Global economic outlook: Down but not out

11 December 2018 | Markets and Economy


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Will the global slowdown lead to a recession? Will higher interest rates and rising debt levels choke economic activity? In this short video, Vanguard economists discuss the outlook for economic growth around the world.  

Leo Schulz (moderator): The title of our Vanguard Economic and Market Outlook for 2019 is ‘Down but not out’. My name is Leo Schulz. I have with me Dr Peter Westaway, chief economist and head of investment strategy at Vanguard Europe, and senior economist, Alexis Gray.

Peter, Down but not out - what is your thinking behind that title?

Peter Westaway (chief economist and head of investment strategy, Vanguard Europe): So the main message of our outlook this year is that global growth is going to slow, but contrary to some of the more doom-laden predictions that we hear from many commentators, we’re not expecting a recession, so that slowdown involves growth falling back slightly from the rate of 3.5% this year, and that is mainly driven by a slowdown in the United States where some of the growth this year around fiscal policy stimulus and loose monetary policy, that is gradually abating.

In China, growth is expected to slow slightly, but still stay around 6%, that growth rate is being sustained by increasing policy stimulus, and then here in Europe, we’re expecting growth to be around 1.5%, again, partly because of stimulus from the ECB.  

Leo Schulz: Alexis, a softening picture, but not that gloomy. Why the talk about recession?

Alexis Gray (senior economist, Vanguard Europe): Well, the talk about recession is because risks, at the moment, are more elevated than normal, particularly in the United States where we’re at a slightly later stage in the cycle than other parts of developed markets, and we remember, of course, that monetary policy has already been tightening in the U.S. for several years, and that is a headwind. And you add to that, of course, that the U.S. and China have been in this trade war this year, so there are some headwinds there.

Leo Schulz: What about emerging markets, Alexis?

Alexis Gray: Well, emerging markets also face headwinds, in particular, as I mentioned, with rising interest rates in the U.S., many emerging markets borrow at cheap rates in U.S. dollars, and so when the Fed raises rates, that could potentially cause problems in some emerging countries.

Leo Schulz: Peter, might it be the case that policymakers have left raising interest rates too late?

Peter Westaway: Possibly, although to be fair it is quite difficult to see what else they could have done, because growth simply hasn’t been strong enough until now. But the irony is that the policy of very accommodative monetary policy - low interest rates and QE - may well be building up risks in the system by encouraging more debt than perhaps is sustainable. It is the case that, at the moment, global debt is higher than it was at the time of the financial crisis, and so there are certain countries, in particular China, where there is a risk that that debt could unravel. It could cause problems for growth.

Leo Schulz: So it would suggest that slightly tighter conditions are, in fact, appropriate.

Alexis, could you bring us a bit closer to home? What about conditions in Europe?

Alexis Gray: In Europe, the biggest domestic risk is this building tension between the Italian government, which was recently elected, really as a populist – a sign of populism in Italy - tensions between Italy and the European Union. The government now is pushing to raise spending and break the rules that the E.U. plays by, and we could see, perhaps, some penalties imposed and a spill-over into the financial markets.

Leo Schulz: Peter, Alexis, thank you both very much.

As far as growth prospects go, the global economy is down but not out with growth continuing at decent levels, but a number of downside risks to occupy the minds of investors in 2019.

Thank you for watching.

Investment risk information:

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested. Past performance is not a reliable indicator of future results.

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