September 2019 GLOBAL GROWTH OUTLOOK
Shock treatment US protectionism and Brexit increasing risk of recession
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Global economic growth will drop down to only three percent this year, the weakest growth seen since 2002. Global trade is likely to grow only marginally above the previous year’s level. Global industrial production is expected to grow one percent at most.
▪
The risk of further upheavals to the world economy remain very high. The trade disputes between the United States and China and the EU are already significantly hampering investment activity and foreign trade. The risk of a disorderly Brexit is an additional source of strain. The major central banks are already responding to these risks. Too little action is being taken on the fiscal policy front. Powerful stimuli are much needed.
▪
We expect the U.S. economy to grow by 2½ percent this year. The Fed is holding out against Trump’s policy of spreading uncertainty. China’s economy continues to lose steam, but growth could still reach 6¼ percent. Japan’s economy should manage to maintain its growth rate of one percent. Prospects for the next year are weaker.
▪
Europe’s economy is cooling down markedly. Monetary and fiscal measures need to be implemented now to fend off a recession next year. Reforms and investment in infrastructure would also help significantly.
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Germany’s industry is in recession. The German economy is still growing slightly overall but gloomy trade prospects are likely to curb investment activity and foreign trade over the next few quarters. Economic policy must unleash powerful impetus now to stop the downturn spreading to the whole economy.
Shock treatment | US protectionism and Brexit increasing risk of recession 05/09/2019
Inhaltsverzeichnis Political front curbing growth ................................................................................................................. 3 Protectionism curbing trade growth ‌ .................................................................................................. 3 ‌ and weakening investment activity worldwide .................................................................................. 4 Global industrial production flattening out ............................................................................................. 9 Advanced economies: United States still growth engine ...................................................................... 9 Industrial production in emerging economies ...................................................................................... 10 World trade .......................................................................................................................................... 11 Foreign direct investment .................................................................................................................... 12 Macroeconomic policy must act as a counterweight ........................................................................... 12 Financial markets and exchange rates ............................................................................................... 16 U.S. economy loses steam .................................................................................................................. 18 Slowdown in foreign trade triggered by trade disputes between the United States and China .......... 19 US foreign trade policy harbours additional economic risks ............................................................... 19 The U.S. budget in election year 2020 ................................................................................................ 20 Europe: economic lull with risk of recession ....................................................................................... 21 China: economic downturn and trade disputes continue to constrain growth ..................................... 23 Mixed economic indicators .................................................................................................................. 23 Japan records fairly strong growth ...................................................................................................... 25 Regional outlook .................................................................................................................................. 26 Consequences for Germany ............................................................................................................... 27 Sources ............................................................................................................................................... 28
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Shock treatment | US protectionism and Brexit increasing risk of recession 05/09/2019
Political front curbing growth The global economy should have been on track to grow around four percent this year and the next. The ten-year recovery period of the global economy, supported by expansionary monetary policy, a restructuring of the financial systems and a persistent, though slow of late, recovery of the labour markets could have continued for quite some time even with normalised interest rates and rising wages and prices. However, politics has come in the way of this plausible development in principal countries. The present slowdown in global economic momentum has largely been caused by the major political risks currently facing economic activity – risks which have either already materialised or are based on decisions that have yet to be taken. So, what is the current situation? The global economy is now likely to grow only marginally over the three-percent mark in real terms (3.1 percent). Before the latest escalation in the economic dispute between the United States and the People’s Republic of China, the international organisations all (including us) expected the global economy to grow by around 3.2 percent over the previous year in 2019, followed by a slight increase of a quarter of a percentage point in the next year (IMF 2019, European Commission 2019, OECD 2019a). Particularly foreign trade and investment activity have lost steam, while private consumption remains robust in most major economies although global retail sales have also dropped momentum this year. Furthermore, in 2018, the financing costs for industry increased more than the situation merited. It also remains unclear to what extent the pronounced weak trend in industry will spread to services and the overall economy. This applies especially, of course, to China and Europe while the United States is less vulnerable in this respect due to the smaller proportion of its industry in national value added. However, industrial momentum can in any event not be decoupled from the overall economy in the long term. Main forecast: Growth of real gross domestic product compared to previous year (in percent) Global economy
3.1
Euro area
1.0
World trade
1¾
EU
1.2
USA
2½
Germany
0.5
China
6¼
Japan
0.9
Source: BDI
Protectionism curbing trade growth … The increase of U.S. tariffs on imports from the People’s Republic of China as of 1 September and 15 December and the countermeasures expected to be taken by the Chinese government alone are likely to prevent a strong recovery of global trade, particularly following very sluggish momentum in the first half of the year. Growth is now likely to be below two percent, while back in May the OECD predicted two percent growth for the year overall, the European Commission 2.9 percent and, in July, the IMF forecast 2.5 percent. Exports from Japan and the euro area are expected to be particularly hard hit, while the trade volumes of China and the United States are fluctuating strongly from month to month and mainly trending sideways.
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Shock treatment | US protectionism and Brexit increasing risk of recession 05/09/2019
Global trade stagnates*
Exports and imports of the major economies** 160
128
150 140
126
130 120
124
110 100
122 2018
2018 Euro area (exports) USA (exports) China (exports) Japan (exports)
2019
World (exports)
World (imports)
2019 Euro area (imports) USA (imports) China (imports) Japan (imports)
* export and import volumes, global exports and global imports in volume and current prices (USD) ** export and import volumes, seasonally adjusted Source: Macrobond
‌ and weakening investment activity worldwide The international disputes are already curbing investment activity. Back in May, the OECD already predicted investment activity to grow by only 1.75 percent both this year and the next, following average growth of 3.5 percent during 2017 and 2018. Purchasing Managers` Index* Welt 56
54
52
50
48 2017 PMI Manufacturing
2018 PMI Services
2019 PMI Composite
* PMI Source: Market Source: Macrobond
While this figures also reflects the end of the technology and semiconductor cycle in Asia, it is on the more optimistic side of the spectrum of forecasts given the unresolved status of Brexit and the macroeconomic impact of this on Europe as well as the further escalation of the trade disputes. Hardly
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Shock treatment | US protectionism and Brexit increasing risk of recession 05/09/2019
surprising then that the weak level of global economic growth and investment activity has brought with it a veritable slump in industrial production, incoming orders and the purchasing managers’ indices for manufacturing across broad sections of the world economy. In May, the global manufacturing purchasing managers’ index fell below the threshold of 50 for the first time and has languished in contraction territory since then. Services and the economy overall are still managing to keep above the neutral threshold, but at 52 and 51 respectively are clearly indicating weakness. In the EU and the euro area, the index for manufacturing has fallen to levels of around 46.5. German industry has lost 20 index points since December 2017 and is down to a good 42 points which is the lowest among all major economies. In these rollercoaster times for the world economy, the highs and lows for the German economy are very close together. Purchasing Managers` Indices* 65
Germany
65
Euro area
60 60 55 55 50 50
45 40
45 2017
2018 Manufacturing PMI Services PMI Composite PMI
2019
60
2017
2018 Manufacturing PMI Services PMI Composite PMI
2019
56
China
USA 58 54 56 54
52
52 50 50 48 2017
2018 Manufacturing PMI Services PMI Composite PMI
2019
48 2017
2018 Manufacturing PMI Services PMI Composite PMI
2019
*PMI Source: Market Source: Macrobond
The current picture for incoming orders in manufacturing is similarly bleak. In the United States, new orders dropped substantially in the second quarter and are currently below the 2018 level. In China,
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Shock treatment | US protectionism and Brexit increasing risk of recession 05/09/2019
new orders fell below 50 in May. In the euro area, incoming orders have fallen three percent since the beginning of the year and as much as five percent in Germany.
