Since the beginning of the year, the emerging economies have been under pressure from financial markets. The reasons for a reappraisal of emerging countries’ risk are numerous including, rising US interest rates, a rallying dollar, a trade war, political tensions and sanctions. “Predictably, the countries depending most on the rest of the world for their financing, particularly Argentina and Turkey, have been hit the hardest”, notes Anton Brender, chief economist at Candriam. These pressures gradually spilled-over to other emerging countries.
The risk reappraisal, which has made it necessary for the most vulnerable countries to rebalance their current accounts, will slow down their growth. Brender highlights that global growth should not be impacted too heavily, however, as “the economies concerned are relatively small”.
The trade war is a more serious threat to the global economy. The US’s introduction of higher customs tariffs is an unprecedented move in the post-war period. If the rise in tariffs were to be applied to all Chinese imports and extended to include the automobile sector, the average level of US tariffs would be close to that last seen in the 1930s. Such a reversal would clearly jeopardise global growth. The disruption of global production chains, in which China plays a pivotal role, would also impact the most developed economies.
US: towards the longest expansion in the post-war era
Despite these headwinds, the US economy – driven primarily by household spending – remains dynamic. The rise in the dollar and the worsening global growth outlook will of course weigh on US exports, while higher interest rates are already curbing residential investment. However, solid job creations, coupled with a gradual acceleration in wages, will nonetheless continue to underpin consumption, allowing growth to be around 2.5% in 2019.
With a divided Congress, the forthcoming budgetary hurdles – the 2019 budget vote, the raising of the debt ceiling and the increase in caps on discretionary spending (the “fiscal cliff”) – are again sources of uncertainty. The Federal Reserve should nonetheless secure the soft landing of an economy whose unemployment rate is close to all-time lows and where signs of financial fragility among firms are emerging.
Eurozone: caught between commercial tensions and political uncertainty
Growth in the eurozone clearly stalled during the third quarter. This was attributable to temporary factors such as difficulties in the automobile sector, higher fuel prices and a sharp downturn in exports to Turkey. Over the next few months, however, the fall in the oil price should restore household purchasing power and activity in the automobile sector should normalize. On average over 2019, GDP growth should be somewhere around 1.5%.
“The next few months will continue to be shaped by the Brexit negotiations and the showdown between the Italian government and the European Commission”, says Florence Pisani, head of Economic Research at Candriam. In the longer term, intra-regional growth divergences will serve as a reminder that, in the words of Jacques Delors, the EMU is “lame”: “although we have implemented monetary union, we have neglected economic integration, in the belief that one will naturally lead to the other.” notes Florence Pisani.