World Economic Prospects Monthly

Abstract

Overview: Downturn to spur monetary policy loosening ▀ We now expect global GDP growth to dip slightly below 2016's post‐crisis low of 2.6% in 2019. Moreover, despite a swathe of insurance policy loosening, we do not see a rebound in GDP growth in 2020 and have revised down our forecast from 2.7% to 2.5%. This is in contrast to the previous downturn when growth rebounded sharply in 2017. ▀ Timely global activity indicators have remained soft and while they do not point to a sharp loss of momentum in the shorter term, neither do they suggest that the economic situation is likely to get better imminently. Nonetheless, there are two key reasons why we have become more pessimistic about growth prospects next year. ▀ First, we have added further US‐China tariffs to our baseline forecast, which, despite likely more aggressive policy action by the Fed and China, is set to lower GDP growth in both economies next year, with inevitable spill‐overs to the rest of the world. ▀ Second, the ongoing uncertainty surrounding US‐China relations, coupled with growing recession fears in response to the inversion of the US yield curve, is prompting the manufacturing‐focused weakness to spread. Consumers are generally still in good health, but declining business confidence has triggered weaker hiring intentions which may weaken consumer spending growth further ahead. ▀ Our baseline assumes that insurance policy loosening prevents consumer panic and a deep economic slowdown from here. But the reduced effectiveness of monetary policy in the current environment and the small likelihood of a definitive and imminent end to US‐China tensions imply that a notable growth pick‐up, as seen in 2017, is unlikely. ▀ While our baseline assumes no end to the global expansion, we would warn against complacency over the risk of recession. For monetary policy loosening to place a floor under global growth, it will need to be augmented by more accommodative fiscal policy and perhaps a bit of luck in the form of no further major negative shocks.