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Key factors that will influence the 2019 global economy

By Zhang Yuyan | Updated: 2019-01-04

The global economy sustained a medium-rate growth over the last year, and saw a wide disparity among major economies. The US returned to a neutral monetary policy, giving rise to uncertainties. What’s more, long-term issues such as high debt level and high asset prices are undergoing accumulation and adjustment, and vulnerability increased in some emerging economies. The unilateral, protectionist trade policy of the Trump administration has created trade tensions and exerted influence on the world economy in multiple fronts. The multilateral and regional trading systems have come to a stage of profound adjustments.

The aforementioned factors together jack up the recession risks for the world economy in 2019.

A year ago, the Institute of World Economics and Politics made an estimate of 3.6 percent when forecasting the growth rate of 2018, slightly lower than the IMF's 3.7 percent. In retrospect, in a sense, the world economy has undergone a roller-coaster ride in the past year.

The accelerated growth in the latter half of 2017 and the first half of 2018 boosted optimism globally, and the IMF ticked up its forecast to 3.9 percent in its first two quarterly reports. However, in the latest World Economic Outlook, the IMF dropped its 2018 and 2019 growth rate forecast to 3.7 percent in light of the turbulence in the US stock market, trade frictions initiated by the Trump administration and the chronic problems aggravated by coping with the financial crisis.

For the major developed economies, the US registers a growth rate of 2.9 percent in 2018, the EU 2.1 percent, Japan 1.1 percent, and the three combined scores 2 percent.

With regards to the major emerging economies, China's growth rate is 6.6 percent in 2018; India performs well with a rate of 7.4 percent; Russia (1.7 percent) and Brazil (1.4 percent) are lower than expected; and South Africa managed not to go into negative territory by getting a 0.6 percent growth rate.

Overall, the optimistic first half of 2018 and less encouraging second half have met our expectations. Looking forward, the world's economic trend in 2019 will be hinged on the following factors.

First is the direction and adjustment pace of US monetary policy. The basic monetary policy of the Federal Reserve returns to a neutral interest rate. In theory, against the context of full employment and stable low prices, a neutral interest rate exerts neither stimulus nor a containing effect on economic growth.

As the US economy gets better, the Fed is gradually changing its ultra-low interest rate to a neutral increase. The interest rate was ticked up four times in 2018, adding up to a total of nine increases since this increase-rate hike cycle began in December 2015. The Fed forecasts to hike the median Federal fund rate to 3.1 percent by the end of 2019, indicating at least two more upticks in future. As the largest economy, US’ monetary policy and its adjustments will no doubt influence the world economy significantly.

Second is the stock market performance of major developed countries. After a nearly 10-year long bull market, the US stock market peaked in September 2018, far exceeding its accumulative nominal GDP growth over the same period. Guided by the US’ super slack monetary policy, the global stock market values in the corresponding period increased by $54 trillion, also surpassing the global accumulative nominal GDP growth.

In the first eleven months of 2018, the MSCI index slumps by 5.7 percent, and among this, index for developed countries drops by 4.5 percent and index for emerging economies drops by 15 percent. As interest rate hikes by the Fed are expected, further fluctuations in asset prices in the US and the world at large are highly probable -- a 10-15 percent adjustment in the US stock market will not be surprising.

Third is the global debt level. The Institute of International Finance estimates that global debt topped $247 trillion in the first quarter of 2018, signifying a $75 trillion increase since the last quarter of 2008. Of this number, corporate debt increased by $28 trillion. Over the same period, however, the accumulative global GDP growth stood at $24 trillion. The current global debt is three times the world GDP of 2017, hitting an all-time high.

The increasing rate of the global debt sees a slow down, in particular for China whose debt has started to decline. But the size of global debt is still enlarging. Against the backdrop of a neutral monetary policy by the US, a high debt level faces higher vulnerability, susceptible to interest rate changes. For example, for those developing countries and emerging markets which borrowed in massive dollar debts when interest rates were very low, they suffered huge currency depreciation against the dollar and major setbacks in their economies.

Fourth is unilateral trade protectionism of the Trump administration. Since conflicts among major economies continue to escalate, the WTO in 2018 twice lowered estimates for 2018 and 2019 global goods trade. In just one year prior to mid October of 2018, WTO members introduced 137 items of trade protection measures, covering $588 billion of imports, seven times of the previous year. Although the overall effect of the protectionist measures are yet to be felt in the global economic performance, uncertainties in long-term trade policy will inevitably eclipse global trade and output. The measures adopted by major developed countries such as higher tariffs, stricter origin criterion and enhanced investment security scrutiny have already inhibited global investment.

Last but not lease, qualitative change has occurred to China-US economic and trade relations. The US government unveiled the Special 301 Report in 2018 and increased tariffs on Chinese goods, bringing about a very negative impact on China-US trade.

Whether the two countries engage in cooperative game or non-cooperative game in such issues as WTO reform, setting up more rigorous sustainable debt standards within IMF and other multilateral and regional cooperation, will have huge and far-reaching influence on the global economy in the next year and even the next five years.

The IMF has lowered the 2019 growth rate forecast by 0.2 percentage points to 3.7 percent, but the actual result may turn out to be a still lower 3.5 percent.

Besides the factors mentioned above, the world economy is also facing several other challenges -- economic risks induced by major internet incidents, market fluctuations caused by weaker expansion momentum, and rebuilding confidence on central banks of various countries.

In conclusion, it’s highly likely that the world will keep a medium growth rate of 3.5 percent in 2019. But if recessions are to occur in the US or Europe and spread to other countries, this target will be hard to achieve.

Zhang Yuyan is director of Institute of World Economics and Politics, Chinese Academy of Social Sciences. The author contributed this article to China Watch exclusively. The views expressed do not necessarily reflect those of China Watch.