Brexit, 'stagflation' and the US-China trade war: Your global economic outlook in 2019

The world economy continues to expand but there are signs that growth has peaked as the US, European and Asian economies slow, according to Keith Wade, chief economist and strategist at global investment manager Schroders.

"We expect trade tensions between the US and China to persist well into next year, with higher tariffs creating a more "stagflationary" environment of lower growth and higher inflation," comments Wade.

Schroders forecasts that global economic growth will slow to 2.9% in 2019, from an estimated 3.3% in 2018. It sees US GDP growth at 2.4% in 2019, as the boost from tax cuts fades while interest rates move higher and the effects of a prolonged trade war with China are felt.

In the eurozone, Wade says Schroders forecasts growth to slow further in the first half of 2019 due to the effects of the trade war between the US and China.

"Our forecast has GDP growth slowing from 1.9% in 2018 to 1.6% in 2019.

"Assuming Brexit goes smoothly, the UK should see an improvement in growth in 2019; we forecast GDP growth of 1.4%," he says.

For Japan, Wade says they see GDP growth of 1% in 2019, little changed from 2018.

The picture in emerging markets is mixed, with China and the wider Asian economies under pressure from trade tensions and lower demand in the technology sector.

"We forecast Chinese growth to slow to 6.2% in 2019 from 6.6% in 2018. Latin America may be a bright spot within the emerging markets as Brazil's economy looks set to strengthen now that the elections are over," he says.

Despite cooler economic growth and lower oil prices, Wade says that Schroders' global inflation forecast has increased to 2.9% for 2019. This, he explains, is a result of higher inflation in the emerging markets, where currency weakness is pushing up import prices.


Wade says three more interest rate increases are anticipated from the US Federal Reserve, taking the Fed funds policy rate to a peak of 3% in June 2019.

On Wednesday, the Federal Reserve said they forecast two rate hikes in 2019. 

"For the Bank of England, we look for two rate rises next year, although this is dependent on a smooth exit from the EU with a transition period for the economy," Wade says.

Meanwhile, the European Central Bank (ECB) is expected to end its asset purchase programme in January 2019 and to raise interest rates in September. Although euro zone growth is expected to be weaker next year, Wade said it will still be above trend and sufficient for a central bank keen to start raising interest rates from ultra-low levels.

Weaker dollar

The combination of a peak in US rates and the start of tighter monetary policy elsewhere could result in a weaker US dollar in 2019.

Although the difference between US interest rates and those elsewhere will remain in favour of the US, he says that currency markets are likely to have priced this in already.

"We think currency markets will increasingly focus on the growing budget and current account deficits in the US, which will drag the currency lower," says Wade.

For emerging markets, Wade says a weaker dollar could be the silver lining in the outlook.

"Although an escalation of the trade wars and the prospect of slower global growth does not bode well, a weaker dollar would help ease pressure on the region. In 2018, rising US interest rates and a stronger dollar squeezed dollar borrowers outside the US, put pressure on emerging market currencies and forced local central banks to tighten monetary policy," he explains.

"Dollar strength also weakened commodity prices and hurt world trade. In 2019, there is scope for some of these factors to unwind, thereby easing financial conditions and supporting emerging market assets."

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