New orders, manufacturing 115
116 114
110
Germany*
Euro area*
112 110
105 108 106
100
104 102
95 2017 * Index
2018
2017 * Index
2019
2018
2019
56
520
USA* 500
China* 55 54 53
480
52 51
460
50 49
440 2017 * in billions US-dollar
2018
2019
2017
2018
2019
* Index
Source: Macrobond
In Europe, the downturn started in early 2018 with drops in the computer and electronics industry that then spread to the chemistry and car industry before reaching pharmaceuticals. The car industry is currently suffering especially (European Commission 2019: 12-16). China, the world’s largest market for car sales, was particularly affected with two-digit drops in sales year on year, while the world’s second largest market, the United States, is stagnating. New car registrations in the euro area are also below the level preceding the transition to the new test procedure WLTP, although EU28 sales managed to remain marginally positive. It has been a sluggish year for the European car industry so far. Production and exports are weak, not only in Germany and Italy but also in Spain and France. The German car industry, which accounts for just over five percent of German gross value added and almost 20 percent of exports, is struggling with a whole row of negative shocks in demand and problems in supply (including WLTP, further test cycles, strikes in foreign plants, weak production and sales in the United Kingdom and Turkey, the enforced transition to electric mobility in China, a slump in demand for diesel vehicles, and structural shifts in consumer preferences from buying to car sharing)
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Shock treatment | US protectionism and Brexit increasing risk of recession 05/09/2019
with substantial knock-on effects for countries and industries along the supply chain. Additional shocks from a disorderly Brexit with potentially high tariff barriers, non-tariff barriers and transport and logistics problems in trade with the United Kingdom, the biggest foreign market for the sale of cars made in Germany, over a prolonged period of time and a possible increase in duties imposed by the United States on cars imported from the EU (including Germany) starting in November 2019 are casting further clouds on prospects ahead. Car registrations 12
13
EU28*
Euroraum*
10 12 8
11
6 2017 2018 * sales and registrations in millions
2017
2019
2018
2019
* sales, registrations and repairs in millions
28
18
USA*
26
China*
24 22 20
17
18 16 14 16
12 2017
2018
* sales and registrations in millions
2019
2017 2018 * sales and registrations in millions
2019
Source: Macrobond
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Shock treatment | US protectionism and Brexit increasing risk of recession 05/09/2019
The trend in inflation rates in the world’s major economies reflects the general economic lull. For well over one year, the major inflation rates have been pointing down with overall and core inflation remaining below target in the United States, the euro area, Japan and China. Once again, inflation forecasts have become unstable and are too low in many economies. Average inflation in OECD countries is likely to be 1.5 percent in 2019, and at over 3.5 percent in emerging and developing countries. Additional simmering risks for the economy are likely to pull expectations down still further.
Forecast summary: Growth in real GDP 2018/19/20 in percent 2018
2019
2020
IMF1
OECD2
EUCOM3
IMF1
OECD2
EUCOM3
IMF1
World
3.6
3.54
3.6
3.2
3.24
3.2
3.5
3.44
3.5
USA
2.9
2.9
2.9
2.6
2.8
2.4
1.9
2.3
1.9
China
6.6
6.6
6.6
6.2
6.2
6.2
6.0
6.0
6.0
Japan
0.8
0.8
0.8
0.9
0.7
0.8
0.4
0.6
0.6
EU
2.0
OECD2
1.4
EUCOM3
1.6
Euro area
1.9
1.8
1.9
1.3
1.2
1.2
1.6
1.4
1.5
Germany
1.4
1.5
1.4
0.7
0.7
0.5
1.7
1.2
1.5
France
1.7
1.6
1.6
1.3
1.3
1.3
1.4
1.3
1.5
Italy
0.9
0.7
0.9
0.1
0.0
0.1
0.8
0.6
0.7
Spain
2.6
2.6
2.6
2.3
2.2
2.1
1.9
1.9
1.9
U. Kingdom
1.4
1.4
1.4
1.3
1.2
1.3
1.4
1.0
1.3
India
6.85
7.0
7.4
7.05
7.2
7.1
7.25
7.4
7.3
Brazil
1.1
1.1
1.1
0.8
1.4
1.9
2.4
2.3
2.4
Russia
2.3
1.6*
2.3
1.2
1.5*
1.5
1.9
1.8*
1.8
1: IMF (July 2019) 2: OECD (May 2019, *November 2018) 3: European Commission (May 2019) 4: Forecast on basis of 70 percent world GDP (PPP of 2013) 5: Information on India for the fiscal year in current prices
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Shock treatment | US protectionism and Brexit increasing risk of recession 05/09/2019
Global industrial production flattening out Following two years of solid growth above three percent, global industrial production will be much weaker in 2019. According to data from the Netherlands Bureau for Economic Policy Analysis (CPB), industrial production only increased by 1.5 percent in the first quarter which is the weakest growth seen since 2016. According to the figures available, growth in the second quarter until May was even lower. The global manufacturing purchasing managers’ index (PMI) has been indicating a slight contraction since May. In July, the PMI hit a 15-month low, falling to 49.3 index points. Unlike three years ago, when industrial production decreased in the advanced economies, both groups of countries managed to increase production levels. In the emerging countries, industry increased production by 2.3 percent year on year in the first quarter 2019. The advanced economies nonetheless managed to close off the quarter with 0.7 percent growth. Second quarter performance is expected to have been even poorer. According to the figures available (April/May 2019), industrial production increased by 1.9 percent year on year in emerging countries and 0.5 percent in the advanced countries. If production stagnates at the present level for the rest of the year, the annual growth rate would be around 1.5 percent in emerging countries and 0.5 percent in industrialised countries. World: Industrial production* emerging economies advanced economies
5 4 3 2 1 0 -1 2016
2017
2018
2019
*Production index: two-month average, after calendar and seasonal adjustments, in percent, year on year Sources: Macrobond, Netherlands Bureau for Economic Policy Analysis, own calculations
Advanced economies: United States still growth engine In 2018, the U.S. industry accounted for more than half of industrial production growth in the advanced economies even though it accounts for only around one third of the total production of this group of countries. At the start of 2019, the U.S industry was once again the engine of growth. Production increased by 2.9 percent in the first quarter 2019 (year on year) but was one whole percentage point below the annual growth rate of the previous year. In the first two months of the second quarter, growth dropped to 1.5 percent. Provided production levels do not fall any further in the remainder of the year, the U.S. industry should close off the year with an increase in production of one percent. Japan’s industry started off the year with production declining by 1.2 percent in the first quarter. While production did increase substantially at the start of the second quarter, it is still likely to remain slightly
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Shock treatment | US protectionism and Brexit increasing risk of recession 05/09/2019
below last year’s level. If production levels remain at the second quarter level in the second half of the year then production levels would only be marginally negative year on year, by around 0.5 percent. In the euro area, production levels did not continue the sharp downturn seen since the end of 2018. In the first quarter 2019, production was even slightly up on the previous quarter, although still down 0.4 percent year on year. Production in the second quarter is likely to remain negative compared to last year’s level. Even if production stabilises at the level recorded in the first six months for the further course of the year, industrial production in the euro area will be down on the previous year’s level by somewhat over one-half percent. In the remaining advanced economies, industrial production started off the year by rising 0.3 percent in the first quarter. Growth in this group of countries has picked up slightly in recent months. Figures available (until May 2019) indicate that growth has doubled since the start of the year. If this level is maintained in the second half of the year, it will be the seventh consecutive year of growth in industrial production for these countries.
