Courtesy of Bloomberg Businessweek
Europe will have more than Brexit to worry about in 2019. European Central Bank President Mario Draghi, who saved the euro in 2012 by vowing to do “whatever it takes,” will complete his term in October, and the jockeying to succeed him is fierce. In Italy, a populist coalition government is defying EU demands to shrink the country’s projected 2019 budget deficit. Other EU members, including Germany, have violated deficit caps without serious consequences, but the European Commission is playing tough with Italy. The leaders of the two populist parties, the League and the Five Star Movement, show no sign of backing down. An angry standoff over deficits could lead to Italy’s following the U.K. out the EU’s back door, but that’s considered unlikely and almost certainly won’t happen in 2019. Bloomberg Economics predicts Italy will expand 1 percent in 2019, continuing a long trend of weak growth. It forecasts Germany growing 1.7 percent.
China’s outlook for 2019 sparkles in comparison, with Bloomberg Economics projecting GDP growth of 6.4 percent. But that would be the lowest figure since the lull following the Tiananmen Square democracy protests of 1989. A big factor is the Trump tariffs, which cover more than half of Chinese exports to the U.S. Another headwind is the government’s effort to shrink the pile of debt accumulated by Chinese families, businesses, and governments. Nonfinancial debt has doubled as a share of GDP since 1998, to 200 percent. If deleveraging threatens to weaken 2019 growth too much, count on the government to ease up on its balance-sheet-cleansing campaign and spend enough to make sure the economy grows at least 6 percent.
Another growth lever China’s leaders can pull is to allow the yuan to depreciate, which makes Chinese goods more competitive against those of rivals such as Japan and South Korea. One U.S. dollar bought 6.9 yuan in early November, up from 6.3 yuan in April. But that strategy has its limits. If the yuan breaches 7 to the dollar in 2019, panic selling could result that would make the currency weaker than authorities want. A weak yuan would raise the burden of dollar-denominated debt—and equally concerning, damage China’s ambition of making the yuan a global reserve currency on par with the dollar and the euro.
Growth in Japan has been strong in recent years, despite a lack of labor force growth. GDP grew at an annual rate of 3 percent in the second quarter. But Japanese governments have a habit of choking off their expansions by raising taxes. Another hike in the sales tax is set for October. That and weakening export growth are two reasons Bloomberg Economics forecasts growth to retreat to 0.9 percent in 2019.
Asia’s growth champion is now India (which, to be sure, remains far behind China in GDP per capita). Prime Minister Narendra Modi needs to keep the expansion rolling as he seeks a second term in 2019. He’s pressing the central bank to worry more about growth and less about inflation—echoing Trump.
And so it goes, with nations’ fates influenced by both global and local forces. In Brazil the outlook depends on whether Jair Bolsonaro, a right-wing former army captain, can get a grip on Latin America’s biggest economy when he takes office as president on Jan. 1. He might take notes from Indonesian President Joko Widodo, another hardscrabble populist, who will run for a second term in 2019. The rupiah cratered along with other developing nations’ currencies in 2018, but it partially rebounded as investors recognized that Indonesia’s trade deficit was a byproduct of investment for growth, not just consumption, says Patricia Perez-Coutts, a lead portfolio manager at Toronto-based Westwood International Advisors.
In September 1998, Federal Reserve Chairman Alan Greenspan said in a speech at the University of California at Berkeley that “it is just not credible that the United States can remain an oasis of prosperity unaffected by a world that is experiencing greatly increased stress.” The U.S. did manage to avoid a recession then, and its momentum is stronger now, not to mention that the stress in the emerging markets is lighter, says Nathan Sheets, a former U.S. Department of the Treasury official who is chief economist for PGIM Fixed Income in Newark, N.J. Still, says Sheets, a big question for 2019 will be “How does this divergence play out?”
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