In the third quarter of 2018, the global economy has encountered some challenges to steady growth, with large economies like Germany and Japan shrinking while China’s momentum is vanishing. Europe’s economy growth has slowed, with quarterly GDP growth at 0.2% compared to 0.4% in H1; however, the growth has decelerated during the past year, forecasted to slow from 2.8% in 2017, to 2.3% in 2018, and 1.9% in 2019 (IMF). Slowed economic growth in Europe can be linked to several different factors including a decrease in external demand and ongoing macro events, such as Brexit and Italy’s budget crisis (according to IMF).
External demand, specifically for European goods, has slowed in 2018; European exports have diminished in 2018 and are expected to remain weak in 2019 as well. Export growth has slowed from roughly 7% in 2017 to roughly 3.5% in 2018. German car manufacturers like BMW, VW, etc. have felt the slowed export growth based on the possible 25% tariffs introduced by President Trump. Germany’s economy grew at a level of 0.2% this quarter, the lowest since 2014, mainly due to a 0.3% decrease in industrial production.
Rising energy prices, especially oil, has had significant effects on the global economy throughout 2018. Before oil prices crashed nearly 25% since the equity market sell-off starting on October 3rd, Brent Crude Oil had gained 30% YTD, reaching a high of $86. The drastic rise in oil prices, accompanied with higher commodity prices, dampened income for most European citizens. Real disposable income dropped by 0.5% (as a percentage of GDP) across Europe. The outliers were oil-producing countries such as Norway and Russia, who saw their real incomes increase as a result of higher oil prices. Nevertheless, this decline of disposable income is expected to continue, even as OPEC expects a decrease in global demand, and will heavily contribute to the growth slowdown in Europe and across the globe.
U.K. economic growth hit a two year high in Q3, at 0.6%; however, a slowdown is expected in Q4 and the coming two years. Uncertainty surrounding the U.K.’s plans to leave the E.U., along with weak economic fundamentals and the expected slowdown in global growth are three factors that have affected U.K.’s projected economic outlook. The indecision involving Brexit has also resulted in companies pulling back on their investments. Predictions of slowed economic growth in Q4 are based on a “Soft-Brexit”; in other words, the U.K. is expected to experience slowed economic growth compared to the E.U. even if Prime Minister Theresa May reaches a deal with Brussels by the March 29th deadline. Whether or not the U.K. is able to reach a compromise with Brussels by March will have different implications on its economy, and a no-deal scenario could result in the most negative downsides. The commission has predicted a GDP growth in the U.K. of 1.2% in 2019 and 2020, which will be the lowest predicted growth in Europe by 2020.
16 months after the referendum, the U.K. and the E.U. have yet to agree on a few key issues that would save Britain from the dreaded, chaotic “no-deal” exit. If a deal isn’t made before March 29th, 2019, the U.K. will have no transition period and all the current trade agreements, regulatory links and customs processes will end immediately, halting the entire economy and leaving the country in limbo. While many of the issues have been solved, the main issue that has been dividing British Prime Minister Theresa May and the British Parliament has been centered around the Irish border backstop, where officials are unsure about how to keep the border between Ireland and Northern Ireland open to trade, people, and services. This debate, along with the ERG amendment and many others, have resulted in the U.K.’s inability to move on from Brexit and focus on growing their economy. As of November 14th, the U.K. and the E.U. have agreed on a preliminary deal that addresses these problems, but it will still need to gain the approval of the British Parliament and the European Commission to become law.
Italy’s budget dispute is important to consider when analyzing the expected global economic slowdown. As the eurozone’s third largest economy, behind Germany and France, Italy’s increasing debt has the potential to slow economic growth in both the EU and globally. The country’s high spending budget has been deemed unaffordable for both Italy and the EU; if the Italian economy crashed it would have dire consequences on the rest of the eurozone and even the world. Since the beginning of the budget crisis, the yields of 10-year government bonds have increased to 3.45 euro, indicating investor doubts and the markets view of Italy as a risky country to lend to.
Following natural disasters, including typhoons and earthquakes, Japan’s economy contracted 0.3% in Q3 compared to an upward 0.8% in Q2. Annualized, the economy contracted 1.2%, which was worse that the market prediction of 1%. According to trading economics, factors that contributed to Japan’s negative GDP growth include, negative private demand (-0.2 percentage points) and negative private consumption (-0.1 percentage points). Japanese Economy Minister, Toshimitsu Motegi, stated that “Japan’s economy is expected to recover driven mainly by domestic demand;” however, falling exports and trade protectionism may stifle this recovery.
The rising trade tensions between the U.S. and China, in addition to the slowdown of global trade are anticipated to contribute to global economic slowdown. Moody’s reported that they expect global economic growth to slow to under 3% in 2019 and 2020 from the estimated 3.3% in 2017 and 2018. They also expect that the trade disputes between the U.S. and China will escalate further in 2019, predicting that the tariffs on Chinese imports will rise from 10% to 25% in January 2019. There is still hope for a resolution before 2019, as Trump and President Xi are expected to meet to discuss trade during the G20 meeting in Buenos Aires later this month, which would dramatically alter the global outlook.
Written by: Gabriella Sullo and Robert Biggar