The global economy — review and outlook

On Dec. 20, the Dow Jones index reached an all-time high of 28,533. As per usual, global stock markets followed the US lead. Digging a bit deeper, things look less clear cut.

2017 was an extraordinary year with volatility all but gone and a flawless rally. Global stock markets returned to a state of considerable change and unpredictability in 2018 and 2019.

In January 2018, the International Monetary Fund (IMF) forecasted a 3.9 percent synchronized growth across the globe. In came trade wars, slowing economies in China and Europe, as well as repeated downgrades of economic growth rates of 2.9 percent in 2019 and 3 percent in 2020 as per the IMF.

The World Bank’s forecasts were even gloomier with 2.6 percent in 2019 and gradually rising to 2.8 percent in 2021. The outlook for advanced economies looks dimmer with the Euro area forecast for 2020 of 1.4 percent and the one for the US of 1.6 percent for the same year.

The culprits were trade tensions between the US and China, but also between Korea and Japan, as well as other looming commercial conflicts especially between Europe and the US.

The updated prognosis was published in June by the World Bank and in October during the IMF World Bank annual meetings. This was right at the height of belligerent trade rhetoric and the introduction of ever newer tit-for-tat tariff action.

The US and China are the world’s two largest economies and their trade conflict had ripple effects across the world — especially in open trading economies such as Germany and Japan, for whom both the US and China are major export markets.

IMF managing director, Kristalina Georgieva, warned of synchronized deceleration of growth and generational dislocation of economic alignments, especially as far as supply chains were concerned.

All things being equal, we can look forward to interest rates remaining lower for longer, and more volatility in stock markets.

Cornelia Meyer

The fact that stock markets put in an impressive rally toward the end of the year can be attributed to an easing of trade tensions between the US and China by concluding phase 1 of a new trade deal.

South Korea and Japan are also ratcheting up their talks, culminating in a summit of Japanese Prime Minister Shinzo Abe and Chinese President Xi Jinping on Dec. 24. The clear victory of Boris Johnson in the UK general election earlier this month helped too, by avoiding a no-deal Brexit for the next 12 months.

Are we out of the woods then, and will we return to the rosy low-volatility, high-growth picture of January 2018? Most definitely not.

The US and China have only reached a tentative agreement on phase 1 of a three-pronged trade deal. Next year US President Donald Trump’s attention will focus on Europe, especially Germany, if the recent American sanctions against companies and executives involved in the construction of Nord Stream 2 (an undersea pipeline allowing Russia to up its gas exports to Germany) are anything to go by.

German car exports to the US have been a thorn in Trump’s side from day one. Germany is Europe’s largest economy and has been the growth engine of the eurozone for well over a decade. The country narrowly escaped a technical recession in the third quarter. Europe always follows the German economy’s trajectory.

We should be ready for more volatility in line with how the global trade picture evolves.

Brexit will be an outlier. While markets reacted well to British premier Johnson’s resounding election victory, we can expect new fears of a no-deal Brexit toward the end of 2020, because it will be hard for the UK to reach a trade deal with the EU 27 within 11 months. This means that the prospect of a no-deal Brexit will be on the horizon again.

We should not forget that the EU still remains the UK’s most important trading partner by far. Emerging market currencies will ebb and flow in line with the strength of the dollar.

The US Federal Reserve had three rate cuts this year and will most probably preserve its headroom as far as interest rates are concerned during 2020, barring unforeseen circumstances.

Global economic growth rates will not allow the European Central Bank (ECB) and the Bank of Japan to escape the negative interest-rate trap, with all its ramifications for the financial sector and the pensions’ industry.

Most central banks have run out of ammunition, because interest rates are at all-time lows and their balance sheets at historical highs. The demand from ECB chair Christine Lagarde and others for fiscal measures to support the activities of central banks will intensify.

All things being equal, we can look forward to interest rates remaining lower for longer, and more volatility in stock markets.

At the same time, we should expect trade tensions to flare up at regular intervals and the relative strength of currencies to be a bone of contention among world leaders, especially Trump. Long gone are the times of synchronized global growth devoid of all volatility.

• Cornelia Meyer is a business consultant, macroeconomist and energy expert.

Twitter: @MeyerResources