Global outlook for 2019: Time for business to take stock

More to worry about than Brexit …

Sitting in the UK it is very easy to believe that Brexit is the only economic risk to focus on. This inward-looking view is dangerous as it risks UK businesses and consumers failing to adjust for changes in the global economy.

After a couple of years of improvement in the global outlook, growth began to slow in 2018 and the latest EY ITEM Club view is that we will see global GDP slow from 3.0% in 2018 (the level it also was in 2017) to 2.8% in 2019. The main drivers of this slowdown are:

·      The impact of global trade tensions and increased tariff measures, especially the US-China trade dispute, and concerns over globalization more generally. We do appear to be heading to a new paradigm - world trade growth slowed markedly during 2018, halving to a 3% annual growth rate, and it seems this may be a sign of weaker trade performance in future.

·      A continuing slowdown in China appears likely, even though a sharp downturn should be avoided. While China’s exports have held up well so far, Chinese authorities have already taken several measures to support growth as tariffs bite, and to counter a continued slowdown in domestic demand and activity. Additional measures – such as further reductions in banks’ reserve requirement ratio, greater support for infrastructure, and further cuts in taxes and social security contributions – are very possible. This suggests GDP growth of 6% in 2019, compared to 6.5% in 2018, but continuing easing of the rate of expansion.

·      Slowing growth in the emerging markets due to a combination of the impact of higher interest rates in the USA, which are making dollar dominated debt more expensive to service, and slowing demand from China.

·      Continuing low growth in Japan, which is expected to be around 1% in 2019.

·      A gradual slowdown in the European Union as the stimulus from faster global growth disappears. The failure of policy makers to drive the much talked about structural reform may also limit future growth.

… and even if it is not a crisis …

Although global GDP growth is expected to slow, 2.8% is still a reasonably healthy pace for 2019. The risk of recession in advanced economies still appears low for 2019, and we expect falling unemployment rates but little upward pressure on inflation in the US and the eurozone. Lower oil prices will also limit inflation in the developed world and while the rate of price rises may accelerate in many emerging markets, it should do so only moderately.

There are arguably more risks to the downside than opportunities for a better than expected performance. Notably we could see:

·      Tighter monetary policy, declining liquidity, high debt levels and lofty asset prices could cause a more pronounced financial market sell-off that results in a sharper-than-expected slowdown;

·      Higher than expected volatility caused by capital flows from emerging markets to countries normalising monetary policy;

·      A sharper slowdown due to faster increases in trade protectionism;

·      A harsher than-expected slowdown in China; and

·      A crisis in Italy causing problems across the Eurozone.

… it is time to think longer-term.

While the central case is for a gradual rather than a significant negative shock, it is nevertheless the case that future trends are emerging that do require businesses to consider their long-term strategies.

The outlook is uncertain with productivity performance across countries remaining significantly weaker than was the case before the 2007/8 crisis. Debt levels are also high (and in many cases increasing) across public and private sectors and questions are increasingly being asked about key economic policies such as globalisation, immigration and market liberalisation. However, the signs indicate that growth will remain low by historic standards for the foreseeable future and the policy approaches we have become used to may be subject to change.

Beyond the immediate developments, it is also the case that technological change and demographic patterns will impact the economy. In much of the West and China, demographics are a risk to growth as the population ages while the impact of technological change remains to be seen.

Against this backdrop, many businesses need to fundamentally evaluate their strategies, operating models and geographic footprints against the likely economic and social and political outlooks. While global supply chains and offshoring of production may have made sense in the past, it may now be that more reshoring of activity or greater moves to regional supply chains will be more appropriate. Equally, target markets may also be changing as the relative balance of growth between countries shifts.

A slowdown, but not a collapse, offers a window to review and act in a reasonably stable environment. Better to be prepared and have time to change, rather than being forced into a panic response.