The global economic slowdown is happening and could spread to the United States next year.
The economies of Germany and Japan shrank in the third quarter, according to data published Wednesday, providing a sharp contrast to another quarter of strong US growth. In China, there are signs of a deepening economic malaise.
The reasons for the weak performance are varied, and economists believe that both Germany and Japan will dodge recessions by returning to growth soon. But the data underscore the major challenges faced by many of the world’s largest economies.
Germany’s economy shrank for the first time since 2015 in the third quarter. It was hit by new auto emissions testing procedures that slowed car sales and a decline in exports, partly due to the US-China trade war.
The car certification bottleneck is expected to ease, but economists say export growth could weaken further because of reduced demand from major trading partners such as Turkey, Russia and China.
Japan is much more accustomed to economic stagnation, and even recessions, but the outlook there is brighter. Its lackluster third quarter was caused by natural disasters, and economists expect consumer spending to spike this quarter ahead of a planned sales tax hike next October.
In China, the world’s second largest economy, new data Wednesday revealed weaker consumption growth, subdued confidence and disappointing credit growth. Economists expect the government to ramp up stimulus measures to mitigate the effects of a trade war with the United States.
“We believe the worse is yet to come, with growth slowing faster into spring 2019,” Ting Lu, chief China economist at investment bank Nomura, wrote in a research note.
And despite the prospect of a rebound in Germany and Japan before the end of this year, the global economy is also heading for a weaker 2019.
The International Monetary Fund expects global growth to slow to 2.5% in 2019 from 2.9% this year.
Risks clouding the global outlook include the trade war and the impact of US interest rate hikes on emerging markets. Italy, which is locked in a standoff with the European Union over government spending, could spark another crisis in Europe.
‘Significant slowdown’ in the cards
“We’re not thinking it will be anything like [the financial crisis], but there might be a significant slowdown next year. It’s very possible,” said Andrew Kenningham, chief global economist at Capital Economics. “We think the IMF is too optimistic.”
Some of the risk is already reflected in markets. On Tuesday, fears over weaker global demand helped push US oil prices down 7%, and major stocks indexes are 5% to 7% off their peaks.
One big question is which countries might serve as growth engines in 2019.
India’s economic growth has accelerated this year, hitting 8.2% in the most recent quarter. But as one of the world’s biggest energy importers, it has felt the pain of higher oil prices this year. The rupee is one of the world’s worst performing currencies in 2018, and that has further stoked inflation.
The United States could also move into the slow lane next year as the effects of tax cuts fade.
“We think the United States will slow quite significantly,” said Kenningham. “The fiscal stimulus is temporary and the Fed is raising interest rates.”