Five for ’19
January 11, 2019
It is tempting to start a new year with predictions about events over the next 12 months. Especially at a time of such uncertainty in Washington, we will not be so bold but will instead lay out some “known knowns” about the global economic outlook in the year ahead—i.e., things scheduled or likely to happen—and “known unknowns”—and questions we have as the year begins.
We categorize them in five main buckets:
Global Growth: Most forecasters expect global growth to slow in 2019. The causes are clear: tighter monetary conditions globally, a slowdown in China, and heightened trade tensions, to name a few. The fact that financial markets—which are supposed to be forward-looking and therefore aware of such “known knowns”—had such a dismal year-end in 2018 begs the question, “Are economic conditions significantly worse than we thought?”
Not yet, but the question takes us to the “known unknowns”: will the United States and China reach an agreement that avoids further escalation in the trade war? How bad is China’s debt problem, and how vulnerable is the Chinese economy? Will the European Union and United Kingdom reach a deal for an orderly Brexit? How “disruptively constructive” will the United States be in seeking to reform the multilateral system? These questions and the perception that official actors may have a higher risk tolerance than previously thought have heightened uncertainty, which—other things equal—depresses growth. It’s this downside risk, rather than the baseline scenario that financial markets have been processing and will weigh on growth until the underlying issues are resolved.
U.S. Monetary Policy: The Federal Reserve is continuing to exit from the exceptionally accommodative monetary policy that has been the norm since the global financial crisis. The fear is that the Fed will tighten too much and push the U.S. economy into recession. With unemployment below 4 percent, a strong December jobs report, and robust real wage growth, these fears seem overblown. Still, there is obvious tension between the White House and the Fed, as evidenced by a Christmas Eve tweet from the commander-in-chief: “The only problem our economy has is the Fed.” How this relationship evolves, and the effect it has on the Fed’s independence and direction of monetary policy, will remain a source of uncertainty.
Another “known unknown”—albeit one likely to play out over years and not months—is the market’s tolerance for U.S. fiscal deficits and debt. The non-partisan Congressional Budget Office estimates the U.S. federal budget deficit could reach $1 trillion this year. When will market participants insist on being compensated for the higher risk of lending to a highly indebted borrower? When will taxpayers tire of ever-larger portions of the nation’s revenues going to service the debt and force politicians to address the problem? When will the rest of the world insist we get our fiscal house in order? It’s doubtful any of these questions will be answered in 2019, but hope springs eternal.
Trade: This is one area where it’s safe to make predictions: 2019 is likely to be another year of drama on President Trump’s signature issue. The “known knowns” include a March 1 deadline for the 90-day U.S.-China talks launched by Trump and Xi Jinping in early December in Buenos Aires. The best outcome is likely to be a provisional deal that includes commitments by Beijing to purchase more big-ticket U.S. exports and marginally improve market access in China, but few expect Beijing to fundamentally overhaul its industrial policies. The year will also include congressional debate—and possible passage—of the U.S.-Mexico-Canada (USMCA) trade agreement and the launch—but unlikely completion—of bilateral negotiations with Japan and the European Union.
The latter highlights one of the biggest uncertainties on the trade front: will President Trump move ahead with threatened tariffs on imported automobiles and auto parts under the pending Section 232 national security case? The Commerce Department is scheduled to issue its findings in late February. Both Japan and the European Union have said in no uncertain terms that they will not negotiate if the White House goes ahead with the tariffs. Another major uncertainty is whether Trump will follow through on his threat to raise existing tariffs on $200 billion worth of imports from China, and/or impose new tariffs on the remaining $250 billion, if the bilateral talks end in failure. The biggest question of all may be whether the dispute-settlement mechanism at the World Trade Organization (WTO) will collapse late this year due to lack of a quorum if the Trump administration continues to block appointment of new judges.
Technology: Another thing we can predict with a high degree of confidence: technology will remain a central theme in 2019. The march of technology will continue, economies will become more productive, and productivity gains will make countries richer. How those gains will be shared, and what technological progress mean for societies, is much harder to predict. Related, evolving views on digital governance and data privacy will impact regulation and the business and competitive landscape for most technology companies.
Technology will also remain a central theme defining the U.S.-China relationship. The battle for technological leadership between the world’s two largest economies has put an asterisk next to the U.S. commitment to a free and open investment environment. Revised foreign investment screening and export control laws, especially as applied to “emerging and foundational technologies,” will weaken economic linkages between the United States and China. On the one hand, “great power competition” may actually spur new, even government-funded investment, in research and development in the United States, further propelling the United States as an innovation leader. A darker take, one described by the Eurasia Group as “Innovation’s Winter,” sees heightened economic competition and national security concerns as reducing “the financial and human capital available to drive the next generation of emerging technologies.” Which view dominates won’t be answered for years to come.
Global Economic Governance: The abrupt resignation of World Bank President Jim Yong Kim at the start of the year makes it certain that the reform of the Bretton Woods institutions will be a major theme in 2019. Whether the top positions in the World Bank and International Monetary Fund (IMF) will continue to be monopolized by Americans and Europeans, respectively, will be topic one. But the IMF also faces a perennial debate this year on the amount of financial resources it has to respond to economic crises around the world. And as mentioned above, the third pillar of the Bretton Woods system, the WTO, is likely to face severe governance strains this year.
A key question is how President Trump will approach his own participation in multilateral economic forums in 2019. Japan hosts the Group of 20 (G20) summit in Osaka in late June; will the U.S. president be a disruptive or accommodating force as Tokyo tries to broker agreement on a smorgasbord of global economic priorities, including quality infrastructure, regulation of cryptocurrencies, global health, and free trade? In a reversal of the usual order, France will host the G7 summit of advanced democracies in Biarritz in late August; unlike last year in Canada, will Trump be willing to at least feign solidarity with his closest allies and sign a joint communiqué? As with the other “unknowns” about international economics in 2019, only time will tell.
Note to Simon Chair readers: For the past seven years, we have been offering our thoughts on international economic policy through our publication “Global Economic Monthly” (known here affectionately as “the GEM”). Starting this month, we are launching a new periodical called “Simon Says” as the principal platform for our musings. These pieces will also be offered to the wider CSIS readership through the Commentary series published on the Center’s homepage. The GEM will live on as the monthly newsletter that it was originally intended to be, with recaps of Simon Chair activities and writings over the past month, upcoming events, and the latest news in global economics. We appreciate the growing readership that our publications have enjoyed and welcome your feedback on the new formats, as well as the ideas in them.
Matthew P. Goodman is senior vice president and holds the Simon Chair in Political Economy at the Center for Strategic and International Studies in Washington, D.C. Stephanie Segal is senior fellow and deputy director of the Simon Chair.
Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
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