Our round-up of major economies; featuring charts and commentary.
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Growth is expected to slow below trend in Q1, due to the direct effects from the government shutdown and the impact on consumer and business sentiment of the decline in asset prices in Q4.
However, we expect that slowdown to be temporary, with modestly above-trend growth for the remainder of the year. Overall, that implies a slowdown in annual growth compared to 2018, with a further slowing expected in 2020.
We do not expect a recession this year or next. Inflationary pressures are expected to remain moderate, and we now expect the Fed to remain on hold for a period, although do not rule out the potential for another hike. This view stands in stark contrast to current market pricing.
Figure 1. US
Last year saw successive growth disappointments in the euro zone, with annual GDP growth slowing to just 1.1 per cent from 2.7 per cent a year earlier. The early part of 2019 continued in the same vein, although more recent data suggest that the worst could be over, demand should revive gently over the rest of the year. The slowdown at the end of 2018 was probably exaggerated by a cluster of one-off, adverse impacts, most of which should unwind.
More fundamentally, weaker growth was almost entirely due to a big fall in trade flows – domestic demand held up reasonably well. If China stabilises and global trade tensions recede, net exports should recover. But the slowdown has lasted for long enough for the ECB to react, pushing out rate hikes until 2020.
A return to the stellar growth rates of 2017 is unlikely, but a resumption of trend growth or slightly better by the second half is plausible, given strong jobs markets and healthy corporate finances. What is more of a worry is the continued weakness of inflation. Underlying measures need to drift higher in 2019.
Figure 2. Eurozone
Brexit has, once again, dominated the political and financial market backdrop in the UK over the last three months. The British Parliament has comprehensively rejected PM May’s Withdrawal Agreement twice (at the time of writing) and a no deal exit is still possible, if not likely.
In the meantime, growth has remained sluggish with the chronic weakness of business investment almost certainly attributable to Brexit-related uncertainty. Consumer spending has held up better, helped by a rise in wage growth and puzzlingly strong increases in employment.
With output growth weakening further in Q4 (+0.2 per cent in the quarter, 1.3 per cent over the year), productivity growth has turned negative again. If the labour market were to turn – and a number of surveys suggest it could do so – the outlook could quickly darken further. The Bank of England continues to adopt a slightly hawkish stance, but their ability to raise UK rates may be further compromised by subdued inflation, which is now back below target.
Figure 3. UK
Beijing has moved from an effort to rein in credit growth to more of an emphasis on “slowing down the slowdown”.
Fiscal and monetary stimulus is being applied, after quarterly growth came in at just 1.5 per cent at the end of 2018. Inflation has fallen sharply and low PPI usually translates into margin pressure for corporates.
The impact of tariffs has been felt and will persist in 2019 even as further increases have been deferred, as Xi and Trump work with their negotiators to sign a deal that will, if successful, decrease the tariffs in exchange for market access, better protections for foreign investors, and specific promises to import more US goods. Despite a balanced current account, the Chinese currency should remain broadly stable as portfolio inflows follow index inclusion.
Figure 4. China
Japan is likely to experience a non-linear growth trajectory.
In the early part of the year, domestic demand is likely to offset to an extent the damage from external demand weakness, driven by front-loading of spending before the consumption tax hike and some help from fiscal measures.
In Q4, domestic demand is likely to weaken once the consumption tax hike kicks in. But by then, the external demand outlook should be less challenging, as the effects of dovish policy turns by the Fed and ECB, China’s policy stimulus and lower trade tensions help world trade volumes recover.
Meanwhile, the outlook for inflation looks very benign. In a low-growth environment, it is unlikely that the Bank of Japan will launch any new policy experiments to help the yield curve steepen. Much will depend on the outlook for the yen, which has remained on the defensive with a recovery in risk appetite but could strengthen if the Fed stays on a lengthy hold.
Figure 5. Japan
While a slowdown in Canadian growth in late 2018 and early 2019 was anticipated, the decline has been sharper and broader than expected.
Looking ahead this implies that growth in early 2019 will be slower than the Bank of Canada’s (BoC) forecast from their January monetary policy report.
At the same time, macro concerns around US-China trade policy have impacted global confidence and economic activity. The combination of weaker than expected domestic growth and a disappointing global backdrop has led to the BoC to take a more cautious stance to monetary policy tightening and therefore we expect rates to be kept on hold for now.
On the inflation front, the headline rate has fallen due to lower fuel prices, but core inflation measures remain near target. In future, price pressures will be muted by the slower growth outlook. In particular, the BoC will be watching household spending closely to guide expectations about domestically driven growth and inflation pressures.