Advanced economies: Industrial production* other advanced economies Euro area Japan USA
5 4 3 2 1 0 -1 -2 2015
2016
2017
2018
2019
*Production index: two-month average, after calendar and seasonal adjustments, in percent, year on year Sources: Macrobond, Netherlands Bureau for Economic Policy Analysis
Industrial production in emerging economies Among the emerging countries in Asia including China, the expansion of industrial production in the first quarter 2019 dropped to under five percent for the first time in three years. In the second quarter, output looks to have been only slightly over four percent higher than in the second quarter last year. While Asia is still the growth engine, it has lost considerable momentum. Industrial production in the region will nonetheless still increase by more than three percent this year even if levels stagnate in the second half of the year. Growth in the countries of Central and Eastern Europe was much lower. In the first quarter 2019, this region recorded two percent growth in industrial production, less than half that of Asia. Growth in the second quarter appears to have been slightly lower. If production remains at the second quarter level it will still be up on the previous year by slightly more than one-half percent. For the first time since 2013, industry in Africa and the Middle East contracted. Production in the first quarter was down by 2.2 percent. The drop was slightly less steep in the second quarter. Even if production stabilises at the level recorded in the first half of the year for the rest of the year, industrial
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Shock treatment | US protectionism and Brexit increasing risk of recession 05/09/2019
production in this region will be down by almost two percent year on year. The trend in Latin America is very worrying. Industrial production is set to decrease this year for the sixth year running. In the first quarter, production dropped by 5.3 percent year on year. Figures for the second quarter show a similar pattern. Even if production does not drop further until the end of the year, annual industrial activity will be down by more than four percent. Emerging economies: Industrial production*
Africa/Middle East Latin America Central and Eastern Europe Asia
5 4 3 2 1 0 -1 -2 2015
2016
2017
2018
2019
*Production index: two-month average, after calendar and seasonal adjustments, in percent, year on year Sources: Macrobond, Netherlands Bureau for Economic Policy Analysis
World trade According to International Monetary Fund estimates from July 2019, world trade increased by 3.7 percent in 2018 over the previous year. Preliminary figures from the Netherlands Bureau for Eco-nomic Policy indicate a decrease in world trade in the first quarter 2019 of 0.3 percent compared to the previous quarter. Major factors causing this dip are the trade disputes and protectionism flaring up across the globe, with the trade dispute between the United States and China playing a particu-larly large role in slowing down momentum in world trade. Imports in the first quarter were down due to a cut in demand from emerging countries (down 1.6 percent). Global exports were also down on account of drops in emerging countries (down 1.2 percent). Advanced countries, in contrast, increased both their imports and their exports in the first quarter. In June, the RWI/ISL Container Throughput Index, which measures the volume of global trade based on the capacity utilisation of key container ports around the world, remained at the previous month’s level (on 137.1 index points). This indicator has now stagnated for about the last nine months. In July, the IMF revised its forecast downward for the current year by all of 0.9 percentage points and is now anticipating world trade to grow by only 2.5 percent this year. In view of the latest decisions to impose further trade defence measures, an annual growth of only 1.75 percent can be expected for the year.
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Shock treatment | US protectionism and Brexit increasing risk of recession 05/09/2019
Foreign direct investment In June, the UNCTAD World Investment Report revealed a hefty 13-percent decrease in worldwide investment flows in 2018 compared to the previous year (down to 1.3 trillion U.S. dollars in 2018). This third consecutive annual drop has brought global FDI movements down to pre-global financial crisis levels. The industrialised countries were particularly affected by the slump in 2018, reporting a whopping 27 percent decrease in investment. Investment in industrialised countries has not been this low since 2004. The decline in investment flows to Europe was particularly pronounced, with investment down by half compared to the previous year. The main factors dampening investment flows to Europe were the repatriation of investment to the United States triggered by the new U.S. tax legislation and a steep drop in investment to the United Kingdom (down 36 percent). Contrary to this trend, investment flows to emerging countries, grew in 2018 and now account for 54 percent of global annual FDI flows. Emerging countries have never before attracted such a high proportion of global investment flows. The current trend in many countries to step up controls of foreign direct investment does not bode well for a speedy recovery of investment flows. In 2018, 55 countries amended their legislation on foreign investment. More than one quarter of these measures imposed new restrictions, which is the highest number in the last two decades and signalises the beginning of a spiral of investment protectionism. Investment screening, state investment controls to protect national security, has taken on a central role. Since 2011, investment controls have been introduced in eleven countries and tightened in a further 41 countries. For the current year, UNCTAD is expecting an increase in global investment flows, particularly in advanced economies, partly due to dwindling repatriation of U.S. foreign investment.
Macroeconomic policy must act as a counterweight The changed environment has not yet been considered sufficiently in current macroeconomic policy. This is particularly true of fiscal and economic policy. Once again, it is the central banks that are taking resolute action to tackle the new situation. It is clear, however, that this will not be enough to stabilise economic activity. The fiscal and economic policy of several major countries needs to be fleshed out to support the economy and contain the damage. The opportunity to organise concerted action in the G7, G20, the EU and other platforms is minimal, particularly given that political decisions caused the lion’s share of the downturn in the first place. This, in turn, endangers economic growth quite independently. Already in spring, the IMF and the OECD gave a general recommendation to keep monetary policy on the expansionary side and that those few countries that have solid fiscal policy space make use of it. At the same time, it called on countries to protect themselves against macroprudential and financial vulnerabilities, particularly those caused by highly indebted business sectors and individual property markets, by stepping up respective supervision and regulation. The major central banks are in the process of adjusting to the new global economic problems and aligning monetary policy accordingly and will therefore be a major determinant of the news in autumn. Most governments and parliaments of the major economies have not yet digested the new environment or adjusted their line of action accordingly. Starting from very diverse positions in financial policy, the few industrialised countries that have budgetary flexibility need to apply this to strengthen growth, productivity and investment, and stabilise demand. These efforts need to be combined with appropriate
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Shock treatment | US protectionism and Brexit increasing risk of recession 05/09/2019
structural reforms while not losing sight of the sustainability of public finances. Most international organisations are rightly calling on those countries in a relatively robust fiscal position to use the available policy space to support overall economic demand and bolster monetary policy. In a great number of countries, public infrastructure tasks and structural reforms to increase incentives for climate protection, education and research, as well as reforms in other policy areas, are on the cards. The implementation of reforms in almost all OECD countries was too low throughout 2018 and 2019. The focus of reforms in OECD countries has most recently been the labour market and the tax system (OECD 2019b, Business at OECD 2018). Many central banks are stepping on accelerator Monetary policy in the United States and Europe has changed course fundamentally since the turn of the year, while China and Japan have reviewed and adjusted the dose level in light of the changed circumstances. On a general note, it is once again the central banks that are responding to the politically induced slowdown in economic momentum.
