Summary
- The global growth slowdown is reinforced within a number of indicators, including commodity prices and non-U.S. business sentiment indicators. However, the downshift in the actual data remains largely consistent with our past forecast. Peak global growth occurred in the first half of the year at about 4%. It has since stepped down to roughly 3.2% and is expected to hover just above that mark at 3.4% in the year ahead. This figure still depicts a pace that is slightly above the global economy’s long-term running speed. We embedded a modest downgrade to our 2019 global forecast to capture the anticipated negative investment and export drag from ongoing global trade uncertainty and in a nod to the growing balance of downside risks.
- Although the selloff in global risk assets is outsized relative to the magnitude of the economic slowdown, it likely reflects the build-up of unresolved global risks, coupled with a delayed adjustment in growth expectations from lofty levels. There are few signs that the economic expansion is nearing an end, but negative sentiment can become self-fulfilling. We remain vigilant in monitoring signals to that end: yield curves, business confidence, risk-assets, and labor market conditions.
- Despite the 90-day ceasefire agreement by U.S. and China on an escalation in their trade war, policy uncertainty and tariff escalation (both with China and others) remains a pressing near-term threat to global growth prospects. There was a clear rolling over of international business optimism and trade volumes when the U.S. turned threats into action by imposing steel and aluminum tariffs in March. Escalation since then risks scarring new global investment.
- The temporary ceasefire is inherently unstable. The U.S. has set a high bar in addressing politically difficult issues related to China’s record of business practice malfeasance. This leaves a strong chance that an escalation in tariffs has only been deferred, but not eliminated.
American economy passes high water mark
| Economic & Financial Forecasts | |||
| 2018F | 2019F | 2020F | |
| Real GDP (annual % change) | |||
| Canada | 2.1 | 1.8 | 2.0 |
| U.S. | 2.9 | 2.5 | 1.9 |
| Canada (rates, %) | |||
| Overnight Target Rate | 1.75 | 2.25 | 2.50 |
| 2-yr Govt. Bond Yield | 2.05 | 2.50 | 2.55 |
| 10-yr Govt. Bond Yield | 2.20 | 2.80 | 2.85 |
| U.S. (rates, %) | |||
| Fed Funds Target Rate | 2.50 | 3.00 | 3.00 |
| 2-yr Govt. Bond Yield | 2.80 | 2.95 | 2.95 |
| 10-yr Govt. Bond Yield | 3.00 | 3.15 | 3.15 |
| WTI, $US/bbl | 60 | 65 | 66 |
| Exchange Rate (USD per CA | 0.76 | 0.78 | 0.79 |
| F: Forecast by TD Economics, December 2018; Forecasts for oil price, exchange rate and yields are end-of-period. Source: Bloomberg, Bank of Canada, U.S. Federal Reserve. | |||
- The U.S. economy remains the growth-leader among the G7, by a wide margin. Tax cuts and fiscal stimulus pushed the expansion to an average of 3.5% over the second and third quarters of this year. We expect real GDP growth of 2.9% in 2018, consistent with our last forecast. The economy should moderate next year to 2.5% and 1.9% in 2020, as the impulse from fiscal policy wanes and higher rates feed through.
- Consumer spending has been the main thrust of this recent outsized GDP growth. It has averaged 3.7% in the past two quarters, on the back of impressive job market strength. Data so far in the fourth quarter suggest moderation to a still-healthy 2.9% pace.
Above-trend growth should keep the Federal Reserve biased towards further rate hikes. We expect the upper limit of the fed funds rate will reach 3.00% in 2019. This would also mark the peak in the rate-cycle within our forecast, coming to rest within the Fed’s neutral range of 2.50% to 3.50%. - We are certainly not out of the woods on sabre rattling regarding further trade actions. The U.S. has agreed to hold off on raising the tariff rate on $200 billion in Chinese imports from 10% to 25% for 90 days. But, this does not erase the negative impact on business sentiment and the potential knock-on effects to investment in affected sectors. We did not include the direct impacts from a step-up in the tariff rate in this round of our forecast, but we are injecting some negative judgement around exports and investment due to the persistence of policy uncertainty.
- Fiscal policy remains a key source of uncertainty within the forecast. If a divided Congress cannot reach a deal on extending the current spending caps by the end of 2019, automatic spending cuts would take an additional 0.5 percentage points off 2020 growth. This is not embedded within our forecast.
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