Eurozone (EZ) GDP growth now looks likely to slow to just 1% this year according to a report published today by Fitch Ratings' Economics team. The deterioration in growth prospects and declining inflation expectations will prompt the ECB to consider restarting asset purchases.
The broad contours of Fitch Ratings' December 2018 Global Economic Outlook (GEO) forecasts for 2019 still look intact, with above-trend growth in the US and policy easing preventing growth dipping below 6% in China. Eurozone outlook has weakened but some recovery in growth still looks likely after a disappointing 4Q18.
Frontier emerging markets saw widespread declines in export growth and in foreign exchange reserves in the latter part of 2018, according to Fitch Ratings' latest 'Frontier Vision' chart pack. Fitch's Frontier Vision chart pack tracks high frequency macroeconomic data for the 35 countries included in NEXGEM.
Evidence of the slowdown in global trade is coming through most clearly in the export growth data for Europe and Japan. Export volume growth has slowed markedly in the eurozone (including in each of the four largest eurozone economies), the U.K., Switzerland and Japan over the last three to six months.
Despite strong above-trend growth and rising input costs, core inflation (overall excluding energy and food) has remained stuck firmly around the 1% mark, well below the ECB's inflation target. While recent weak economic data have been depressed by temporary factors affecting the car industry, we see an underlying slowdown in growth in train, partly reflecting a deceleration in world trade growth.
Global growth is slowing and becoming less well-balanced, while downside risks are rising, particularly for 2020. "The world economy is still expanding at a rapid pace, but cracks are starting to appear in the global growth picture," said Fitch Chief Economist, Brian Coulton.
The impact of the US-China trade war on other major economies through supply-chain linkages will be highest in Korea and Japan and reflects their sales of intermediate products to China that are ultimately bound for the US market. However these exposures are still quite small relative to total exports.
Capital flows to large emerging markets (EMs) are expected to remain subdued as a share of GDP over the next couple of years due primarily to Fed tightening. This follows a sharp fall in capital flows so far this year, with preliminary estimates for 3Q18 showing aggregate net capital flows to the EM9 (EM10 excluding China) having reached their lowest level since the global financial crisis of 2008-2009.
The last five years have seen steep increases in the share of the working age population in employment (the employment rate) across most advanced economies. This has gone a long way in offsetting the impact of weaker demographics and labour productivity.
ECB purchases of Eurozone sovereign debt have far outweighed net issuance since 2015, raising the risk of increased bond market volatility as quantitative easing (QE) comes to an end. QE purchases by the ECB have played a key role in absorbing the increase in Eurozone government debt since the beginning of 2015 and their scheduled termination in December 2018 will require private sector investors to fill the gap.
A big market shock is inevitable as the U.S. continues to hike rates and central banks around the world tighten their respective policies, according to Brian Coulton, Chief Economist at Fitch Ratings, speaking to Bloomberg radio’s Daybreak Europe show.
In an interview to CNBC-TV18, Brian Coulton, Chief Economist, said, "We were positively surprised by the Q2 GDP numbers. In some ways, India is more resilient than a lot of the other countries, which are being caught up in this emerging market turmoil recently."
The number of people working in Japan has increased sharply since 2012, a remarkable achievement as the country's working-age population fell over the same period. The number of people working rose to a new high of more than 66.6 million in 2Q18, exceeding the previous record in 1997, while the working-age population decreased by more than 11 million since 1997.
Protectionist US trade policies have now reached the point where they are materially affecting what remains a strong global growth outlook, with the US-China trade battle prompting us to downgrade our 2019 global GDP forecast.