Key interest rates in selected countries 3
2
1
0
-1
European Central Bank
Federal Reserve Bank
Bank of England
Bank of Japan
Source: Macrobond
The Federal Reserve last raised its key interest rates in December 2018 to a range of 2.25 to 2.5 percent but also indicated back in January that it would wait and see how the situation evolved. By spring at the latest, the central bank had become increasingly concerned about developments, with inflation falling. In May, the 12-month inflation rate had dropped to 1.5 percent with core inflation at 1.6 percent and forecasts suggesting only moderate rises for 2020 and 2021. Already at the June Federal Open Market Committee meeting, decision-makers were anticipating a cut in key interest rates of 25 basis points on average in the course of the year. On 31 July, the Fed consequently cut key interest rates by 25 basis points down to a range of two to 2.25 percent for the first time since the end of 2008 and confirmed the reinvestment of maturing debt securities from its purchasing programme, justifying the move with the growing risks for the U.S. economy and in the international system. This marks an interruption to the tightening of monetary policy initiated in 2017. The weak development of foreign trade (and net exports) expected for the remainder of the year coupled with renewed declines in
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Shock treatment | US protectionism and Brexit increasing risk of recession 05/09/2019
investment activity make further cuts in key interest rates likely during the rest of the year. Given the most recent escalation in the trade war, impetus generated through the interest rate cuts are likely to be between one-half to one percentage point (including the interest rate cut in July) which should lift growth by almost one-half percentage point (Deutsche Bank Research 2019a, b). In the first half of the year, the European Central Bank deemed it necessary to orchestrate an almost complete turnaround. Abandoning original plans of monetary tightening for the start of the year and deciding instead on a succession of expansionary steps. The gradual tightening of monetary policy could not be implemented as planned on account of the deterioration of the economy and extremely weak upward trend in inflation which was particularly low in the summer. In September a new package of stimulating monetary policy measures will now be implemented. This is an urgently necessary step. Inflation in the euro area dropped to 1.1 percent in July. Core inflation even dipped below the threshold of one percent (0.9 percent). Prices for industrial goods (excluding energy) only increased by 0.4 percent. In June, monetary growth was negative 4.5 percent while lending to households increased by 3.3 percent over the previous year’s level and corporate lending 3.8 percent, thus maintaining the pace of growth recorded the previous month. In its most recent macroeconomic forecast, the ECB revised expected growth down to 1.2 percent for the euro area and inflation to only 1.3 percent for the year, forecasting a moderate rise in production and price levels of 1.4 percent in each case for next year. The ECB expects inflation to be as low as 1.6 percent in 2021 (ECB 2019). These figures do not factor in the most recent escalations in the international trade and currency conflicts and the risk of a disorderly Brexit. The situation has therefore become even gloomier since. The ECB responded to the weak inflation trend and decreasing market expectations with decisions in March, June and July, followed by the announcement of an overall package of further measures in September. In June, the ECB decided not to increase interest rates until the middle of 2020 at the earliest. It also decided on modalities for refinancing commercial banks from September onwards. It is therefore continuing the programme to provide the banking system with very favourable conditions, although not quite to the full extent provided by the previous programme.1 In September, the ECB is scheduled to respond to the excessively low inflation rates and expectations with another package of measures. In July, it decided only to review forward guidance options (to orient market participants), measures to cushion undesirable side effects, including staggered negative interest rates, for example, and a new bond purchasing programme to boost inflation. The debate on monetary policy is meanwhile heating up. Over the last five years, the monetary policy of the ECB has featured a whole range of instruments to inject impetus into the real economy, including not only through the main refinancing operations rate but also the interest on deposits, targeted longer-term refinancing operations programmes, the asset purchase programme and forward guidance. These instruments have each considerably lowered yields at the short end and the long end, bolstered transmission through the banking system and injected momentum into economic activity (Lane 2019, Hartmann and Smets 2018, Draghi 2019). The ECB has also had a significant influence on shaping the expectations of the financial markets. The next year and a half will nonetheless be a challenging period for the ECB during which it will have to respond to the dramatic deterioration of the foreign trade
1
The third programme for quarterly targeted longer-term refinancing operations (TLTRO III) is scheduled to run from September 2019 to March 2021. The interest rate for this two-year programme, which can be used for a volume of up to 30 percent of the stock of eligible loans as of end of February, will be set at a level of 10 basis points above the average rate applied to main refinancing operations. The conditions will be even more favourable for banks whose eligible net lending exceeds their benchmark net lending (by up to ten basis points above the lower deposit rate).
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Shock treatment | US protectionism and Brexit increasing risk of recession 05/09/2019
environment, and adjust its dose level in order to reach the target inflation rate of below, but close to, two percent. There is no real doubt that the monetary policy measures will be able to trigger the intended impact, particularly as President Draghi has indicated repeatedly for some time now that central banks quite generally must not be left to tackle the stabilisation of the economy alone but need support in the form of structural reforms in the member states and appropriate fiscal policy on the national and the euro area level. In the first six months of the year, the Chinese central bank, the People’s Bank of China, managed to keep the structural slowdown in economic momentum on quite a stable course by reacting to the complex foreign trade environment with several smaller-scale expansionary measures. Efforts to bring the growth of bank lending down to the pace of nominal economic growth have been largely successful. Further moderately expansionary steps are to be expected in the further course of the year aimed at keeping the domestic economy on course despite the trade spats. The Chinese central bank has also stabilised the external value of the renminbi to prevent incentives for another wave of adverse capital outflows. The impact of the trade, currency and technology disputes with the United States on foreign trade and the external value of the renminbi are nonetheless real and is likely to lead to further substantial devaluation of the renminbi in the next few months at least. The United States has already accused China of manipulating the devaluation when the renminbi dipped briefly under the seven renminbi per U.S. dollar mark. This is certainly not the case given that the currency exchange rate has already been very close to estimates of the equilibrium value for over four years now and China no longer has current account surpluses (see also Bergsten 2019). The Japanese central bank is continuing its battle against the slowdown in production and price levels and announced in late July that it would make its monetary policy more expansionary if growth continues to be weak. Over the last few quarters, Japan’s central bank has kept its stock buying programme well below its announced target of 80 billion yen per year. While the shortage on the labour market has led to robust wage increases over the last few years, it has failed to push the inflation rate close enough to the target rate of two percent. One reason for this is the considerably restrictive impact of the country’s financial policy. Inflation is below one percent with core inflation at just under one-half percent. Fiscal policy moderately expansionary but too weak to counteract economic slowdown Fiscal policy in 2019 and 2020, at over one-quarter percentage point of potential output in the OECD, is running a moderately expansionary course (OECD 2019a). The fiscal impetus in the United States is still boosting performance. Germany is also driving an expansionary course in 2019. For the euro area, the EU27 and the EU28, budget deficits will increase in each case by around one-half percentage point compared to 2018 to around one percent of economic output; the underlying budget position in the euro area will only deteriorate marginally by about 0.2 percentage points to just under one percent deficit (in percentage of potential growth) with lower growth and sinking financing costs a structurally containing factor (European Commission 2019: 56). In addition, three of the five major economies in Europe have debt levels exceeding either 100 percent (Italy) or above 90 percent (France and Spain), while debt levels in other smaller economies are also problematic (Belgium, Greece and Portugal are all above 100 percent, Cyprus over 90 percent). Currently, neither those countries with high current account and budget surpluses nor highly indebted countries are adjusting sufficiently. Japan is continuing its course of consolidation. China generated impetus through financial policy in spring and would need to have a new budget to initiate further measures this year, which is highly unlikely.
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Shock treatment | US protectionism and Brexit increasing risk of recession 05/09/2019
In view of the very low financing costs for governments, debt levels should still be able to fall slightly despite somewhat higher deficits. However, the moderately expansionary course adopted by some countries, particularly in Europe, Germany, the Netherlands, Spain and the United Kingdom, will probably not be enough to counteract the deterioration in the economic environment. In a few countries, including Italy, France, Japan and the United States, fiscal policy space is extremely limited on account of unfavourable debt dynamics and, in some cases, regulation. China has a certain amount of fiscal policy space as its augmented deficit, as estimated by the IMF, is usually kept to around the pace of nominal growth in production by the Communist Party and has been at around ten percent of economic output for some time. Corporate indebtedness, however, has grown far too rapidly in the last few years. The Communist Party is therefore highly unlikely to be interested in a strong anti-cyclical economic package that involves large deficits for the central government. In Japan, the government plans to cushion roughly half of the VAT hike scheduled for November with fiscal spending programmes but is still maintaining a restrictive fiscal stance. Italy is in a particularly precarious situation with high fiscal risks due to low economic momentum and high national debt. France has again pushed back the timeline for its consolidation with the government’s concession to the yellow vests’ movement of a package of measures to the tune of 17 billion euros keeping its budget deficit high for the time being. If the global economic environment continues to deteriorate the debate calling for financial policy that is more supportive of growth over the next one or two years is likely to heat up considerably. Given the complex political constellations in many countries any swift action here is highly unlikely.
Financial markets and exchange rates The rising uncertainty regarding the global economy did not have a major impact on financial markets in the first six months of the year, but has affected currency, bond and stock markets increasingly since July. The IMF recently rightly recognised that the ingredients for a steep increase in the risk aversion of investors are largely in evidence, with ongoing trade and currency disputes, problems in emerging countries such as Argentina, political uncertainty in the fiscally unstable industrialised countries, and flagging economic development in China and Europe. It should therefore come as no surprise that the second half of the year is set to be marked by high volatility and flight towards quality. The trend on international bond markets is particularly worrying. Yields have again suffered substantial drops and the problem of inverted yield curves has intensified further. The gloomy growth and inflation prospects and anticipated expansionary measures of monetary policy have impacted performance here. Since October 2018, long-term yields in the euro area and in the United Kingdom have dropped by an average of 70 basis points and by as much as 160 basis points in the United States. Yields for German Bunds dropped to below zero in April, most recently still trading below water at over one-half percent. Italian yields for ten-year government bonds fell from 3.5 percent in autumn 2018 to 1.7 percent in late July, but this trend could be reversed just as swiftly. The risk premiums for fiscally weak countries were more or less stable in the first half of the year but could still swing upwards steeply in the further course of the year. Japan is a special case as its central bank is keeping the interest rate and ten-year yields at zero in order to control yield curves.
