Diverging fortunes for world economies
Our US growth forecasts for this year and next have been revised up again but expectations for much of the rest of the world have edged down. While the current divergence is between a booming US and a slowing global economy, the longer-term difference is likely to be between emerging-markets’ superior growth performance relative to demographically challenged developed economies.
US consumer confidence is at an 18-year high, helped by personal tax cuts and record-low unemployment, and strong after-tax profits growth is boosting corporate investment. After three interest rate rises in 2018, the Federal Reserve is predicting tightening continuing at a similar rate in the coming year.
The picture in the rest of the world is not too worrying yet. While Europe is slowing, growth remains slightly above potential and Japan’s story is similar. Only the likes of Argentina and South Africa are actually in recession but many emerging-market economies are slowing and will soften further.
So while further increases in interest rates might make sense for the domestic US economy, it’s not obvious that other countries should follow. However, for some emerging economies the choice may not be entirely theirs.
US rate rises, a strengthening dollar, the risk of oil touching USD100 a barrel and more tariffs on imports from China all point to another challenging year or so for emerging economies.
We still expect improved growth in some emerging countries during 2019 − but less so than previously. And with uncertainties over the impact of US policy on global interest rates, exchange rates, and on trading relationships, there could be a risk of something much worse.
Raising our 2018 US growth forecast from 2.8 per cent to 3 per cent has kept our global prediction this year unchanged at 3 per cent but we’ve shaved next year’s global growth forecast to 2.7 per cent and expect 2.5 per cent for 2020.
After 2.5 per cent US growth in 2019 we expect a slowing to 1.8 per cent in 2020 as the fiscal stimulus wanes and higher interest rates have an impact. With global demand unlikely to be strong enough to lift inflation, we expect the Fed − after a further 0.75 per cent of tightening − to pause in the second half of 2019 and consider rate cuts by the end of 2020.
But despite near-term risks, many emerging economies still have superior long-term growth potential compared with developed economies. They have better demographics and as long as they continue to improve education and skills levels, healthcare, rule of law and technological advances, they should be able to grow much more quickly than the ageing, wealthier advanced economies.
Assuming countries continue to address their economic flaws, global growth could be maintained at close to 3 per cent per year over the next decade, with nearly 70 per cent of that growth driven by emerging markets, particularly Asia. Our model projects that China will overtake the US to become the world’s largest economy by 2030, with India leapfrogging Germany and Japan to become third biggest.
Emerging nations will face new policy priorities – not least growing environmental challenges – but as they develop and their growth becomes more domestically driven, their share of global demand will gain importance. With hundreds of millions of new consumers earning ‘middle-class’ incomes over the next decade, consumption patterns and relationships with the developed world will change.
This research was first published on 1 October 2018.
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