The recovery of 2020 global real GDP growth remains uncertain and will be conditioned on trade developments and central bank support
The IMF downgraded its projection for annual real GDP growth, for a 5th consecutive quarter, by 0.2 pps to 3% for 2019 and by 0.1 pp to 3.4% for 2020 compared with July, versus 3.6% in 2018 and a peak of 3.8% in 2017 post GFC (see graph below). The revisions were mainly due to the further broadening of tariffs during recent months.
The deceleration between 2017 and 2019 can be mainly attributed to a slowdown in a number of Emerging Market and Developing (EMD) economies (e.g. India, Brazil, Russia, Mexico, Turkey), mostly due to idiosyncratic factors. Anticipated recoveries (or weaker recessions) in these countries account for more than 70% of the expected pick-up in global GDP growth in 2020 (i.e. 0.3 pps). Thus, unlike the synchronized slowdown in 2017/2019, the expected global economic recovery in 2020 is far from certain: Note that 2020 real GDP growth in the US and China is expected to be lower compared with 2019.
Other factors accounting for the deceleration in GDP growth since 2017 were higher tariffs, new trade barriers, uncertainty surrounding future international trade relations and geopolitics (including Brexit related risks) as well as slowing domestic demand in China account. According to the IMF, US/China trade tensions are due to subtract cumulatively 0.8% from global GDP levels by 2020 compared with a hypothetical no-tariff scenario, an impact partly offset by further monetary policy accommodation. In the event, the IMF cited that in the absence of monetary policy support, global GDP growth would be down by 0.5% both in 2019 and 2020.
Uncertainty in the Automotive industry has also contributed to the deceleration in global growth deceleration (e.g. car production subtracted -0.04 pps from global real GDP growth in 2018, versus +0.02 pps in 2017). Apart from pressures stemming from the international trade tensions, supply disruptions from new emissions standards in the euro area and China (leading to supply bottlenecks at testing agencies), lower Chinese demand for automobiles due to the expiration in respective tax incentives and stricter regulations on peer-to-peer lending have weighed on the sector. Demand side challenges are also evident (shifting consumer preferences towards decarbonization, evolving car transportation and sharing options).
Looking forward, non-implementation of the pending tariffs and/or a rollout of those already in effect would brighten the outlook. Overall, however, the IMF sees the net balance of risks as tilted to the downside.
On the other hand, downside risks, inter alia, include: i) no dissipation of tensions in key emerging and developing economies; ii) an escalation in trade tensions, combined with a broadening of them to other fronts such as technology, possible barriers in international portfolio investment flows; iii) geopolitical risks; iv) the weakness in global manufacturing spreading to the services sector; and v) a no-deal Brexit. Regarding Brexit, the saga continues, and while the chances of a no-deal Brexit appear less likely following the agreement between the UK and the EU on October 17th, PM Johnson faces an uphill battle in Parliament (see Economics).