Economic “Predictions” for 2019 and Impact on Global Supply Chains | Whale Logistics Australia

Economic “Predictions” for 2019 and Impact on Global Supply Chains | Whale Logistics Australia

The global economy started 2018 with strong, synchronized growth, but the momentum faded as the year progressed and growth trends diverged. Notably, the economies of the eurozone, the United Kingdom, Japan, and China began to weaken. In contrast, the U.S. economy accelerated, thanks to fiscal stimulus.

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According to Nariman Behravesh, chief economist at IHS Markit, growth in the U.S. will remain “above trend,” while other key economies will experience further deceleration. As a result, he predicts that global growth will edge down from 3.2% in 2018 to 3.0% in 2019—and will keep eroding over the next few years.

“One major risk in the coming year is the sharp drop-off in world trade growth, which fell from a pace of above 5% at the beginning of 2018 to nearly zero at the end,” he says. “The risk of an escalation in trade conflicts remains elevated. If such an escalation were to occur, a contraction in world trade could slow the world economy even more. At the same time, the sell-off in equity and commodity markets, on top of the gradual removal of accommodation by some central banks, means that financial conditions worldwide are tightening.”

Combined with heightened political uncertainty in many parts of the world, these risks point to the increased vulnerability of the global economy to further shocks and the greater probability of a recession in the next few years – although still relatively low in 2019, IHS Markit further notes.

Supply chain managers may face mixed blessings on the domestic front, based on estimates about sustainable growth in the labor force and productivity. IHS Markit assesses the potential growth in the U.S. economy to be around 2.0%. In 2018, U.S. growth was a well-above-trend 2.9%, compared with only 2.2% in 2017.

“The acceleration was almost entirely due to a large dose of fiscal stimulus with tax cuts and spending increases put in place at the beginning of the year,” says Behravesh. “The impact of this stimulus will still be felt in 2019, but with diminishing potency as the year progresses.”

Consequently, IHS Markit expects growth of 2.6%, which is less than in 2018, but still above trend. By 2020, the effects of stimulus will have fully dissipated, ushering in a new level of maturation. Economists add that over the next year, there are likely to be “countervailing pressures” leading to a plateau.

“On the downside, housing has been a disappointment, the dollar has been rising, credit conditions are tightening, and higher tariffs could still hurt growth,” says Behravesh. “On the upside, interest rates are still low, and fiscal stimulus is still aiding expansion. For the balance of 2019 U.S. economic fundamentals remain fairly solid.”

Among the other predictions made by researchers are these:

  • Japan’s recovery will remain weak. Japanese growth also peaked in 2017, at a rate of 1.7%. Growth in 2018 is expected to come in at a much slower rate of 0.8%, hold close to that rate (0.9%) in 2019, and then slip to 0.5% in 2020. While monetary policy continues to be ultra-accommodative, there are two big drags on Japanese growth. The first is the slowdown in China’s economy. The second is the fallout from the trade tensions between the United States and China and the resulting hit to trade growth. The expected rise in construction spending ahead of the 2020 Olympics will sustain growth in 2019, but the boost will fade by the end of the year.
  • China’s economy will keep decelerating. In the third quarter of 2018 China’s real GDP grew at a year-on-year rate of 6.5%, the lowest since the financial crisis 10 years ago. The quarterly rate of growth has been steadily edging down since the beginning of 2017. On an annual basis, the pace of expansion has slowed from 6.9% in 2017 to 6.6% in 2018, and will fall further to 6.3% in 2019 and 6.0% in 2020. The underlying dynamic behind this deceleration is the government’s attempt to reduce ultra-high debt levels. That said, the Chinese government is very sensitive to both a too rapid decline in growth—6.0% growth is often referred to as the “line of defense”—and the recent rout in the stock market.
  • Growth in the emerging world has topped out, and will slide further. At 4.9%, emerging-market growth in 2017 was the strongest since 2013. During 2018, growth among these countries has edged down to 4.8%. IHS Markit expects another decline in growth over 2019, to 4.6%. These averages, hide a large divergence. Some economies such as Brazil, India, and Russia experienced a mild pickup in growth in 2018. Others such as Argentina, South Africa and Turkey came under intense financial pressure and suffered recessions or near-recessions. Going forward, emerging markets face a number of headwinds. First, growth in the advanced economies (about 60% of world GDP) is slowing—as is the pace of world trade. Second, global financial conditions are getting gradually tighter and the dollar is expected to remain strong.
  • The volatility in commodity markets will continue, with significant downside risks. Weaker global growth, the gradual tightening of credit conditions, and strength in the US dollar will pose challenges for commodity markets in 2019. Nevertheless, demand growth next year still looks strong enough to provide markets with support, making the kind price collapse seen during 2015 unlikely. IHS Markit predicts that commodity prices at the end of 2019 will be little different than at the end of 2018. But getting from here to there could be another roller-coaster ride.
  • Inflation will not rise much—if at all. Global consumer price inflation rose from 2.0% in 2015 to 3.0% in 2018. Most of this was due to a transition in the developed world from deflationary (or near deflationary) conditions to inflation rates that are close to central banks’ targets of 2.0%. Over the near term, IHS Markit expects global inflation and developed-economy inflation to remain close to 3.0% and 2.0%, respectively. While there will be upward pressures in many economies as output gaps close and unemployment rates fall (in some cases to multi-decade lows), there are downward pressures as well. Outside the United States growth is weakening.
  • The Fed will stay the course by raising interest rates only gradually; a few other central banks may follow, but at an even slower pace. With the world’s key economies at different points in the business cycle, it is not surprising that the respective central banks are moving at different speeds (and in different directions). Given weaker growth and muted inflationary pressures, however, the pace of removing accommodation is likely to be even more modest than previously expected. In the case of the Federal Reserve, a December rate hike is likely, and IHS Markit expects three interest rate increases in 2019 and one in 2020.

Original article: Supply Chain Management Review

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