Five reasons why the world economy will slow down

  • The increase in interest rates by the Fed should begin to weigh on economic activity 
  • The main efforts to stimulate the economy through Trump’s fiscal policy are being made this year, but the effect will decrease in the coming years
  • China’s economic slowdown and trade tensions are two reasons that may cause the global economy to lose strength

By Funds Society, Madrid2019 has begun with a global economy that shows signs of strength from the cyclical point of view. However, there are several reasons that suggest that the relatively robust growth of the last two years will weaken. In this sense, the analysis of Hans Bevers, chief economist at Bank Degroof Petercam, points out that in the coming months we will see a slowdown in the world economy.

In the first place, Bevers points out, what he calls, the “absorption of overcacapity”. As he explains, “today, the massive overcapacity resulting from the Great Recession has greatly diminished. Estimates are not evident, but according to most international institutions, the production gap (the difference between real economic activity and potential economic activity) is almost completely met in most regions. Logically, this means that the margin of economic recovery has decreased considerably. “

Second, it points to the progressive tightening of monetary policy. After the rate hike made by the Fed in December 2018, for this year, it should continue on the same upward path. However, this increase in interest rates should start to weigh on economic activity. In Europe, for the time being, monetary policy remains extremely flexible.

According to Bevers, another element that will have a great influence on the progress of the global economy will be the effects of the withdrawal of the fiscal stimulus from the United States. “The US economy is in a phase of cyclical expansion. Confidence indicators soared, economic activity in the second and third quarters exceeded 3% and the unemployment rate dropped to historically low levels. The main efforts to stimulate the economy through Trump’s fiscal policy are being made this year, but the effect will decrease in the coming years, “he explains.

The last two reasons highlighted by Bevers are China’s economic slowdown and trade tensions. On China, explains that credit growth has decreased, which has not yet had a significant impact on the country; However, history shows us that the consequence has always been a slowdown in economic activity. Therefore, the Chinese government has already taken monetary and fiscal stimulus measures to anticipate the situation.

Closely related to China is the risk of trade tensions, which can slow global growth so much. “Of course, the threat of increasingly strong protectionism is not helping to stimulate growth. Trump imposed import duties on steel and aluminum, upset the G7 summit in Canada and promoted taxes on Chinese products worth 250 billion dollars. The future is not clear, but in any case, confidence indicators suggest a downward trend in the growth of world trade, “concludes Bank Degroof chief economist Petercam.