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On the foreign exchange markets, the euro appreciated slightly on a nominal and trade-adjusted basis but depreciated against the U.S. dollar, the yen and the Swiss franc. The British pound continued its downturn, already losing further ground as the probability of a hard Brexit rises. The renminbi was also under pressure, with the currency even temporarily dipping under the symbolically important threshold of seven renminbi to the U.S. dollar this summer. Bond yields* (daily) 5 4 3 2 1 0 -1 Germany U. Kingdom
France USA
Italy China (monthly)
Spain Japan
*Yields of ten-year government bonds Source: Macrobond
The renminbi is expected to continue depreciating in the course of 2020 as the shock in demand triggered by protectionism continues to cool down the economy. Beijing will have a hard time ahead trying to avoid adverse capital outflows. While the accusation of the U.S. Treasury that Beijing manipulated the renminbi is unfounded, it highlights the potential for bilateral currency exchange rates to become a political issue. Other currencies to register hefty losses this year in a reflection of the difficult economic environment were the Argentinian peso and the South Korean won. Trade-adjusted exchange rates* of the U.S. dollar and the euro 130 120 110 100 90 80 2017 Euro, nominal effective exchange rate index, broad Euro, real effective exchange rate index, broad *Index: 2015=100 Source: Macrobond
2018
2019 US-dollar, nominal effective exchange rate index, broad US-dollar, real effective exchange rate index, broad
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Shock treatment | US protectionism and Brexit increasing risk of recession 05/09/2019
The trend on the world’s major stock markets in 2019 was positive until well into June. In the first quarter 2019, the stock markets of Moscow, Milan, Paris, New York, Frankfurt and Shanghai largely recuperated its losses of autumn 2018. The second quarter trended sideways across the globe. News from the political arena and the falling profits and profit expectations of many corporations again caused the major indices to wobble from June onwards. The heightened risks of recession are additionally curbing the risk propensity of global investors. Exchange rates against the U.S. dollar 1,30 1.30
0,85 0.85
120
7,2 7.2
1,25 1.25
0,80 0.80
115
7,0 7.0
0,75 0.75
110
6,8 6.8
0.70 0,70
105
6.6 6,6
1.05 1,05
0.65 0,65
100
6.4 6,4
1.00 1,00
0.60 0,60
95
6.2 6,2
1,20 1.20 1,15 1.15 1.10 1,10
1.00 Euro (left axis) Pound Sterling (right axis)
Renminbi (right axis) Yen (left axis)
Source: Macrobond
U.S. economy loses steam Following a strong start to the year with the U.S. economy growing by an annualised rate of 3.1 percent of GDP in the first quarter, growth slowed down considerably in the second quarter 2019, dropping down to 2.1 percent of GDP. Public expenditure added positive momentum in both quarters, turning up in early 2019 following the end of the government shutdown, with a quarter-on-quarter increase of 2.9 percent in the first quarter and five percent in the second. Private consumption expenditure also made a positive contribution to growth in the first and second quarters (up 2.5 percent in Q1 and 2.6 percent in Q2 year on year) (Federal Reserve Bank of St. Louis 2019). Private gross fixed capital formation, on the other hand, lost momentum in the second quarter. After rising 6.2 percent in the first quarter 2019 compared to the previous quarter, it dropped 5.5 percent in the second quarter (Bureau of Economic Analysis 2019). The subdued level of investment is evidence of the uncertainty companies are grappling with in the United States on account of the trade war between the United States and China and other risks facing foreign trade. In view of the downward global economic momentum, the IMF has forecasted a slowdown of U.S. economic growth for 2019 compared to 2018 (2018: 2.9 percent). GDP growth is expected to be at around 2.6 percent for 2019. The slowdown of the U.S. economy will be even more pronounced in 2020 with an estimated growth of 1.9 percent (IMF 2019a). After Donald Trump’s most recent announcement in early August that the United States would impose further tariffs on imports from China worth 300 billion U.S. dollars (the List 4a and 4b tariffs) and his threat to increase duties in response to retaliatory measures from China ahead of the G7 Summit, we can expect further downward
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Shock treatment | US protectionism and Brexit increasing risk of recession 05/09/2019
adjustments to the growth prospects of the United States. We anticipate real economic growth of 2.5 percent of GDP at the most. The Fed recently cut the key interest rates of the United States from 2.5 percent to 2.25 percent. Slowdown in foreign trade triggered by the trade disputes between the United States and China U.S. trade has suffered considerably in the first six months of 2019 on account of the trade dispute between the United States and China and the resulting uncertainty. Both U.S. exports and U.S. imports decreased in the first half of 2019 compared to the same period in 2018. While U.S. goods exports contracted by 0.4 percent, exports of services realized a narrow increase of 0.9 percent. Overall, U.S. exports of goods and services registered a miniscule increase, nudging up by only 0.04 percent in the first half of 2019 compared to the first half of 2018. For comparison, U.S. exports increased by a thumping 8.3 percent in the first half of 2018 compared to the first half of 2017. U.S. imports increased by 1.5 percent overall in the first six months of 2019 compared to the same period last year. Goods imports were up by 0.7 percent, while imports of services rose 5.4 percent year on year in the first six months of 2019. Contrary to the promise of the U.S. president that additional import duties would improve the U.S. trade balance and that trade wars were “good and easy to win� (Donald J. Trump, Twitter 2018), the U.S. trade balance actually deteriorated sharply in the first half of 2019 compared to the first half of 2018, plunging eight percent. The escalation of the trade war has noticeably weakened the competitiveness of the export-focused sectors of the U.S. economy. The Trump administration plans to have the new tariffs on imports from China fully in place by 15 December at the latest. This would lift the average U.S. tariff on imports from China to well over 20 percent (Peterson Institute for International Economics 2019). Ahead of the G7 Summit in late August 2019, the trade dispute escalated further. Chinese Ministry of Finance responded to the additional U.S. tariffs with countermeasures. These include additional duties of five or ten percent on 5078 products from the United States worth around 75 billion U.S. dollars. The new Chinese tariffs will take effect in phases in parallel to the most recent U.S. special tariffs on 1 September and 15 December. The first group are additional tariffs on soy beans and crude oil imports from the United States. In a second statement, the Chinese Ministry of Finance additionally announced that the suspended tariffs on U.S. vehicles and parts of 25 and five percent will be resumed as of 15 December. These had been imposed back in 2018 in the course of the trade dispute but paused following an agreement between Trump and Xi in December 2018 in Argentina to temporarily suspend further measures. On 23 August, the Trump administration announced that it would increase the duties on imports from China worth 550 billion U.S. dollars by an additional five percentage points. Tariffs will consequently increase from 25 percent to 30 percent on a volume of goods worth 250 billion U.S. dollars starting on 1 October and from ten to 15 percent on a volume of goods worth 300 billion U.S. dollars starting on 1 September and 15 December. Consumers in the United States and in China bear the additional costs of the tariff spiral. The trade war increases prices, causes inflation to rise, and production and investment to decline. In its most recent Economic Outlook, the OECD, for example, is expecting the escalation of the trade war from the middle of May 2019 alone to stunt GDP growth in the United States by 0.2 percentage points until 2021/2022. In May 2019, Trump hiked up special duties on an import volume from China worth 200 billion U.S. dollars from ten to 25 percent and China retaliated with duties on a trade volume of over 60 billion U.S. dollars. The tariffs that the United States and China had imposed before that were not
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Shock treatment | US protectionism and Brexit increasing risk of recession 05/09/2019
