Global Growth Prospects. What Has Changed? – By Colin Vella

What are the prospects for the coming year and beyond? One could start by referring back to the global growth trajectory since the global financial crisis in 2008. A decline in GDP growth of 1.73% was in fact recorded as a result of the crisis, following which (and naturally) GDP growth rebounded by 4.31% in 2010, to then hover between the 2.5 to 3.2% mark (Source: World Bank). This means that the recently revised GDP growth figures by the International Monetary Fund (IMF) earlier this week to around 3.5% in 2019 and 3.6% in 2020 still makes both figures among the highest when compared to the post-crisis highs.

The forecasted figures mentioned above for 2019 and 2020 are only modestly lower than what had been forecasted in last October’s World Economic Outlook. However, back in October it is worth noting that such figures had already been revised lower. It would be interesting to understand what has caused a change in global growth expectations once again.

Perhaps, you may have heard of the ongoing trade war between the US and China (sarcasm). This was highlighted in the IMF’s report published earlier this week as one of the main factors contributing negatively to the global growth expectations over the years to come. The increases in tariffs enacted earlier in 2018 by both the US and China have had their contributing part and will continue to have as negotiations evolve. Moreover, the report also makes reference to Germany’s introduction of new automobile fuel emission standards as well as concerns revolving Italy’s sovereign and financial risks which in turn impaired domestic demand. One other contributing factor to these downward revisions was also the result of a general weakening financial market sentiment throughout the fourth quarter of 2018, as well as a deeper than previously projected contraction in Turkey.

Other substantial risks which could further increase any potential downside revisions to the global growth forecasts include a “no-deal” Brexit scenario and a slower growth in China than currently being forecasted. Recent GDP figures show that China has registered its slowest annual growth in almost 30 years. Nevertheless, it is worth highlighting the fact that today’s share of Global GDP by China is also way larger than it used to be some 30 years ago. Making reference to one particular economic metric, Purchasing Power Parity (PPP), which in theory is the most comparable and fair across different countries, China became the world’s largest economy back in 2013. The PPP is a metric whereby the necessary adjustments are taken into account such as to adjust currencies in different countries in a manner where a basket of goods and services in the respective countries is worth the same.

Apart from recording some 10-fold increase in GDP per person (PPP adjusted) since 1990, statistics also show that since the financial crisis of 2008, China accounted for approximately 45% of the world’s growth in GDP (Source: The Economist).

Shifting back to what lies ahead and why forecasted GDP growth had to be revised downwards once again, much of the headwind revolves around concerns in developed countries rather than emerging ones. Namely, the IMF highlighted significant downward revisions within the Euro area as a result of production difficulties in Germany (the auto sector and lower external demand), as well as Italy’s financial risks and the connections between the two. As Jamie Dimon, CEO of JP. Morgan Chase, highlighted earlier this week, if Brexit and trade between the US and China go south and the shutdown goes on for longer, that will obviously only lead to further potential downward corrections over the months to come.

It is interesting to assess what the US government shutdown means and how this is (not could) affecting US growth. Since 1976, following the introduction of the Congressional Budget and Impoundment Control Act, which established the federal budget process, the government has shutdown a total of 21 times. Half of such shutdowns lasted a weekend only. However, some of the remaining half lasted for quite a few days, with data by the Congressional Research Service indicating seven of which lasted for over 10 days. The record for the longest shutdown in US history was broken on January 12, having reached the 22-day mark, with such record lost by the Clinton administration back in 1995-6 (21 days). 

Ironically enough, the US Federal Reserve which is in need of fresh data in order to keep its policy decisions in sync with the US economy, is being impacted directly as a result of the shutdown. Why? Any data relating to economic growth, consumer spending, jobs and inflation is all being halted as a result of departments responsible for the collection of such data being closed. For instance, the Commerce Department, the unit that produces GDP figures with Q4 data due at end of month, has been closed for over a month. Likewise, data relating to personal income and spending due on the 31st is likely to be delayed. Such data is one of the Fed’s preferred gauge for inflation, indicating how far off prices are form the central bank’s target of 2%.

A recent article in the financial times also indicated how such a shutdown is actually beginning to hit economic growth. Economists are forecasting that quarterly growth could be impaired between 0.5 to 1% should the shutdown last any longer, although it would also be likely to witness a bounce back as the government reopens. Estimates by White House economists also suggest that the impact of some 380,000 federal workers who are not working, could curb the US GDP growth by 0.08 percentage point each week the shutdown carries on. Similarly, lost work by federal contractors could shave off some further 0.05 percentage point.

At the time of writing, senators were supposed to vote on Thursday on bills from both parties such as to bring the government shutdown to an end, although it was still unclear whether either measure can pass. What is certain is that the longer it lasts, other than directly impairing economic growth, the more will it directly impact consumer economic sentiment and potentially lead to Global Rating Agencies such as S&P and Fitch having to re-evaluate the country’s credit rating. The 10-year Treasury yield has since the early dip of around 2.60% at beginning of the month, bounced higher to around 2.73%, which could have potentially justified the relatively stable if not stronger US dollar since then. However, as the US deadlock stretches any further, markets will perhaps need to reassess the situation and take action on their dollar positions. Let us hope for light at the end of the tunnel not to give any reason for markets to reverse the positive direction they have embarked on since the beginning of 2019.

Concluding, although it is easier said than done, whatever lies ahead my word of advice is to always sit tight and to avoid any frenetic moves or decisions. Always focus on your long-term objectives and strategic allocation when viewing your overall invested portfolio.

This article was prepared by Colin Vella, CFA, Head of Wealth Management at Jesmond Mizzi Financial Advisors Limited. This article does not intend to give investment advice and the contents therein should not be construed as such. The Company is licensed to conduct investment services by the MFSA and is a Member of the Malta Stock Exchange and a member of the Atlas Group. The directors or related parties, including the company, and their clients are likely to have an interest in securities mentioned in this article. Investors should remember that past performance is no guide to future performance and that the value of investments may go down as well as up. For further information contact Jesmond Mizzi Financial Advisors Limited of 67, Level 3, South Street, Valletta, on Tel: 2122 4410, or email [email protected]

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