ls global growth poised to weaken further? Yes.

07 October 2019

Michelle GirardManaging Director, Co-Head Global Economics, Head of Strategic Coordination & Business Operations, US

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Against the current backdrop of central bank action and a resurging demand for fiscal policy, the global slowdown is a hot topic for investors. Here’s why we see weaker growth manifesting across the key regions in the coming year. 

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Regional outlook snapshot: The need-to-know

Overall global outlook

We’re relatively pessimistic. After advancing by 3.0% in 2018, we expect global output to increase by just 2.4% in 2019 (the weakest performance since 2009). At best, output is likely to remain around that relatively subdued level throughout 2020.


The global slowdown is broadening across sectors and countries. Yet, despite this clear deterioration, central banks have not turned more aggressive in delivering interest rate cuts. In major economies particularly, the data outlook and the policy outlook appear misaligned. With central banks remaining behind the “easing” curve, growth may continue to slow.

US outlook:

More US rate cuts ahead


The Fed cut rates in September but suggested little inclination for reduce rates further.  However, we believe heightened uncertainty associated with the trade war and the outcome of the 2020 presidential election will dampen activity over the coming year, ultimately forcing the Fed to lower rates further than policymakers currently expect will be necessary.

Eurozone outlook:

Calls for more expansive fiscal policy are getting louder


Domestic demand has remained resilient, but signs of contagion from global trade are now appearing. Germany looks headed for a technical recession increasing the challenge for eurozone growth broadly. Fiscal policy support is needed, and soon. We expect action from eurozone governments beginning with the autumn 2019 budget session. Read more on our expectations for eurozone fiscal policy.

China outlook:

Chinese GDP growth appears likely to slow below the targeted range of 6.0-6.5%.


China’s GDP growth faces downside pressure from both deleveraging policies and trade tensions with the US. Policymakers, however, are likely to stick with targeted monetary easing, tolerating slower growth rates rather than risk rapid debt accumulation to boost domestic demand. View our China Stress Index to see how we are tracking investor sentiment towards China.

UK outlook:

UK fiscal policy easing of 0.5% of GDP in 2020 and an Article 50 extension to the end of January


Fiscal policy easing and an extension would reinforce the Bank of England’s existing aggressive monetary policy guidance. However, we expect capital expenditure to continue to falter – avoiding ‘no deal’ is not the same as avoiding significant economic disruption. And there is growing evidence that consumer resilience will be tested in 2020, so we continue to expect further policy easing. An autumn 2019 election looks likely. Check out our Brexit tracker.

Japan outlook:

Growing odds of more monetary stimulus


We expect growth to remain solid in 2019 but downside risks for next year are increasing. As such, the probability that the Bank of Japan will implement monetary easing measures at the October 2019 policy meeting is rising. Yen appreciation following more easing from the US Federal Reserve could lead to more easing from the Bank of Japan in 2020. Read more on our expectations for the October Bank of Japan meeting.

The global slowdown is taking root

Global growth prospects are looking increasingly dim – let’s first assess the data.

Global factory activity

The decline in factory activity that began last spring has deepened. The global manufacturing Purchasing Managers Index (PMI) fell this summer to its lowest level since late 2012, as you can see in chart 1. The weakness – evident first in the eurozone, then China and the UK – has now spread to the US. Previously considered to be the bastion of ’exceptionalism’, US gauges of factory activity signalled contraction in August, with exporter sentiment looking even worse than its global counterpart.

Chart 1: Global Manufacturing PMI vs. US Manufacturing PMI/ISM average

Source: Markit, ISM, NatWest Markets.

Trade war and uncertainty

The weakness in global manufacturing has been tied to the trade war and increased uncertainty, which has led to a cooling in business investment. The optimistic spin is that much of this uncertainty is self-inflicted and could be erased by policymakers at any time.  According to this argument, if the US and China reached an agreement on trade, then business confidence would return and much of what has ailed the global economy would disappear.

Spotlight on the US-China trade war

We expect business uncertainty around US-China trade policy to linger

Many believe that Trump will be motivated to strike a trade deal with China before the 2020 Presidential election. However, both Democrats and Republicans favour action against China (the differences between the two parties surround the approach).  With many Democratic candidates talking tough on China, Trump cannot risk looking soft on the issue. Thus, counter to conventional thinking – and growing optimism over another trade truce – we do not expect US-China tensions to ease materially and/or sustainably between now and the November 2020 election.