factored into the OECD simulation. If a special duty of 25 percent is imposed on the remaining groups of goods excluding commodities, the OECD expects the fallout to be on a scale of 0.6 percentage points of GDP for the U.S. economy until 2021/2022. The IMF is also forecasting annual losses to GDP of 0.3 to 0.6 percentage points if the United States imposed an additional duty of 25 percent on all Chinese imports to the United States, and China imposed retaliatory duties on the same scale (IMF 2019b and OECD 2019). The dispute between the United States and China has meanwhile also spread to currency issues. In August 2019, the Trump administration accused the Chinese authorities of manipulating the renminbi with a targeted devaluation. Since 1989, the U.S. Treasury regularly provides the U.S. Congress with a “Report on the Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States”. Secretary of the Treasury, Mnuchin, will now begin a dialogue with the Chinese authorities and the IMF to resolve these concerns. The BDI sees the proposal of the U.S. Department of Commerce to reform the trade defence measures based on the Tariff Act of 1930 very critically as it would allow the United States to establish and penalise unilaterally currency manipulations in antisubsidy proceedings. The IMF has firmly rebuked this move (IMF 2019a). US foreign trade policy harbours additional economic risks Alongside the risk of a further escalation in the trade war between the United States and China, disputes over subsidies of aircraft makers Airbus and Boeing, and Trump’s threat of imposing additional tariffs on European vehicles and parts also harbour considerable risks. A dispute resolution process of the WTO between the EU and the United States has been going on since 2004 with both sides accusing the other of illegal subsidies (also in the form of tax relief and financial support in the area of research and development) for Boeing on the one hand and Airbus on the other. A WTO ruling in the Airbus case on the value of damage caused to the United States and the volume of potential retaliatory duties is expected in autumn 2019. In parallel, in 2019 the WTO also concluded that the United States had not dismantled illegal subsidies for Boeing as requested. A ruling in the Boeing case is expected for the coming year (first quarter). WTO-compliant retaliatory duties would probably affect also other sectors. In April and July 2019, the Office of the United States Trade Representative (USTR) already pre-emptively published two lists with goods from the EU with a combined value of 25 billion U.S. dollars that could be subject to retaliatory measures. Experts expect the WTO ruling on the damage caused to be considerably lower. The Trump administration has indicated that the United States is interested in settling the disputes by means of negotiations. But there are no signs of a resolution to the dispute as yet. Many observers believe that the United States will impose tariffs without waiting for the ruling in the Boeing case. Trump’s threat to impose additional duties on U.S. imports of vehicles and parts is causing considerable uncertainty on the transatlantic market. In April 2019, based on an unpublished investigation report under Section 232 of the Trade Expansion Act of 1962, the President of the United States declared in an Executive Order that some vehicles and parts from the EU and Japan constitute a threat to the national security of the United States. He also called on USTR Robert Lighthizer to eliminate this threat to national security through negotiations with the EU and Japan until the middle of November 2019. If this fails, both trading partners will face additional duties of 25 percent. These would affect 30 percent of all German exports to the United States (worth 34 billion euros) according to a study by the ifo Institute. This study also forecasts that the German exports subject to these tariffs
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would drop by 17 billion euros, meaning by half. In the longer-term, this would cost Germany around five billion euros in GDP (ifo Institute 2019). The U.S. budget in election year 2020 The U.S. federal budget consists of three types of expenditure: around 60 percent flows into mandatory spending, which is determined by multi-annual programmes enacted by law. Eight percent flows into servicing debt. The remaining approximately 32 percent of expenditure is approved in the annual budget bills. This discretionary spending is coordinated every year in twelve appropriation bills, the most important of which are packaged into an omnibus spending bill. In addition, the U.S. Congress regularly decides on specific spending caps for this discretionary spending. An additional debt ceiling is also negotiated by the representatives and senators and applies to all expenditures and the debt level. In July 2019, the U.S. Congress and the U.S. President agreed in the Bipartisan Budget Act of 2019 to increase the spending caps for discretionary spending by a total of 320 billion U.S. dollars for the next two fiscal years (2020 and 2021). The spending cap for discretionary spending therefore stands at 1.29 trillion dollars for the fiscal year 2020 and 1.3 trillion U.S. dollars for 2021. Even though the level of discretionary spending has now been fixed for 2020 and 2021, the U.S. House of Representatives had only approved ten of the twelve appropriation bills before its summer break in August. A failure by the U.S. House of Representatives or the Senate to reach agreement in the next few months could result in another shutdown in the fiscal year 2020. The debt ceiling which determines the total debt level was suspended by the same Bipartisan Budget Act of 2019 until the middle of July 2021, which is after the presidential elections in 2020.
Europe: economic lull with risk of recession The European economy has lost steam in the course of the year. While the euro area managed to post a solid plus in the first quarter of 0.4 percent compared to the previous quarter, growth was down to
Euro area: Growth in real GDP in percent 3
2.5 2.3
2.1 2
2.0
2.0
1.8
1.7
1.2 (Forecast) 1 0.3 0 -0.4 -1 I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV 2010
2011
2012
2013
change over previous year quarter
2014
2015
2016
2017
change over previous quarter
2018
2019
change over previous year
Source: Macrobond
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Shock treatment | US protectionism and Brexit increasing risk of recession 05/09/2019
only 0.2 percent in the second quarter (EU28: 0.5 percent and 0.2 percent). We now anticipate growth for the year overall of only one percent (EU: 1.2 percent). The consumption expenditure of private households continues to be robust in most countries due to rising employment, decreasing unemployment, rising wages and disposable incomes, coupled with a moderate increase in prices. Furthermore, the financing conditions for private household and corporate lending remain favourable. Construction activity is thus also following a robust upward trend. On the negative side, foreign demand for goods has dropped and investment activity is losing steam. Manufacturing is in a downturn. ECB’s somewhat more expansionary course in fiscal policy and the more expansionary monetary policy anticipated ahead should help keep the economy afloat. Future developments depend to a large extent on whether and to what extent the numerous international risks materialise or not. Direct risks include further escalating protectionism, a disorderly Brexit, military disputes on the Strait of Hormuz and the potential impact of these on oil prices, the development of business and consumer confidence in view of these uncertainties and low valuation ratios on the stock markets if prospects indicate that the current slowdown of the world economy will be extended rather than temporary as largely assumed until now. Spain is the only major EU economy that is currently in a robust position with growth currently in line to come in at over two percent; the second quarter registered one-half percent growth (up 2.3 percent compared to last year). Employment is continuing to rise with gradual recovery taking place despite the turbulences in foreign trade and the instable government constellation. The German economy managed to start the year off with a robust 0.4 percent growth in the first quarter but then closed off the second quarter at minus 0.1 percent. Growth this year so far indicates weak growth for the year of well under one percent. The French economy is only growing at a low level according to the most recent figures (Q2: up 0.2 percent) and is likely to grow by just over one percent this year following growth of 1.5 percent and 2.3 percent in the two previous years. Private consumption is losing momentum while investment activity, particularly public sector investment, is currently robust. Performance was compounded by negative inventory effects and neutral net exports. Production sector output pointed down according to the most recent figures particularly in the automotive and refinery business. Italy’s economy is likely to stagnate this year. Homemade uncertainty surrounding government action are compounding the gloomier prospects for foreign trade. The lull in manufacturing will at most be compensated for by the slight upward trend in services. It is currently not possible to anticipate how the country’s financial policy will play out in the further course of the year and whether Italy will take any special measures to comply with the fiscal regulations. The economic output of the United Kingdom dropped in the second quarter for the first time since 2012 (down 0.2 percent). Although the country got off to a strong start to the year with growth of one-half percent, although this figure was partly distorted through a pile up of stocks in preparation for Brexit. Spring saw a slump particularly in industry (down 2.3 percent in Q2 following an increase of 1.9 percent in Q1), caused largely by the temporary shutdown of many UK plants due to Brexit in April. Production levels have meanwhile returned to normal since June. The sales of cars in June was still, however, more than 40 percent below last year’s level which indicates trouble. Construction activity was also down, while services trended sideways (up 0.1 percent). Over one half of service industries registered negative development. Investment activity dropped by four percent while net exports increased by the same amount. For the year overall, growth of a good one percent still looks feasible. Ireland, Luxembourg, the Baltic, Eastern European and Southern European countries all registered strong growth of over two percent. The Netherlands, Austria, Portugal and the Nordic countries are set to grow between 1.5 and two percent. Growth in Belgium will be average.
