Global Macro Outlook - October 2018

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.

Key Forecast Trends

• Recent economic data indicate that global growth remains firm. But trade tension and tighter financial conditions suggest a softer period ahead.
• While there have been some positive developments on the trade front, we very much doubt that tensions will fade quickly. Rising trade tension is a manifestation of populism that we expect to weigh on the economic and investment backdrop for some time to come.
• Inflation still seems likely to increase, as the growth slowdown is likely to be modest and capacity use is already high. What's more, uncertainty from the trade war will weigh on supply as well as demand, adversely affecting the growth/inflation trade-off.
• If the slowdown in growth remains gentle, developed-market central banks are likely to proceed with policy normalization—though at very different paces and with the Fed still clearly in the lead.
• All of this points to higher bond yields, modest dollar upside (especially against the more vulnerable emerging-market currencies) and a more challenging period for risk assets.

Outlook

• We reduced our bottom-up global growth forecast again for 2019, this time to 2.9%. This was a small downgrade, but it's consistent with our view that a period of slower growth lies ahead.
• We're in line with the consensus growth forecast on China at 6.3% and slightly above it on Japan (1.1% versus 1.0%). But we're below consensus on both the US (2.3% versus 2.5%) and the euro area (1.6% vs 1.8%).
• Global inflation is expected to be little changed next year as a slowdown in emerging-market (EM) inflation (4.1% versus 4.5% this year) offsets increased price pressure in developed markets (2.1% versus 1.9%).
• While the overall trend suggests tighter global monetary conditions, there are important variations to consider. The most important outlier is China, where substantial policy easing will be required over the next few quarters.