World Economic Prospects Monthly

Abstract

Overview: slowdown persists amid mounting trade risks ▀ Mounting trade tensions, along with higher oil prices, have the potential to exacerbate the ongoing global slowdown. However, we expect neither to trigger a sharp loss of economic momentum and still see only a moderate deceleration in global GDP growth. We have kept our 2018 and 2019 world GDP growth forecasts unchanged at 3.1% and 2.9% respectively, supported by US fiscal stimulus and healthy Chinese domestic demand. ▀ The US decision to impose steel and aluminium tariffs on the EU, Canada and Mexico will, on its own, have only marginal direct economic effects, but it raises the risk of a series of tit‐for‐tat action that could prove far more damaging. The worrisome outcome of the recent G7 meeting further adds to concerns that trade relations between advanced economies will get worse before they get better. Our baseline remains that a major escalation will be avoided. But the uncertainty created could well lead to weaker investment in the short term and limit the degree to which both the US and the eurozone bounce back after their disappointing starts to the year. ▀ Solid global oil demand, supply cuts in Iran and Venezuela and pipeline constraints in the US will support a firmer oil price environment in the near term. Higher energy prices will erode household discretionary incomes and weigh on consumer spending, though stronger energy sector investment is likely to provide some offset. ▀ Eurozone economic activity is slowing this year, putting downward pressure on the euro. We still the expect the euro to appreciate against the dollar over the next 18 months in response to rising US twin deficits and a narrowing in the growth differential between the US and the eurozone. In addition, we do not think recent growth readings and currency moves will affect the ECB's plan for monetary policy normalization. ▀ Risks clouding the outlook for emerging markets (EMs) have increased, with rising oil prices and tighter financial conditions coinciding with growing trade risks and less synchronised global activity. That said, we expect a weaker dollar in the medium term to alleviate pressures, which should keep EM growth supported this year.