The International Monetary Fund will soon issue its latest World Economic Outlook ahead of the mid-April meeting of leading finance ministers and central bank governors. The gathering will take place amid an increasingly uncertain and downbeat outlook.
Most 2019 forecasts for the US predict a slowing economy, but one growing above potential. Strong labour markets buoy disposable income and consumption. However, weaker US growth and purchasing managers index figures, tensions from President Donald Trump’s trade wars and other external risks cloud the outlook. The Federal Reserve’s continuing dovish swerves reinforce suspicions of a more significant softening, perceptions that will only be strengthened by the inverting yield curve.
China’s economic outlook poses major questions. Deleveraging and trade tensions continue to weigh. Strong monetary and fiscal stimulus may be arresting a weakening in activity. But the authorities’ stimulus is restrained relative to past efforts. Given the echo chamber of official pronouncements, all forecasts pencil in a growth estimate of more than 6% for 2019. But the reality is that Chinese data are suspect. Anecdotal reports point to a much sharper downturn than soothing words from the authorities suggest. Further, a sustainable Chinese growth rate – let alone in a consumer driven economy, de-emphasising inefficient investment and intensive use of credit by state-owned enterprises – is significantly lower than 6%.
The euro area offers perhaps the most sombre outlook. In January, the IMF marked down its October 2018 WEO projection for 2019 EA growth to 1.6% from 1.9%, and Germany’s to 1.3% from 1.9%. But in all likelihood, the Fund has farther to cut. The Organisation for Economic Co-operation and Development recently projected much weaker 2019 growth for euro area and Germany, at 1% and 0.7%, respectively. Between December 2018 and March of this year, the European Central Bank cut its euro area 2019 outlook to 1.1% from 1.7%, and even then underscored downside risks. It also slashed its inflation projections to 1.2% from 1.6%, underscoring again the ECB’s longstanding inability to even approach its inflation objective.
French and German purchasing managers indices were sharply lower in March, highlighting continuing weakness of German manufacturing. That sector is probably being in part hit not only by automotive sector issues but the depth of China’s downturn. The German 10-year bond yield just turned negative, the first time since late 2016.
At its early March meeting, the ECB put forward its own dovish swerve, in essence offering new longer-term refinancing operations and extending its forward rate guidance. Perhaps the ECB was seeking to catch up with the market or get ahead of the curve. Regardless, the seeming boldness of its actions underscored anew that robust ECB measures, which could inspire market confidence, are often held back until it’s too late by German and northern European countries’ influence in the governing council. In the light of anaemic growth rates in the euro area, what will happen when the next major European downturn arrives, and the ECB potentially faces a starting point of a minus 0.4% deposit rate?
Meanwhile, fiscal policy offers scant support. Countries that have fiscal space, such as Germany, may use it only sparingly. But others facing weakness – especially Italy, whose debt load poses an enormous stability risk to Europe and the world – don’t have space. Nor does France, which is also being impacted by the ‘gilet jaunes’ opposition. Discussions on a euro area fiscal capacity are making little headway.
The UK continues to flounder with its exit from the EU. European banks remain weak, as evidenced by Italian bank woes and improbable discussions on a possible merger of Deutsche Bank and Commerzbank – two unwieldy, low-profit banks, whose merger would pose enormous multiyear challenges for integrating systems, cultures and the like.
Emerging markets are perhaps somewhat of a bright spot. The Fed’s pause has eased financing strains and outflow pressures. But emerging market positioning is already stretched. To the extent that lower global interest rates reflect weakening global growth, the latter can negatively impact commodity prices and emerging market exports to advanced economies. While emerging markets are in much better health now than during past advanced economy downturns, there are idiosyncratic weaknesses among some, renewed signs of froth in lending to these markets, and financial stability risks – such as crowded trades in domestic sovereign debt – are present.
The spring meetings will undoubtedly seek to call for a renewed sense of global co-operation and multilateralism and create a positive buzz. But the US is generating trade tensions for the world and understandably – and regrettably – seen as an unreliable leader and partner. China is fighting off its near-term economic malaise at the same time its growth model is facing rising internal contradictions between the state and markets. An introverted Europe is consumed by its own weaknesses.
Despite the outward appearances, international co-operation and multilateralism may unfortunately be in short supply at the spring meetings. Behind the curtains, they are likely to be a downbeat event.
Mark Sobel is US Chairman of OMFIF.