The wobbly end to 2018 in financial markets partly reflected a heightened fear that 2019 could be the year that the post-Lehman upswing comes to an end. A loss of economic momentum in Europe and an ongoing slump in China added to such concerns. Still, it is probably too soon for the party to end just yet.
Barring a major political misstep that causes an unnecessary downturn, recessions do not happen simply because the upswing is getting on a bit. Expansions do not die of old age. They end because excesses build up to such an extent in credit, prices, wages, production or investment that a cleansing correction is required. Across major parts of the advanced world, these excesses are not present so much so that correction is due for this year – or next year – already.
The US economy, which had built up a head of steam in 2018 thanks to a fiscal stimulus and regulatory reform, will likely slow to a more sustainable, but still strong pace. No longer immune to the risks elsewhere, the recent softening of US household and business confidence could temper President Trump’s aggressive approach to trade policy. Progress – or lack thereof – in resolving the US-China trade dispute could be the ultimate deciding factor for whether or not the global economy can regain some of its erstwhile momentum.
China’s problems are well known. As the single-party government fights the uphill struggle to meet its official growth target, it nurtures China’s long-term structural problems of excessive debt and capital misallocation. An ageing population and a naturally slowing underlying growth rate add to China’s challenges. Eventually, the Asian giant will have to face the music.
For now at least, its cash-rich authorities will do all they can to kick the problems into the long grass. Additional stimulus in response to further near-term softness will probably do the trick to stabilise growth and take China off the list of immediate concerns by the middle of the year.
In 2018, the eurozone economy was plagued by a series of risks that, one by one, stripped it of its stellar 2017 momentum: local political problems – think Italian populists and Brexit; trade wars that hit export-oriented producers; a sharp drop in exports to crisis-hit Turkey and other troubled emerging markets; and the mid-year spike in the oil price.
The good news is that, having largely fixed past excesses through a combination of painful austerity and supply-side reforms, the relatively young eurozone upswing is at last in line for a cleansing recession. If and when some of the risks fade, the current winter in the eurozone can make way for the green shoots of growth just in time for spring.
In the UK, after taking it to the eleventh hour, its parliament is still striving to do what it takes to avoid crashing out of the EU on 29 March without a deal in place for future UK-EU relations. By eliminating the hard Brexit risk and some of the uncertainty over the outlook for UK-EU trade, a Brexit deal would provide the UK with a sizeable medium-term boost.
If the UK avoids a hard Brexit, it can probably get back to near the top of the European growth league in 2019. Still, a hard Brexit presents the biggest near-term tail risk for the UK and the broader European economy.
After the disappointing 2018, markets are less optimistic about the global economic outlook compared to a year ago. As the political risks are significant, caution is justified. Without the underlying ingredients for a recession, however, seldom do such risks cause the economic cycle to turn by themselves. With a bit of luck, 2019 may turn out to be not so bad after all.
Kallum Pickering is senior economist at Berenberg Bank