The IMF downgrades growth prospects again, especially for the Eurozone

In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the IMF’s April forecast:

  • World growth was downgraded to 3.3% for 2019 (3.5% in January), but growth was still expected to pick up to 3.6% in 2020. The IMF commented that such a recovery was “precarious” and risks remained “tilted to the downside”.
  • US growth was expected to be 2.3% for 2019 (2.5% in January), slowing to 1.9% in 2020 (1.8% in January), reflecting the fading effects of President Trump’s fiscal boost.
  • Growth in the Eurozone was expected to be a disappointing 1.3% in 2019 (1.6% in January, 1.9% in October), before picking up to 1.5% in 2020 (1.7% in January).
  • There were especially sharp downward revisions to the growth projections for 2019 for Germany (down to 0.8% from 1.3% in January, 1.9% in October) and Italy (down to 0.1% from 0.6% in January, 1.0% in October).
  • The IMF downgraded UK growth to 1.2% for 2019 (1.5% in January and October) and 1.4% for 2020 (1.6% in January).
  • China’s growth slowed in 2018 to 6.6% (from 6.9% in 2017) following “a combination of needed regulatory tightening to rein in shadow banking and an increase in trade tensions with the USA”. It is expected to be 6.3% in 2019 and 6.1% in 2020.

Recent German data have been mixed:

  • Industrial production (26% of GDP, compared with 14% of GDP in the UK) fell 0.4% (MOM) in February, to be 2.0% down (YOY).
  • Manufacturing new orders dropped by 4.2% (MOM) in February, following a 2.1% (MOM) decline in January. The February fall overwhelmingly reflected weaker overseas orders, with domestic orders slipping by just 1.6% (MOM), whilst foreign orders were 6.0% (MOM) down.
  • Exports did fall in February but so did imports. Moreover, exports have held up reasonably well over the last 12 months, despite some slowdown in export markets.
  • Markit surveys indicated that manufacturing output (23% of GDP) was declining, but construction (5% of GDP) and services (68% of GDP) were growing.

Concerning UK data:

  • The economy appears to be holding up fairly well. GDP rose by 0.3% (QOQ) in the three months to February, to be 1.6% higher (YOY).
  • The trade (goods and services) deficit widened in the three months to February, acting as a drag on growth.

On Brexit:

  • At the emergency summit of EU leaders on 10 April, the UK and EU27 agreed to a further extension of Article 50 negotiations, with the end date of 31 October 2019. If a “deal” is ratified in the meantime, the extension will end.

Ruth Lea said, “The IMF’s April forecast was cautious, with growth downgrades and an emphasis on the risks to the world economy. The downgrades for the Eurozone were especially notable, especially for Germany and Italy. The lower growth expectations for the UK could well be on the pessimistic side, especially as the economy seems to be holding up quite well.”

Ruth Lea CBE has been Arbuthnot Banking Group’s Economic Adviser since 2007 and was an Independent Non-Executive Director from 2005-2016.

Ruth co-founded Global Vision in 2007 and was Director until 2010, and was previously the Director of the Centre for Policy Studies (from 2004 to 2007), Head of the Policy Unit at the Institute of Directors (from 1995 to 2003) and Economics Editor at ITN (from 1994 to 1995).  Prior to ITN she was Chief UK Economist at Lehman Brothers, Chief Economist at Mitsubishi Bank, worked for 16 years in the Civil Service (the Treasury, the DTI, the Civil Service College and the Central Statistical Office) and was an economics lecturer at Thames Polytechnic (now the University of Greenwich).

She is the author of many papers and articles on economic issues and has been a Governor of the London School of Economics and Council Member of the University of London.

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