World economic growth is slowing down and could result in a synchronized recession.

Author: Luca Ventura
Project Coordinator: Binh P

The global economy is growing at its slowest pace since the financial crisis 10 years ago according to the latest edition of International Monetary Fund's October 2019 World Economic Outlook report due in part to the proliferation of international trade wars.

Presenting the study, the new managing director of the IMF, Kristalina Georgieva, could not have painted a clearer picture of the situation we are in today: “Two years ago, the global economy was in synchronized upswing. Measured by GDP, nearly 75% of the world was accelerating. Today, even more of the world economy is moving in sync. But unfortunately, this time growth is decelerating. To be precise, in 2019 we expect slower growth in nearly 90% of the world.”

How fast is the deceleration of global economic growth? Fast: global growth is forecast at 3% for 2019, down from 3.6% in 2018 and 3.8% in 2017. Uncertainty has severely dented investment and demand for capital goods and raises concerns of whether and when weakness in manufacturing may spill over into the services sector. According to the IMF, the cumulative effect of trade wars could amount to a loss of around $700 billion in growth by 2020, or about 0.8% of global GDP. In the meantime, China’s economy is moving at the slowest pace in 30 years and is likey to fall below 6% growth in 2020. The US will grow this year a modest 2.4% and will likely slow down further the next to 2.1%. GDP forecasts for advanced economies in Asia have been revised downward due to fallout from trade tensions. Elsewhere, Latin America’s growth has been downgraded to a measly 0.2% from 1.4% predicted only a few months ago. South Africa is slowing down the recovery in the entire sub-Saharan region. Lower crude oil prices and geopolitical tensions in the Middle East and Central Asia brought overall growth to just 0.9% from 1.8% last year. In Europe, an automotive industry slump contributed to putting the brakes on economic activity and rising unemployment.

Region 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 10-Year Avg. GDP %
World 5.4 4.3 3.5 3.5 3.6 3.5 3.4 3.8 3.6 3.0 3.8
Advanced economies 3.1 1.7 1.2 1.4 2.1 2.3 1.7 2.5 2.3 1.7 2.0
Euro area  2.1 1.6 -0.9 -0.3 1.4 2.1 1.9 2.5 1.9 1.2 1.4
Major advanced economies (G7) 2.8 1.6 1.4 1.4 2.0 2.2 1.5 2.3 2.1 1.6 1.9
Advanced economies excluding G7 and euro area) 5.9 3.4 2.2 2.5 2.9 2.3 2.4 2.9 2.6 1.6 2.9
European Union 2.1 1.8 -0.4 0.3 1.9 2.5 2.1 2.8 2.2 1.5 1.7
Emerging market and developing economies 7.4 6.4 5.4 5.1 4.7 4.3 4.6 4.8 4.5 3.9 5.1
Commonwealth of Independent States 9.6 7.6 7.0 6.9 6.8 6.8 6.7 6.6 6.4 5.9 7.1
Emerging and developing Europe 4.4 5.8 3.0 3.1 1.9 0.8 1.8 3.9 3.1 1.8 3.0
ASEAN-5 6.9 4.7 6.2 5.1 4.6 4.9 4.6 4.9 5.0 5.3 5.3
Latin America and the Caribbean 6.2 4.6 2.9 2.9 1.3 0.3 1.3 0.3 1.1 0.2 2.0
Middle East and Central Asia 4.9 4.6 4.9 3.0 3.1 2.6 5.0 2.3 1.9 0.9 3.3
Sub-Saharan Africa 7.1 5.3 4.7 5.2 5.1 3.1 1.4 2.6 3.2 3.2 4.1

Source: World Economic Outlook, October 2019.

Whether this period of synchronized slowing growth will result in a global recession remains unclear. The IMF warns that the threat of a world economic downturn will remain real until three key issues are resolved:

  • Truces and mini-deals between the United States and China will not do, especially while the U.S. engages in trade disputes with other powers.
  • Uncertainties are bound to hang over the UK and its trading partners even after the final details of Brexit are worked out.
  • Violence and tensions in the Middle East have engulfed the entire region, increasing the economic and social malaise.

When does the IMF expect to see a return to growth globally? Not any time soon. Growth in the advanced economies is projected to remain stuck at an anemic 1.6% or slightly less percent for several years to come. Emerging markets and developing economies could start bouncing back in 2020, gradually rising from the current overall output of 3.9% until it reaches 4.8% in 2023 (assuming a synchronized world recession does not occur first).

When it comes to emerging markets, it is worth paying attention to yet another red flag raised by the latest World Economic Outlook report: inequalities within regions. The IMF examined economic performance in 20 advanced countries over the last few decades, and found that subnational disparities have risen since the late 1980s.  These gaps in per-capita GDP are persistent, widening over time and can be even larger than differences between countries.

Poor regions all exhibit similar characteristics. They tend to be rural, less educated and specialized in traditional sectors such as agriculture, manufacturing and mining. Advanced regions are generally more urban, educated and specialized in high productivity growth service sectors, such as information technology, finance and communications. Adjustment to adverse shocks is slower and has longer-lived negative repercussions on economic performance in poorer regions than in the rest of the country, supercharging a corollary of other undesirable effects ranging from high unemployment and a reduced sense of personal well-being to shorter average lifespans.

How does these inequalities come about? Technology shocks resulting from declines in the relative costs of machinery and equipment, the IMF says, raise unemployment in regions that are particularly vulnerable to automation, which—more often than not—are those already behind. "National policies that reduce distortions and encourage more flexible and open markets, while providing a robust social safety net, can facilitate regional adjustment to adverse shocks, dampening rises in unemployment," the report suggests. Most interestingly, trade shocks in the form of greater import competition in external markets do not appear to help bridge differences in the labor market and spur inclusive growth contrary to the claims of supporters of tariffs.