Global growth – The case for a Synchronous Slowdown
After the synchronous global growth pick up in 2017, growth in the U.S. continued to accelerate and diverged from that in the EU, Japan and China. This was owing to the one-off fiscal stimulus, which included tax cuts and repatriation benefits to corporates, the impact of which is estimated to peak at the end of this year. We explore the case for a synchronous global growth slowdown ahead as the U.S. fiscal impact fades, the Fed continues to hike rates as expected and the economic climate in other advanced countries stays meek (Figure 1).
Figure 1: Real GDP growth in the U.S., Japan, EU and China
Global growth – shifting to the slower lane?
The PMI heat map below (Figure 2), a good proxy for manufacturing growth, suggests 2018 witnessed lower production growth vs. 2017 in most of the economies except the U.S. The shift is more obvious if we look at the regional aggregates. PMI readings for developed markets, particularly the EU, have decreased almost consistently since the beginning of 2018.
Figure 2: Manufacturing PMI heat map – 2018 slips
Growth divergence vs. the U.S.
Below, we gauge the extent of the current growth divergence in the EU, Japan and China vs. the U.S through a series of parameters.
Given the economic link through trade, Asian exports too have moderated in 2018 (Figure 11).
What lies ahead
In 2018, we witnessed capital outflows and currency depreciation in many Emerging Markets, U.S. Fed rate hikes, rise in crude oil prices (which have eased a bit of late), initial signs of a slowdown in China and escalating tensions of a trade war. Cost of capital in many EMs became dearer due to interest rate hikes in response to the rapid currency depreciation and fear of pass through to inflation.
Figure 12: U.S. Fed real GDP median projections (%y/y)
As the impact of fiscal stimulus on growth fades in the U.S. (Figure 12), China is tackling the after-effects of its own deleveraging-drive to curb shadow banking amid further tariff threats from the U.S. and the EU is dealing with Brexit related worries, a high budget deficit in Italy, etc. If 2019 does turn out to be a year of synchronous global growth slowdown, it is unlikely other economies, including India, will remain insulated from such deterioration in the global backdrop.
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