Global Economic Slowdown Looms IMF, World Bank and OECD Update Global Economic Forecasts

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International monetary institutions, rating and ranking organizations are repeatedly reviewing and updating forecasts and predictions about the global economic outlook for the current fiscal year 2019. They are unanimous in their viewpoint that global economic growth remain slow and face some sort of slowdown like situation in coming months. But at the same time some organizations have also expressed some sort of optimism about the possible maintenance of global economic growth pace in result of positive outcome from China, US trade talks as well as US, EU car tariff issue resolution. At the same time some economists also bind high expectations about European economic growth in result of some sane outcome from Brexit deal between the EU and UK.

The International Monetary Fund (IMF) has cut global growth forecasts for 2019 and 2020, admitting recent weakness in economic data around the world was likely to persist. IMF reports in an update to its World Economic Outlook, that global economic expansion has weakened. Escalating trade tensions remain a key source of risk to the global economic outlook, the authors note, with potential triggers including a no-deal withdrawal of the UK from the EU (Brexit) and a greater-than-envisaged slowdown in China. Publications from the World Bank and Organisation for Co-operation and Development further highlight risks in low-income countries and the role of digitalization in widening inequalities.

The Fund says the global economy is now projected to grow at 3.5% in 2019 and 3.6% in 2020, respectively 0.2% and 0.1% point below projections from October 2018. Global growth has been revised downward because of negative effects of tariff increases enacted in the US and China, and softer momentum in Europe in the second half of 2018.

In advanced economies, growth is projected to slow from an estimated 2.3% in 2018 to 2.0% in 2019 and 1.7% in 2020. Growth in the Euro area is set to moderate from 1.8 % in 2018 to 1.6 % in 2019 and 1.7 % in 2020. Growth rates have been marked down for many economies: Germany (due to soft private consumption, weak industrial production following the introduction of revised auto emissions standards, and subdued foreign demand); Italy (due to weak domestic demand and higher borrowing costs as sovereign yields remain elevated); and France (due to the negative impact of street protests and industrial action).

For the UK, the IMF notes that there is substantial uncertainty around the baseline projection of about 1.5% growth in 2019-20, because of Brexit negotiations. The growth forecast for the US remains unchanged: growth is expected to decline to 2.5% in 2019 and further to 1.8% in 2020. Japan’s economy is set to grow by 1.1% in 2019 and to 0.5% in 2020.

For the emerging market and developing economy group, growth is expected to decline to 4.5% in 2019 before improving to 4.9 % in 2020. Growth in emerging and developing Asia will go from 6.5% in 2018 to 6.3% in 2019 and 6.4% in 2020. China’s economy will slow due to the combined influence of needed financial regulatory tightening and trade tensions with the US, while India’s economy is expected to increase in 2019, benefiting from lower oil prices and a slower pace of monetary tightening than previously expected.

In Latin America, growth is projected to recover over the next two years, from 1.1% in 2018 to 2.0% in 2019 and 2.5% in 2020. The downward revisions are due to a downgrade in Mexico’s growth prospects in 2019-20, reflecting lower private investment, and a more severe contraction in Venezuela than previously anticipated. These downgrades are partially offset by an upward revision to the 2019 forecast for Brazil, where the gradual recovery from the 2015-16 recession is expected to continue. According to IMF, Argentina’s economy will contract in 2019 as tighter policies aimed at reducing imbalances of softening oil prices that caused downward revisions for Angola and Nigeria. The IMF notes that the numbers for the region mask “significant variation” in performance, with over one-third of sub-Saharan economies expected to grow above 5% in 2019-20.

Furthermore, outside the US, industrial production has decelerated, particularly of capital goods. Global trade growth has slowed to well below 2017 averages. Beyond escalating trade tensions and a deeper-than-envisaged slowdown in China, IMF’s Economic Outlook notes ongoing declines in trust of established institutions and political parties as a risk of a somewhat slower-moving nature. It adds that an overarching challenge for the global community is mitigating and adapting to climate change to lower the likelihood of devastating humanitarian and economic effects from extremes in high temperatures, precipitation and drought.

