Global economic outlook deteriorates – forecasts revised down

Although current newsflow appears to show signs of tensions easing again, the geopolitical risks have in fact escalated. A clear reluctance to invest as a result of continuing “back-and-forth” movement in the various trouble spots which could jeopardise the economy is the main risk factor for growth prospects in many industrialised and developing countries. We no longer expect global economic growth to accelerate this year and next year, and we have also trimmed some of our inflation forecasts.

The intensification of the trade conflict and the further escalation of geopolitical risks are weighing on the global economic climate, although the impact has varied widely so far from region to region. By and large, ongoing discussions and arguments about trade barriers are likely to act as a drag on sentiment for the real economy in the coming months. In general terms, a deterioration in sentiment at companies and for private households will curb investment activity, causing the pace of growth in global trade to decelerate slightly.

This has prompted us to cut our growth forecasts for most of the industrialised and developing countries. The pace of the global economy is unlikely to accelerate, but last year’s rate will be maintained. In 2018 and 2019 we now expect global economic growth of 3.6 per cent, compared to our previous forecast of 3.9 per cent.

Sentiment at companies in the Euro area has deteriorated since the beginning of 2018. Whereas, at the end of 2017, the various sentiment indicators were still showing long-term or all-time highs, purchasing managers’ indices for the Euro area and economic confidence barometers have faltered since January. Readings in the ifo business climate survey for German industry have also been lower recently. However, the weaker trend has not only been reflected in sentiment levels for the Euro area since the beginning of 2018. “Hard” economic indicators have also been fairly disappointing overall so far. We now expect economic growth of 2.0 per cent this year and 1.9 per cent next year. In our view, the already moderate inflation trend in the Euro area so far is also likely to be slightly lower as a result of weaker growth. In addition to Italy, inflation in some of the smaller countries, such as Finland, Greece and Portugal, has even fallen below one per cent in 2018. We now predict an average annual rate of 1.4 per cent for the Eurozone in 2018 and 2019.

We still expect the US economy to grow by 2.5 per cent this year. Visibly weaker growth in the first quarter compared to previous quarters will have been mainly attributable to severe winter weather conditions. Overall, sentiment among consumers and for industry and service providers in the first quarter improved again from an already high level. In addition to recent extensive tax cuts and a continuing very “spendable” budget policy, steady employment growth has also played a part here. However, slightly weaker global demand is also likely to ultimately leave its mark on investment activity in the USA. The main factor here will be heightened uncertainty about general conditions for international trade. These effects should not nevertheless emerge until mid-year, when they will have only a slight braking effect, since the export industry does not play a very significant role for the US economy. We have cut our growth forecast for next year to 2.4 per cent. There is no reason to alter our inflation forecast. The average annual inflation rate is likely to reach 2.3 per cent this year, increasing to 2.4 per cent in 2019.

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