Courtesy of Bloomberg Businessweek
Judging by recent headlines, the global economy is on a wild roller coaster that’s going mostly downhill. There are Brexit, trade wars, Italy’s fight with the European Union, renewed U.S. sanctions on Iran, a Chinese debt bomb, jittery stock markets, intermittent capital flight from developing nations, and more.
The data tell a calmer and happier story. According to the International Monetary Fund, the global economy is on track to grow a healthy 3.7 percent in 2018. That’s exactly how fast it grew in 2017. The IMF’s forecast for 2019? Again, 3.7 percent. It’s a plateau, all right, but a high plateau—call it the Altiplano of economics.
The contrast between the negative daily buzz and positive underlying conditions is sharpest in the U.S., where the expansion of the world’s largest economy has actually strengthened as it’s lengthened: Annualized growth rates in the two middle quarters of 2018 were 4.2 percent and 3.5 percent. In October alone, the economy generated 250,000 jobs.
That kind of growth isn’t sustainable in a rich nation with a slow-growing workforce and lackluster productivity growth. Still, if the U.S. makes it past June without a recession, the uptrend will exceed 120 months. That would surpass the 1991-2001 expansion to become the longest since at least 1857, the beginning of records maintained by the National Bureau of Economic Research.
So the outlook for 2019 is better than one might expect given the minicrises breaking out left and right. Strong growth in the U.S. isn’t only good for Americans; it’s good for workers in countries that produce goods and services for sale to the U.S. In fact, the U.S. is largely responsible for keeping global growth ticking along at an even pace despite the slowdown of many other major economies.
On the other hand, the U.S. outperformance has downsides. It puts pressure on vulnerable nations such as Argentina and Turkey, which rely on an inflow of foreign capital. Global investors, who put their money wherever they think it will earn the highest return, are more likely to choose the U.S. over other countries if it’s thriving. Meanwhile, the Federal Reserve is raising short-term interest rates to keep the U.S. economy from overheating, making the nation’s yields increasingly attractive. To compete for funds, vulnerable countries with chronic trade deficits are forced to raise their own interest rates, which suppresses growth. Bloomberg Economics forecasts, for example, that Turkey’s economy will grow just 0.8 percent in 2019.
There could be political problems as well. The U.S. trade deficit is widening because the country’s appetite for imports is growing faster than foreign demand for American products and services. The IMF projected in April that the negative balance on the U.S. current account—the broadest measure of trade in goods and services, plus investment income—will widen to 3.4 percent of gross domestic product in 2019, up from 3 percent in 2018. That would be the biggest gap since 2008.
President Trump tends to regard the U.S. trade deficit as evidence of foreign malfeasance. He could impose even more tariffs, which would harm both trading partners and American consumers. At the Bloomberg New Economy Forumin Singapore in early November, 68 percent of the 400 delegates identified trade war as the biggest story for 2019; former U.S. Treasury Secretary Henry Paulson warned of an “economic iron curtain” if the U.S. and China don’t reconcile.
Democrats’ capture of the U.S. House of Representatives in the midterm elections on Nov. 6 won’t moderate America’s pugnacity on trade for two reasons: Trump can act without Congress on trade, and a lot of Democratic lawmakers agree with him anyway. On the plus side, the Congress that sits in January is considered a strong bet to ratify the United States-Mexico-Canada Agreement, Trump’s moniker for the successor to the North American Free Trade Agreement.
For economists, the most important date on the 2019 calendar is March 29, when the U.K. is scheduled to leave the European Union after 46 years. Brexit’s impact on the U.K. economy will have a lot to do with decisions made before then on economic integration between the U.K. and the EU. The worst outcome would be a chaotic “no deal” exit. In August, Matt Hancock, the U.K. health secretary, told drugmakers to stockpile medicines in the country in case there’s no deal and imports are delayed. It’s more likely that some kind of agreement will be struck. Bloomberg Economics predicts the U.K. will grow 1.6 percent in 2019, a bit faster than the estimated 1.3 percent this year. One way or another, Brexit “is going to be extremely difficult,” says Duncan Edwards, chief executive officer of the British American Business Council.
(Part Two of this Look Ahead at the Global Economy 2019 will appear in our Blog Section on December 21. Any views or opinions expressed in this piece are solely those of the author/publication/web site and not those of Product Components Corporation.)
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