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Economics Commentary

Global Macro Outlook - August 2019

09 August 2019
3 min read

What You Need to Know

Our experienced global team of economists offers its latest perspective on the world economy. Included are regional and country forecasts for growth, inflation and interest rates, updates on central bank and fiscal policies, and the upside and downside risks that could change the trajectory.

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Key Forecast Trends

  • President Trump’s surprise decision to impose additional tariffs on China adds to our conviction that markets are too sanguine about trade tension, broader populist risks and, ultimately, the probability of global recession— which remains uncomfortably high, in our view.
  • The net result is likely to be more monetary stimulus: higher tariffs on China means more easing in the US and China, while (possible) tariffs on European goods would mean more easing from the European Central Bank (ECB).
  • But investors should take little comfort from this at a time when monetarypolicy effectiveness is declining across the globe. Indeed, monetary policy may already be broken in Europe and Japan.
  • We see additional risks in coming months. The probability of a no-deal Brexit has risen. And with the US poised to take steps to weaken the dollar, so has the risk of a currency war. Rising conflict between policymakers within and across borders represents a major threat to global economic and financial stability.

Outlook

  • We expect the global economy to grow by 2.6% this year and next. This soft performance reflects a weak secular backdrop and rising cyclical headwinds.
  • Risks to this outlook are heavily skewed to the downside. We’re most concerned about open economies with limited policy flexibility. That puts the spotlight firmly on the euro area, which we expect to grow by just 1.0% next year.
  • The secular backdrop continues to point to higher inflation. But cyclical developments point in the opposite direction We expect global inflation to fall to 2.7% in 2019 from 2.9% this year. That’s despite an acceleration to 2.5% in the US.
  • Central banks have abandoned their plans for policy normalization. We expect the Fed to cut rates by another 75 basis points (b.p.) and the ECB to couple modest rate cuts with additional bond purchases. Policy effectiveness will be key.

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