The World Economy: Synchronized slowdown, precarious outlook

In the October World Economic Outlook, we are projecting a modest improvement in global growth to 3.4 percent in 2020, another downward revision of 0.2 percent from our April projections. However, unlike the synchronized slowdown, this recovery is not broad-based and remains precarious.

The weakness in growth is driven by a sharp deterioration in manufacturing activity and global trade, with higher tariffs and prolonged trade policy uncertainty damaging investment and demand for capital goods. In addition, the automobile industry is contracting owing also to a variety of factors, such as disruptions from new emission standards in the euro area and China that have had durable effects. Overall, trade volume growth in the first half of 2019 has fallen to 1 percent, the weakest level since 2012.

In contrast to extremely weak manufacturing and trade, the services sector continues to hold up almost across the globe. This has kept labor markets buoyant and wage growth and consumption spending healthy in advanced economies. There are, however, some initial signs of softening in the services sector in the United States and euro area.

Monetary policy has played a significant role in supporting growth. In the absence of inflationary pressures and facing weakening activity, major central banks have appropriately eased to reduce downside risks to growth and to prevent de-anchoring of inflation expectations. In our assessment, in the absence of such monetary stimulus, global growth would be lower by 0.5 percentage points in both 2019 and 2020.

Advanced economies continue to slow towards their lower long-term potential. Growth has been downgraded to 1.7 percent for 2019 (compared to 2.3 percent in 2018) and it is projected to stay at this level in 2020. Strong labor market conditions and policy stimulus are helping to offset the negative impact from weaker external demand for these economies.

Growth in emerging market and developing economies has also been revised down to 3.9 percent for 2019 (compared to 4.5 percent in 2018) owing in part to trade and domestic policy uncertainties, and to a structural slowdown in China.

The uptick in global growth for 2020 is driven by emerging market and developing economies that are projected to experience a growth rebound to 4.6 percent. About half of this rebound is driven by recoveries or shallower recessions in stressed emerging markets, such as Argentina, Iran, and Turkey, and the rest by recoveries in countries where growth slowed significantly in 2019 relative to 2018, such as Brazil, India, Mexico, Russia, and Saudi Arabia. There is, however, considerable uncertainty surrounding these recoveries, especially when major economies like the United States, Japan, and China are expected to slow further into 2020.

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