Investors have been digesting a number of important global developments this year: fiscal stimulus, trade tensions, divergence in global policy and currencies, and political developments. As 2018 heads into the fourth quarter, we’ve put together what we believe these developments mean looking forward to 2019. Overall, we expect global growth to slow in 2019 but remain strong enough to continue to support the broad global economy and markets. The United States will continue to be the growth engine for developed markets, although we see some upside for Japan, but the front-loaded impact of fiscal stimulus is likely to fade somewhat. In the meantime, we expect some emerging market (EM) headwinds to fade, allowing EM economies to enjoy a stronger pace of growth than developed economies. We do expect China’s growth to slow, but it will likely avoid a hard landing as the economy rebalances [Figure 1].
Developed economies are growing solidly, thanks to accelerating growth in the U.S. However, we expect the pace of growth in developed economies to slow going into next year as the Federal Reserve (Fed) tightens policy further, the impact of fiscal stimulus decreases, and Europe struggles with fiscal and political issues.
The U.S. has led the global economic recovery among developed economies since it entered expansion territory more than nine years ago. As the expansion reaches its later stages, we’ve emphasized that this leg of growth will be driven by the return of more traditional business cycle drivers. This year, we’ve seen this theme materialize in several economic trends.
– Tax relief and deregulation have lifted profits for U.S. firms, allowing them to invest in hiring and productivity, while deficit spending has increased the government’s contribution to growth.
– Growth in capital expenditures has accelerated over the past 12 months, and nonfarm productivity growth is at its highest level in over three years.
– The labor market has continued to tighten, as job growth remains solid and the unemployment rate hovers near a 48-year low.
– Wage growth and tax cuts have emboldened the U.S. consumer, evidenced by higher confidence and a pickup in consumer spending, which accounts for about 70% of gross domestic product.
– Inflation hasn’t threatened output or forced a change in monetary policy: Pricing and wage pressures remain manageable, allowing the Fed to continue on its path of gradual rate increases.
While the U.S. economy has hummed along, trade tensions have emerged as a modest risk to growth, although the impact on the data to date has been minimal, and we continue to believe that any negative impact will be small compared to the positive impact of fiscal stimulus. U.S. manufacturing health has led other global regions [Figure 2], but underlying data hint at supply chain constraints and a decline in international orders. U.S. firms surveyed recently have also noted labor shortages, rising input costs, and bleaker outlooks amid tariff uncertainty.
Overall, we expect the U.S. economy to continue expanding at a moderate pace, averaging a 3% growth clip in 2018 and slowing some in 2019, as strong underlying economic trends outweigh negative impacts from tariffs.