28 August 2018
Bob Cunneen, Senior Economist and Portfolio Specialist
* The countries collectively known as the Group of Seven (G7) consists of the US, Canada, the UK, France, Germany, Italy and Japan. BRIC refers to Brazil, Russia, India and China
The global economy entered 2018 with strong growth prospects. Low global interest rates and US tax cuts suggested that the global economy could accelerate from the 4% annual growth pace in late 2017 (blue line). However this year has seen the promise of stronger global growth confront a tougher reality. Concerns about President Trump’s ‘trade wars’, the Federal Reserve (Fed) raising US interest rates and emerging market problems are now casting a shadow over global growth.
A key leading indicator for global growth are the Purchasing Managers’ Indexes (PMI). Notably the manufacturing PMIs for US, China, Europe and Japan have all moderated over recent months (red line). Manufacturers appear to be concerned that this trade war between the US, Europe and Asia will penalise export opportunities. The Fed’s strategy to raise US interest rates is also tightening financial conditions. A particular concern for emerging markets such as Argentina and Turkey is that higher US interest rates and the rising US dollar are increasing their foreign debt burdens. These emerging market problems are now feeding back into the major economies by curtailing demand for their manufactured goods.
So the global economy enters the final stages of 2018 with fading prospects. The early resolution to this trade war and stabilisation in emerging markets are necessary to ensure that the global growth profile stays positive for next year.
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