The World Bank is the latest international body to downgrade growth prospects

In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the latest World Bank forecasts:

  • Following growth downgrades by the IMF, the European Commission and the OECD, the World Bank has also reduced its growth projections.
  • Global growth is now expected to be 2.6% (compared with 2.9% in January), before inching up to 2.7% in 2020 (2.8% in January).
  • Within advanced countries, the downgrade to the Eurozone’s growth in 2019 was notable (to 1.2%, down from 1.6%).
  • Within emerging market and developing economies (EMDEs), there were no changes to China and India for 2019, but downgrades to Russia, Brazil, Mexico and, especially, Turkey.
  • The World Bank attributed the weaker-than-expected growth to “…heightened policy uncertainty, including a recent re-escalation of trade tensions between major economies, …accompanied by a deceleration in global investment and a decline in confidence.”
  • When analysing global economic developments, it is salutary to note just how concentrated economic activity is in the world’s largest economies.
  • Concerning GDP in market exchange rate (MER) terms, the US and China together comprised nearly half of the world’s GDP in 2018. Including the next five largest economies (Japan, German, the UK, France and India) accounted for over 70% of world GDP, whilst the top 16 economies accounted for over 90%.
  • Even GDP in purchasing power parity (PPP) terms, activity is highly concentrated, though less so. China and the US still accounted for a third of global output in 2018, whilst the top 10 accounted for nearly 64%. India was the third largest economy, followed by Japan, Germany, Russia, Indonesia, Brazil, the UK and France.

Concerning Central Bank Watch:

  • The ECB tweaked its latest GDP forecasts, after March’s major growth downgrade.
  • The ECB also tweaked its “forward guidance”. The key ECB interest rates are now expected to remain at their present levels “at least through the first half of 2020”. In March, rates were expected to be unchanged “at least through the end of 2019”.
  • Fed Chairman Jerome Powell President hinted (4 June) that the central bank was open to cutting interest rates this year if trade conflicts slowed US economic growth, leading to market speculation of a cut in September – or even as early as June (the next rate-setting meeting is 18-19 June).
  • The weaker than expected May Employment Report added to “rate cut” sentiment in the US.

Concerning UK data:

  • The annual growth of consumer credit continued to slow in April, when it was 5.9%, compared with March’s 6.4%.
  • The mortgage market seems to be holding up well. Net lending for mortgages grew by 3.3% (YOY) in April, unchanged from March, whilst the number of mortgage approvals for house purchase, which give an indication of future mortgage lending, picked up in April.
  • Markit/CIPS surveys suggested manufacturing and construction contracted in May, though services were firmer.

There was an important political development. The Prime Minister stood down as Conservative Party leader on 7 June and the contest for the new leader begins on 10 June. The winner is expected to be announced in the week beginning 22 July.

Ruth Lea said, “Global growth has clearly lost momentum this year, especially in the Eurozone. However, none of the major international forecasting bodies is projecting recession – just subdued growth. It is against this disappointing global background that the UK’s performance must be assessed. On the evidence so far, UK growth has slowed in 2019Q2 but there should be growth, albeit modest.”

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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