It is evident that the global economy is in a slowdown and once again, growth for 2019 has been downgraded to 3% - its slowest pace since the global financial crisis. Growth continues to be weakened by rising trade barriers and increasing geopolitical tensions. Growth is also being weighed down by country-specific factors in several emerging market economies, and by structural forces, such as ageing demographics in advanced economies and low productivity growth.
Moreover, a sharp deterioration in manufacturing activity and global trade, with higher tariffs and prolonged trade policy uncertainty damaging investment and demand for capital goods does not help drive growth. In addition, markets have seen the automobile industry contracting, owing also to a variety of factors, such as disruptions from new emission standards in the euro area and China that have had tough effects.
In contrast to extremely weak manufacturing and trade, the services sector continues to hold up almost across the world. This has kept labour markets afloat and wage growth and consumption spending healthy in advanced economies, for now. However, there are some initial signs of softening in the services sector in the Euro Area and the US.
Monetary policy has played a significant role in supporting growth. In the absence of inflationary pressures and facing weakening activity, major central banks have appropriately eased to reduce downside risks to growth.
When looking at advanced economies, their growth has continued to slow and has been downgraded to 1.7% in 2019 vs 2.3% in 2018. On a positive note, strong labour market conditions and policy stimulus are helping to offset the negative impact from weaker external demand for these economies.
Growth in emerging market and developing economies has also been revised down to 3.9% for 2019 vs to 4.5% in 2018 owing in part to trade and domestic policy uncertainties, and to a structural slowdown in China.
Intensifying risks
In addition, there are several downside risks to growth. Heightened trade and geopolitical tensions, could further disrupt economic activity, and disrupt an already fragile recovery in emerging market economies and the euro area. This could lead to a sudden shift in risk sentiment, financial disruptions, and a reversal in capital flows to emerging market economies. In advanced economies, low inflation could become entrenched and constrain monetary policy space further into the future, limiting its effectiveness.
Policies to uptick growth
To uptick growth, policymakers must undo the trade barriers put in place with sustainable agreements and reduce domestic policy uncertainty. Such actions can help boost confidence and revive investment, manufacturing, and trade. In this regard, markets look forward to more details on the recent tentative deal reached between China and the United States.
To push off other risks to growth and to raise potential output, economic policy should support activity in a more balanced manner. Monetary policy has to be coupled with fiscal support where fiscal space is available, and policy is not already too expansionary.
While monetary easing has supported growth, it is essential that effective macro prudential regulation be deployed to prevent mispricing of risk and excessive build-up of financial vulnerabilities.
Disclaimer: This article was issued by Maria Fenech, Credit Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.