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China: economic downturn and trade disputes continue to constrain growth In 2018, China’s gross domestic product still grew relatively steeply at 6.6 percent to a value of 13.8 trillion U.S. dollars. In the first six months of 2019, the increase over the same period last year was down to only 6.3 percent. GDP growth continued to slow down in the course of the first two quarters, with growth down to 6.4 then 6.2 percent. Economic momentum is thus continuing its downturn in 2019 as well. In absolute terms, the economic growth of China is still immense compared to other economic regions. For 2019, Beijing’s economic planners have already downwardly revised the growth range of six to 6.5 percent. The primary industry grew by three percent in the first half of 2019, the industrial sector by 5.8 percent and services by seven percent. Alongside worries about growth, the primary causes for concern for the Chinese government are structural changes on the labour market, municipal and corporate debt, and liquidity on the financial markets. China already took monetary and fiscal measures to stabilise the economy last year and in spring but scope for further action is getting smaller. Large-scale stimulus such as that injected in the course of the financial crisis of 2008 and 2009 or abrupt interventions as seen during the currency and capital turbulences in 2015 and 2016 have not yet been initiated and would only be likely in the case of a sharp escalation of international disputes. For 2019 overall, the economy is likely to slow down further overall with problems on the domestic front coupled with weaker global economic growth. The government and the central bank will therefore need to prepare measures to keep growth and the economy on track through the uncertain times ahead. We anticipate growth for the year 2019 overall to be at 6.25 percent compared to the previous year. Growth is likely to drop down further to six percent or slightly below in 2020 even if the trade spat continues to simmer. If the trade dispute with the United States is resolved in the second half of the year, although this is looking increasingly unlikely, or global economic momentum counters expectations and speeds up swiftly, growth may even be slightly higher. The most recent escalation of the trade disputes may even make growth fall below the six-percent level if the government does not stem against the tide with substantially higher-volume countermeasures to stimulate domestic demand. Mixed economic indicators Several factors are currently putting the brakes on the Chinese economy. These include the uncertainty created by the ongoing trade dispute and the resulting shifts in foreign investment and foreign trade, the faltering Chinese renminbi compared to the US dollar and the global slowdown. Additional factors playing negatively into the equation are mostly cyclical and structural components on the domestic market that have become known for some time now as the “new normal”. Industrial production – defined here as companies with sales of more than 20 million renminbi per year – lost some steam in 2018 but remained stable at six percent growth (first half 2018: 6.1 percent). Within this group, the high-tech sector, which receives special support from the Made in China 2025 initiative, did particularly well with nine percent growth. Growth in this sector in July was nonetheless lower than it has been for a long time at 4.8 percent. Services continued to expand strongly, growing by 7.3 percent, especially in information transfer, software and leasing which together increased by 20.6 percent. Retail sales remained relatively robust with consumer goods sales to the value of about 19.5 trillion renminbi and growth of 8.4 percent in the first six months of the year, although the figure for July was
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Shock treatment | US protectionism and Brexit increasing risk of recession 05/09/2019
also down for this sector, slipping to 7.6 percent. Growth in online sales was down slightly on last year, growing by 17.8 percent. Overall, online sales of goods and services amounted to a value of about 3.8 trillion renminbi. This trend therefore continues to be in line with China’s objective of strengthening domestic demand. Individual industries are nonetheless suffering painful drops. After the dramatic slump in sales in late 2018 in the automotive sector, which makes up more than ten percent of GDP, sales continued to drop in the first half of 2019, going down 14 percent for passenger cars and amounting to around ten million vehicles. Private consumption is currently growing at a considerably slower pace than disposable incomes. The primary reasons behind this trend is the drastic increase in mortgage loans of private households of the last few years which, following the tightening of lending policies in this sector, has led to relatively high interest burdens for households (Deutsche Bank 2019c, d). This is likely to continue curbing economic growth in the medium term. Investment in tangible assets increased by 5.8 percent to a total value of 29.9 trillion renminbi in the first half of the year. The proportion of private investment has lost momentum, with growth down to 5.7 percent and down to three percent in manufacturing (3.3 percent in July). Investment in hightechnology production nonetheless still grew by 10.4 percent. Investment in the property market picked up slightly, speeding up to 10.9 percent. The government has repeatedly imposed restrictions in this sector to prevent the market from overheating and these are likely to remain in place with no changes indicated by the Politburo at the end of July. Foreign trade increased by a meagre 3.9 percent in the first six months of the year, reaching a value of around 14.7 trillion renminbi. While exports still increased by 6.1 percent, the growth of imports dropped off to 1.4 percent. The trade surplus consequently increased by 41.6 percent and is currently at 1.2 trillion renminbi. The largest share of exports was electronic and mechanical products which accounted for 58.2 percent. The EU, the United States and the ASEAN countries are still China’s most important trading partners. Exports stagnated in terms of U.S. dollars while imports decreased by three percent. A medium to steep drop is likely in the second half of the year especially in exports but also in imports (depending on the further development of the dispute with the United States). While deliveries to the United States only make up 20 percent of Chinese exports, the export of goods subject to the duties have dropped by 40 percent. The weak trend in industry in the United States and Europe are additional factors keeping growth down. In the first six months of the year, consumer prices (CPI) increased by 2.2 percent and producer prices (PPI) by 0.3 percent. The rate of unemployment in urban areas was at 5.1 percent in June, slightly higher than the previous year (five percent). The Caixin/Markit manufacturing purchasing managers’ index (PMI) measured 49.4 points in June, thus once again lower than the previous month (50.2 points) and still well below the critical mark of 50 points that indicates the threshold between economic expansion and contraction. The official NBS manufacturing purchasing managers’ index recorded a value of 49.4 points in June, remaining at the previous month’s level and still within contraction territory. The Caixin services purchasing managers’ index dropped to 52 points in June (52.7 points the previous month) but is still indicating expansion. The official NBS purchasing managers’ index for services was at 54.2 points in June, the lowest level this year but still well within expansionary territory. Bank lending is growing only narrowly faster than nominal economic output at around 13.5 percent, with overall financing somewhat lower still at eleven percent. Effective interest rates at slightly over 5.5
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percent are only just over the long-term average. China’s strategy to prevent debt levels increasing further thus seems to be working. The central bank has already cut the required reserve ratios by 350 basis points over the last few years, recently supporting liquidity on the market with open market transactions but has hardly made any changes to the key interest rate. Monetary policy is likely to remain moderately expansionary using open market operations, a further cut in the required reserve ratios and lending policy instruments. The central government has responded to the weaker trend resulting from the trade dispute by cutting taxes and facilitating lending. This has ultimately stimulated demand. In terms of fiscal policy, a stimulus package largely implemented in the first six months of the year lifted GDP by a good 1.5 percentage points. State expenditure grew by a good eleven percent with revenue only increasing by just over three percent making the scope available in the second half of the year extremely slim. The external value of the renminbi is already under pressure due to the interest rate cuts and the continued escalation of the trade dispute. Following President Trump’s most recent announcement of tariff measures, the renminbi broke through the psychologically important threshold of seven yuan to the dollar which is the Chinese currency’s lowest level since 2008.
