Global Economic Outlook (4Q-2019)

The perception that the global economy finds itself in a situation characterized by indicators showing corrections accumulated since the end of 2018 and which resemble those widely observed a decade ago is being reaffirmed. The exception to this is that, for now, these have not fully transferred to consumers or to the service sector, and that there is still no sign of contraction on a global scale.

The world economy remains stable but is clearly slowing down. For the 2019–2020 period, average global growth is expected to be close to, but below, three percent. This figure is noticeably lower than that recorded two years ago but is still far from the figure that is commonly associated with a global recession (below one percent). Developed countries are not expected to make a large contribution, as their individual growth will be around two percent or less. It will be the emerging countries that make a more significant contribution—with growth of around 4.3 percent in both years—thanks to more benign financial conditions, some space for the implementation of fiscal stimulus policies, and an improvement in terms of trade.

The current global economic climate is giving warning signs of a possible recession, which can already be considered a possibility. If one were to occur, it would likely accelerate many of the geopolitical trends that have defined the past five years, including growing nationalism and protectionism, an increasingly fractured international system and the re-emergence of formal and informal trade barriers. Moreover, one of the key risk factors for the global economy, in the current climate, is the variety of ongoing international trade disputes.

Trade wars, or abrupt and poorly negotiated changes in trade relations, are a central consideration given that the intensity of trade disruptions will be a defining element of the slowdown set to continue until the end of 2021. The trade war between the United States and China stands out at the moment, although warning signs of trade conflicts between the United States and the European Union are beginning to appear, as well as between Japan and South Korea. This leads us to the conclusion that the trade and foreign policy style of the Trump administration could be spreading, disrupting the existing world trade order and forcing economic agents to constantly adapt to protectionist measures and arbitrary restrictions imposed by policies that seek immediate responses without considering long-term effects.

The environment described above is all the more worrying as financial institutions and regulators have very few instruments to deal with the effects of a sharp and clear decline in economic activity. The flexible renewal of global monetary policy was recently consolidated by decisions made by both the US Federal Reserve and the European Central Bank, which were backed by a large number of the world’s central banks. While it is true that this shift helps contain the financial risks caused by the debt of many countries, it also strengthens the consensus that resolving the current situation will be complex. The effects of monetary policy are becoming increasingly limited, and the average interest rate in the G7 is below one percent, which puts it very close to the Zero Lower Bound, which acts as an asymptote in the rates from which point there is a greater incentive for monetary savings as a precaution rather than credit and investment. Furthermore, such low interest rates have damaging effects on banks’ maturity transformation business, on lending, and on the ability to remunerate investors from the non-banking financial system (such as insurance companies).

Against this backdrop, there is a growing consensus that the only viable economic policy is aggressive fiscal expansion. This strategy could benefit from the low interest rates and high fiscal multipliers currently found in both developed and emerging countries, or be supported or supplemented by a public policy strategy to amplify the intermediation in savings. However, governments are reluctant to assume that responsibility.

Global economic confidence is so weak that one or more disturbances could have strong effects and cause disruptions for the financial markets, consumer demand or investment, turning the slowdown into a recession.

The balance of risks is slightly on the upside. There are existing risks that are worth reiterating: that related to the governance of the eurozone, which seems to be increasing; that derived from economic policy in the United States, with respect to which the probability is now lower; that related to macro-financial adjustment in China; and that derived from global leverage levels, the latter two remaining unchanged. In addition to these risks, there is a new one: the consequences of a potential geopolitical crisis.

The complete analysis can be found in the report Economic and Industry Outlook 2019: Fourth Quarter Perspectives, prepared by MAPFRE Economics, available at the following link