Even if a US-China trade deal were to be reached in the near-term, uncertainty over a renewed flair-up would linger. Remember, the US had a trade agreement with Mexico and Canada (USMCA) awaiting Congressional approval when President Trump threatened tariffs on Mexican goods in order to further his domestic agenda on immigration. In late July, a meeting on trade between US and Chinese officials was said to be productive. The next day, Trump tweeted that tariffs on China would be broadened and raised. Trump himself has acknowledged that, if re-elected, he will be tougher on China. And, in the unlikely event that a lasting deal with China were to be reached, Trump could simply turn his sights toward other trading partners. For example, tariffs on cars and auto parts imports, which were delayed in May by six months to allow more time for negotiations with the European Union and Japan, might again move to the fore. Given all this, we expect uncertainty over trade policy to persist for the foreseeable future – undermining the outlook for global growth.

Global consumption has slowed too

In addition to the unpredictability of the trade war and future policy, our concern over the global outlook has been heightened by evidence that economic weakness is spreading. Data weakness has become more broad-based, extending beyond just manufacturing and business investment. As shown in chart 2 below, while the deceleration in investment spending has been more pronounced, global consumption has cooled as well. Over the last year, consumers have pulled back on spending of both goods and services, perhaps reflecting the lagged impact of a slowing in the business sector.

Business leads the consumer

As we have long argued, business often leads the consumer. If companies grow cautious and cut back on investment and hiring, then ultimately the household sector will be undermined via weaker job creation and wage growth. In any case, PMI data show the weakness in manufacturing activity is spilling over to services. Indeed, while the contraction in factory activity has garnered most of the attention, the downtrend in the global PMI services activity measure since 2018 is equally concerning.

Regional breakdown

The global slowdown is more than just a trade-related contraction in manufacturing. It has crossed borders and displays regional nuances:

  • Brexit uncertainty has pushed the UK economy to the brink of recession, with little prospect of the Brexit fog lifting in the near term.
  • For China, in addition to the trade war, deleveraging policies in the property sector are weighing on activity.
  • A technical recession in Germany presents challenges for growth in the eurozone.
  • A consumption tax hike in Japan is set to take effect in October, risking a slowdown in consumption next year. Moreover, continuing uncertainty about the trade war and saturation in Olympics-related demands may also lead to a reduction in capital expenditure next year.
  • In the US, uncertainty over next year’s presidential election and the possibility that the business-friendly tax cuts and regulatory relief delivered under President Trump could be reversed by a new administration may encourage firms to maintain a cautious, wait-and-see attitude.

The above slew of idiosyncratic headwinds, on top of an ongoing trade war, leaves us relatively pessimistic on the outlook for global growth in 2020.

Chart 2: Global investment versus global consumption

Source: World Bank, NatWest Markets.

Central bank stimulus or government action?

Economic outlook and central banks are misaligned

Despite a deteriorating global economic backdrop, central bankers have not turned more aggressive in providing increased monetary stimulus. To the contrary, actions taken by monetary authorities all across the globe in September have generally disappointed. In fact, the ability for central banks to act aggressively – in order to stem the global growth slowdown – is limited. This is largely because interest rates are already low (or even negative in some countries). Also, the factors weighing on growth, such as Brexit and uncertainty around the US-China trade policy, cannot be resolved by central bank action. Given these constraints, we expect monetary policymakers will continue to move slower rather than faster in providing support.

Putting the onus on fiscal stimulus

Rather than getting more aggressive with their own actions, monetary policymakers are now looking to hand off the baton to national governments, putting the onus on fiscal stimulus. If global growth continues to decelerate over the coming year (as we expect), we believe that the need for more expansive fiscal policies will dominate the conversation.

More than a passing fad

As central bankers across the globe continue to move slowly, the call for more government action is clear. The use of fiscal policies to more actively manage economic demand is staging a comeback for the first time since perhaps the late 1970s. These fiscal measures might be varied in scale and across regions in 2020, but they will almost certainly be more than a passing fad.

The growth slump is here. And here to stay

Expect subdued global growth

We are relatively pessimistic about the economic outlook. As shown in the chart below, after advancing by 3.0% in 2018, we expect global GDP to increase by just 2.4% in 2019 (the weakest performance since 2009). At best, output is likely to remain around that subdued level throughout 2020.

Chart 3: Global Real GDP Growth: Actuals (2010-2018) and Forecasts (2019-2020)

Source: World Bank, NatWest Markets.

We are in the midst of a global growth slowdown – reflecting a myriad of factors, more than just a trade-related contraction in global manufacturing. We expect the downward trend in global growth to continue. From the US-China trade war to Brexit, from Germany to Japan – a slew of idiosyncratic headwinds leaves us pessimistic about overall global prospects in 2019 and beyond. With limited support available from central banks, we are waiting to see if fiscal policy emerges as a dominant source of economic stimulus.

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