International outlook for 2019: Steady growth through the trade storm?

• Author: Bonser-Neal, Catherine

2018 was marked by a brisk increase in trade tensions elicited by the United States' protectionist measures against its major trading partners: the European Union, China, Canada and Mexico. These tensions have only been heightened by each country's round of retaliatory trade restrictions placed on U.S. goods. So far, these trade wars have affected only a small fraction of the world's volume of imports and exports, which has contained the repercussions from spreading to the global financial market. Therefore, the International Monetary Fund (IMF) projects 2019 world output to continue to grow at a robust pace of 3.7 percent (see Figure 1).

Figure 1: Real GDP growth (%) 2017 2018 2019 World economy 3.7% 3.7% 3.7% Advanced economies 2.3% 2.4% 2.1% Emerging and developing economies 4.7% 4.7% 4.7% Note: 2018 and 2019 values are projections. Source: International Monetary Fund Note: Table made from bar graph. However, if trade wars continue to amplify, the balance of the risks for 2019 will be biased to the downside. Adding to these fears are increased geopolitical tensions that may drive up the price of oil. Also, there is increased fear from rising credit costs, which is created by tighter capital markets, as many of the world's central banks are expected to continue (or start) raising interest rates. All of these uncertainties can disrupt global expansion by affecting market confidence and ultimately decrease business and household spending, which in 2018 has been the principal engine of growth.

Advanced economies

Projected economic indicators (real GDP growth, unemployment rates and inflation rates) remain encouraging in the advanced economies. Nevertheless, a greater divergence in the pace at which advanced economies are growing is noticeable and could signal heightened medium-term risks. For example, the United States is expected to sustain growth above its long-term potential in 2019, while many other advanced economies (for example, Japan and the U.K.) are falling back to their potential.

UNITED STATES

In the United States, the powerful budget stimulus of the current administration is further incentivizing economic activity that is forecasted to grow at 2.5 percent in 2019. Consumer and business confidence are very high, and this should continue to bring the unemployment rate to levels not seen in decades. The domestic risk is the reignition of inflation and, internationally, the exacerbation of the global imbalances that could increase exchange rate volatility. Also, as the U.S. is expected to grow relatively faster, U.S. imports will increase and so will the U.S. trade deficit. All these will contribute to the increase of U.S. interest rates and create political tensions between the monetary and executive authorities, as well as between the U.S. and their trading partners.

EUROZONE

In the eurozone, 2018 expansion was boosted by good economic performance in Germany, the Netherlands and the Iberian Peninsula. The economic activity was further supported by the European Central Bank's continued accommodating monetary policy and increased...