Global Economy Forecast: Not As Bad For The U.S. As Headlines Imply

Image result for Global Economy Forecast: Not As Bad For The U.S. As Headlines ImplyThe global economy is growing moderately, but that’s a great deal better than news headlines imply. World GDP is likely to expand by 2.8 percent his year, inflation adjusted. That’s down from 3.4 percent two years ago, but still decent growth.

That forecast and the more specific projections below come from FocusEconomics. They add up country-level forecasts made by economists on the ground around the world. Their coverage is quite broad, and looking at a consensus figure avoids the risk of picking the wrong guru. Forecasts are not always right, of course, but consensus forecasts tend to work better than any particular forecast.

From a United States perspective, our exports are split almost equally to five different areas: Asia, the Euro area, Canada, Mexico, and everywhere else. Asia is a bit more than one-fifth of our exports, and Mexico a bit less, but this is a simple approximation.

The Euro Area is having the most severe deceleration. The entire global slowdown affects some of Europe’s major economies, especially export-heavy Germany. Protectionism around the world creates uncertainty that slows capital spending. Brexit is the gold medal winner of uncertainty, though Italy’s internal politics merit honorable mention. On the positive side, consumers are in good shape in most of Europe, supporting total spending. The European Central Bank is likely to provide some monetary stimulus soon. The Euro area is too developed to get “catch-up” gains, and their economies are sufficiently strong that they don’t have great hordes of unemployed people to put back to work. As a result, Europe’s upside isn’t too strong, but moderate growth is likely, 1.2% in 2020 according to the FocusEconomics consensus.

Asia is also growing at a slower pace. China is the center of the deceleration, with ripple effects in her nearby neighbors. Hong Kong, in particular, is slowing due to both the mainland deceleration and uncertainty about the island’s political future. China’s GDP growth is officially 6.2 percent, but increasing evidence of statistical manipulation argues for a lower number. The state is likely to pursue both fiscal and monetary stimulus, and the yuan has dropped to the lowest level in a decade. President Trump’s trade stance is certainly hurting Asian economies. The consensus forecast for Asia is 4.6% growth in 2020.

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The United States’ other two large trade partners are here in North America. Canada’s economy is decelerating this year. Part of the change is weaker expansion of the U.S. economy. Canada is also more depending on oil, and the drop in prices has cut back activity in that industry. However, mid-year reports show some rebound from the weak spring statistics. The FocusEconomics consensus sees a rebound next year to 1.7%.

Mexico’s economy weakened early this year. Industrial production declined, oil and gas activity dropped, and construction weakened. The lower oil prices, combined with political and management problems at the state-owned oil company Pemex, have hurt the energy sector. A partial rebound in 2020 is expected by the FocusEconomics consensus, back to 1.7% increase, but not to the strong growth pace of a few years ago. Trade policy uncertainty continues.

The U.S. economy is further constrained by recent gains in the value of the dollar on foreign exchange markets, now the highest in decades (when exchange rates are weighted based on the volume of international trade with the U.S.). A portion of the impact of the stronger dollar is felt immediately, particularly for undifferentiated commodities that sell in global markets. The other portion of the exchange rate impact is spread over a couple of years. This portion applies to goods that are branded or hard to replace, such as those in complex supply chains. Eventually, though, the impact of the strong dollar will depress U.S. exports.

Commodity prices have edged down worldwide on the economic weakness. Oil, in particular, is $16 a barrel cheaper than in October 2018. Commodity prices tend to reflect expectations for global economic conditions. For commodities, especially oil and minerals, supply changes gradually but demand—based on economic activity—changes more rapidly. Thus the recent price declines reflect widespread expectations of slower economic growth on Planet Earth.

Resolution of President Trump’s trade wars would be a major step toward steady economic growth around the world. It seems likely—but not at all certain—that Trump and President Xi in China both want successful resolution, and each are willing to compromise to get it. In Trump’s case, the timing of a deal may depend on his reelection campaign’s estimate of greatest electoral benefit. Economists studying how an economy impacts presidential elections have found that voters do not evaluate a re-election candidate based on a four-year track record. Instead, votes tend to be based on the change in the economy over the preceding 12 months. If the Trump re-election managers know this, and if a cynical approach to diplomatic relations is called for, then look for a new trade deal to be reached in October or November, 2019.

The global economy is sound enough to keep U.S. export sales up, though probably not to boost our exports in the coming year. But some reacceleration of global growth, plus no further gains for the U.S. dollar, would provide a nice climate for eventual increases in our sales to foreign customers.

[“source=forbes”]