hold steady.”

10. Policy shocks risks rise, but likely not enough to trigger a recession

Policy mistakes, especially on trade, remain the biggest threats to global growth in 2019 and beyond, Behravesh said. With such a large deficit, he added, “the U.S. will have little room for fiscal stimulus when the economy next goes into recession.”

He cited low interest rates as troubling because they could “severely limit the ability of central banks to cut rates in a downturn”–this is especially the case in the Eurozone and Japan, where policy rates are either at zero or below.”

“The good news is that the probability of such policy mistakes seriously hurting global growth in 2019 is still relatively low, Behravesh added, “but will rise in 2020 and beyond.”