Japan records fairly strong growth The Japanese economy is experiencing a slight slowdown, led by the manufacturing sector. The purchasing managers’ index for manufacturing already dropped below 50 in February and has since languished below the expansion threshold. The economy should grow by slightly under one percent in real terms this year. As in Europe, sentiment indicators for Japan have recently fallen. Companies and consumers rate both the current situation and prospects with increasingly reduced optimism. The labour market is nonetheless still in fine form. Employment has increased by more than ten percent since 2012 and unemployment, which was at over five percent during the global crisis, has since dropped to below 2.5 percent. Wages have increased substantially in nominal terms in the last few years with real wages also increasing solidly until 2018, although the latest figures indicate a turnaround in this trend. Private consumption is still moderately upward with sales of services and durable consumer goods trending positive this year as well. Investment activity has also brightened up according to the latest figures, contrary to expectations. Although industry is hovering along listlessly with new orders for industry down substantially, investment in services is pointing up, among other factors due to the shortage on the labour market. Private investment activity is at a high level following an upturn of almost ten years. Residential construction and public investment activity also remain positive. Foreign trade is likely to once again reduce growth slightly with exports stagnating while imports, buoyed by consumption, continue to grow. Industrial production is accordingly largely trending sideways. The Abe government is still sticking to its plan to hike the rate of value-added tax to ten percent in October. Japanese financial policy has quite generally been highly restrictive in the last five years, largely passing on the task of stabilising the economy and price levels to its central bank. The central bank has, however, so far not succeeded in lifting inflation closer to the two-percent target despite substantial and extensive monetary policy measures including yield curve control and the purchasing of securities through the Exchange Traded Funds. Core inflation is currently at 0.75 percent, having nonetheless recovered from its level of below zero in late 2016. In view of the large-scale reforms needed in tax and fiscal policy, expectations of the Abe government are currently low and the Japanese economy is likely to continue at half throttle for the time being.
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Shock treatment | US protectionism and Brexit increasing risk of recession 05/09/2019
Regional outlook The slowdown of the global economy has naturally also spread to the other economies in Asia, Latin America and Africa. While industrialised countries are having to make do with less than two percent growth, the developing and emerging countries (including China) are still expanding at an overall rate of over four percent. The economy in Asia has come out best as yet. The ASEAN countries are on track to grow by five percent and India seven percent. In Latin America, growth in Brazil and Mexico will again stay below one percent. The pace is only likely to pick up to two percent or more from 2020 onwards. The whole region is in for another very weak year with growth anticipated to not add up to more than a good one-half percent. The same goes for the Middle East including Afghanistan and Pakistan, with growth for the region expected to be only one percent. Turkey has been in recession since 2018, it remains to be seen whether the pick-up registered in the first quarter will lead to a recovery. Growth in Sub-Saharan Africa, on the other hand, is at a solid 3.5 percent. The CIS region has also accelerated growth to 3.5 percent, with only Russia hardly managing one percent. Among the BRICS group, exalted by the media in the past, currently only India and China are growing robustly while Brazil, Russia and South Africa have been experiencing very weak growth for several years already. Regional economic outlook* 2019 South America
1.1
Central America
3.2
Caribbean
3.6
Asia-Pacific, advanced economies1
1.7
Asia-Pacific, developing economies2
6.2*
CIS-States3
1.9*
Middle East, North Africa, Afghanistan, Pakistan
1.0*
Israel
3.3
Sub-Sahara Africa
3.4*
1 Japan, South Korea, Taiwan, Singapore, Hong Kong, Australia, New Zealand, Macau 2 including China and India 3 Russia, Ukraine, Georgia, Turkmenistan, Caucasian und Central Asian States * Growth of real GDP over previous year in percent Source: IMF (April 2019, *July 2019)
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Shock treatment | US protectionism and Brexit increasing risk of recession 05/09/2019
Consequences for Germany The slowdown in global economic growth and investment activity combined with the increased risk of recession will considerably impair German economic development in the next two to three years. The product portfolio of German industry, premium vehicles, machines adjusted to individual customer wishes, special chemistry and high-value electronic technology have contributed significantly to the record-breaking exports of German industry on the global markets. German investment goods were and still are in high demand in emerging countries undergoing industrialisation. It is not without cause that Germany is more closely intertwined with the global economy than almost any other major industrialised country. This has masked a number of weaknesses in the domestic economy in the past. German industry was the first country to recover from the financial and economic crisis. But the foreign trade engine is now starting to stutter. Protectionism is poison for global trade. The exit of the United Kingdom from the EU is set to substantially impede trade with one of its most important trading partners. The conversion of drive technology in the automotive industry takes time and burdens production. The advantages of yesterday, of being highly interconnected in foreign trade and having an above-average proportion of industry, is currently more of a hindrance than a help. It is therefore not much use that the domestic economy is still in good shape thanks to rising employment and the boom in construction. In the medium term, the domestic economy will not be able to maintain a contrary trend to the global economy either.
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Shock treatment | US protectionism and Brexit increasing risk of recession 05/09/2019
Sources Bergsten, C. Fred (2019). Trump’s Attack on China’s Currency Policy. Peterson Institute for International Economics. Washington, D.C.. 2 August. Bureau of Economic Analysis (2019). Gross Domestic Product. 26 July. Business at OECD (2018). Economic Policy Survey. Paris. CPB Netherlands Bureau for Economic Analysis. (2019) CPB Memo CPB World Trade Monitor May. Deutsche Bank Research (2019a). US Economic Perspectives. Preemptive strikes to sustain the expansion. 12 June ---(2019b). US Economic Notes. Trade tensions back to a boil. 2 August. ---(2019c). China Macro. H2 Outlook: Waiting for policy easing. 18 July. ---(2019d). China Macro: Politburo meeting signals marginal policy loosening. 31 July. Donald J. Trump, Twitter (2018). Draghi, Mario (2019). Twenty Years of the ECB’s Monetary Policy. Rede. EZB-Forum Sintra. 18 June. European Commission (2019). European Economic Forecast Spring 2019. Institutional Paper 102. Brussels. European Central Bank (2019). Eurosystem staff macroeconomic projections for the euro area. Frankfurt/M. June. Federal Reserve Bank of St. Louis (2019). Hartmann, Philipp, Frank Smeets (2019). The first twenty years of the European Central Bank: monetary policy. Working Paper 2219. Frankfurt/M. ifo Institute (2019). Effects of New US Auto tariffs on German exports, and on industry value added around the world. 15 February. Internationaler Monetary Fund (2019). Still Sluggish Global Growth. Washington, D.C.. 23 July. ---(2019a). United States: 2019 Article IV Consultation. Washington, D.C.. June. ---(2019b). World Economic Outlook. Growth Slowdown, Precarious Recovery. Washington, D.C.. April. ---(2019c). World Economic Outlook Update. Still Sluggish Global Growth. Washington, D.C.. July. Lane, Philipp (2019). Monetary policy and below-target inflation. EZB. Rede. 2 July.
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Shock treatment | US protectionism and Brexit increasing risk of recession 05/09/2019
OECD (2019a). Economic Outlook. May. Paris. ---(2019b). Going for Growth. Paris. Peterson Institute For International Economics (2019). Trump’s Latest Trade War Escalation Will Push Average Tariffs on China Above 20 Percent. 6 August. UNCTAD (2019). World Investment Report. Imprint Bundesverband der Deutschen Industrie e.V. (BDI) Breite Straße 29 10178 Berlin T: +49 30 2028-0 www.bdi.eu Authors Dr. Klaus Günter Deutsch T: +49 30 2028 1591 k.deutsch@bdi.eu Thomas Hüne T: +49 30 2028 1592 t.huene@bdi.eu Wolfgang Krieger BDI-Vertretung, Peking T: +86 1085 3258421 w.krieger@bdi.eu Dr. Stormy-Annika Mildner T.: +49 30 2028 1562 s.mildner@bdi.eu Valerie Ross T.: +49 30 2028 1623 v.ross@bdi.eu Dr. Christoph Sprich T: +49 30 2028 1525 c.sprich@bdi.eu Editorial / Graphics Marta Gancarek T: +49 30 2028 1588 m.gancarek@bdi.eu
This Global Growth Outlook is a translation based on „Globaler Wachstumsausblick“ as of 27 August 2019.
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