The IMF argues that the main shared policy priority for countries should be to resolve “cooperatively and quickly” their trade disagreements and the resulting policy uncertainty, rather than raising barriers further and destabilizing an already slowing global economy. Across all economies, measures to boost potential output growth, enhance inclusiveness, and strengthen fiscal and financial buffers in an environment of high debt burdens and tighter financial conditions are imperatives, the Fund says.

Also in January, the World Bank Group released its ‘Global Economic Prospects’ report. Subtitled ‘Darkening Skies,’ the publication notes that debt vulnerabilities in low-income countries are rising. While borrowing has enabled many countries to tackle important development needs, the Bank explains, the median debt-to-GDP ratio of low-income countries has climbed, and the composition of debt has shifted toward more expensive market-based sources of financing.

Speaking on the report’s launch, Ayhan Kose, World Bank, argued that designing tax and social policies to level the playing field for formal and informal sectors, as well as strengthening domestic revenue mobilization and debt management, should be key priorities for policymakers.

The Economic Outlook by the OECD, published at the end of November 2018, adds to the global picture by showing how, as digitalization spreads, the divide between high-skill, low-routine jobs and low-skill, high-routine work continues to grow, posing the risk of further widening inequalities. The Outlook says strengthening product market competition would not only prompt wider diffusion of new technologies, thereby raising productivity growth, but also help transfer output and efficiency gains to wages.

Even the S&P Global, the ratings agency, has painted a grim picture for the real estate sector in Dubai, with a meaningful recovery in property prices expected only after 2022. At a presentation to journalists in the Dubai International Financial Center, S&P analyst Sapna Jagtiani said that under the firm’s base case scenario, the Dubai real estate market would fall by between 5 and 10 percent this year, roughly the same as the fall in 2018, which would bring property prices to the levels seen at the bottom of the last cycle in 2010, in the aftermath of the global financial crisis.
On the real estate side we continue to have a very grim view of the market. While we expect prices to broadly stabilize in 2020, we don’t see a meaningful recovery in 2021. Relative to the previous recovery cycle, we believe it will take longer time for prices to display a meaningful recovery, she said. S&P’s verdict adds to several recent pessimistic assessments of the Dubai real estate market. Jagtiani said that conditions in the other big UAE property market, in Abu Dhabi, were not as negative, because Abu Dhabi never did ramp up as much in 2014 and 2015 as Dubai. S&P does not rate developers in the capital.

She added that a stress scenario could arise if government and royal family related developerssuch as Emaar Properties, Meraas, Dubai Properties and Nakheel which have attractive land banks and economies of scale, continue to launch new developments. In such a scenario, we think residential real estate prices could decline by 10-15 percent in 2019 and a further 5-10 percent in 2020. In this case, we expect no upside for Dubai residential real estate prices in 2021, as we expect it will take a while for the market to absorb oversupply, she said S&P recently downgraded Damac, one of the biggest Dubai-based developers, to BB- rating, on weak market prospects.

However, Jagtiani said that, despite the “significant oversupply” from existing projects, several factors should held stabilize the market: Few, if any, major product launches; improved affordability and “bargain hunting by bulk buyers; and a resurgence of Asian, especially Chinese, investor interest in the market. Jagtiani also said that government measures such as new ownership and visa regulations and reduction in government fees could help prevent prices falling more sharply, as well as increased economic activity related to Dubai Expo 2020, which is expected to attract about 25 million visitors to the emirate.

The outlook on property was part of a challenging assessment of the credit-worthiness of the emirate. In our view, credit conditions deteriorated in Dubai in 2018, reducing the government’s ability to provide extraordinary financial support to its government related entities (GREs) if needed, S&P said in a report. The negative outlook on Dubai Electricity and Water Authority (DEWA) partly reflects our concern that a real estate downturn beyond our base case could out increased pressure on government finances, the report said.

It pointed out that about 70 percent of government revenues come from non-tax sources, including land transfer and mortgage registration fees, as well as charges for housing and municipality liabilities, as well as dividends from real estate developers it controls, like Emaar and Nakheel. S&P was generally comfortable with the credit ratings of the emirate’s banking system, which has an estimated 20 percent exposure to real estate. Banks in the UAE tend to generally display a good level of profitability and capitalization, giving them a good margin to absorb a moderate increase in risks, the report said.