Growth Slows But The Expansion Continues

US Overview

Growth Slows But The Expansion Continues

This summer's fears about escalating trade tensions, slowing global growth and an inverted yield curve have let up somewhat as we have moved closer to fall. Economic mood swings have become commonplace, however, with the trade standoff with China intensifying or deescalating with the speed of a tweet or offhand comment. Through all of this, the economy has shown great resilience. Growth has slowed, but remains strong enough to keep the unemployment rate from rising. The Federal Reserve also stands ready to provide further insurance against downside risks.

Trade tensions and their impact on global growth are expected to weigh on U.S. economic growth in coming quarters. Our forecast for 2019 real GDP growth was further shaved back 0.1 percentage point to 2.2%, while growth for 2020 has been reduced 0.5 percentage points to 1.8%. At the start of this year, we had growth at 2.6% in 2019 and 2.2% in 2020. Our first look at 2021, shows growth bouncing back to a 2.0% pace.

Our outlook continues to be shaped by our expectations that a truce will be eventually be found in the trade dispute, which will reduce some of the uncertainty hanging over the economy. Domestic demand is holding up well and continues to maintain strong momentum, given the higher levels of employment, solid income growth and strong position of overall household and corporate balance sheets. The inverted yield curve is a warning, however, that even the less globally exposed US economy is not immune to effects of slower global growth.

International Overview Growth

Easing Economic Growth, Easy Monetary Policy

Global economic growth has continued on its gradually slowing path as U.S.-China trade tensions have persisted, Brexit issues remain unresolved and monetary easing by several major central banks has yet to have much effect in terms of stabilizing and strengthening global economic activity. We now expect global GDP growth of just 3.0% in 2019, followed by 3.0% in 2020 and 3.2% in 2021.

While the underwhelming performance of the major economies is contributing to slower growth, some key emerging economies are also contributing to the less favorable outlook. In particular, China's economy remains on a slowing path, with export growth turning negative in U.S. dollar terms. Although China's central bank has eased liquidity in response, we believe that any monetary or fiscal policy response will largely be calibrated to cushion the growth slowdown, and thus see GDP growth slowing to 5.6% by 2021. India's economic growth has been very disappointing during the first half of 2019, though, unlike China, we do expect some recovery in Indian growth over time.

For the major economies, the ongoing easing of monetary policy by many G10 central banks remains an important theme, and Federal Reserve and European Central Bank policy announcements should be a particular focus in September. For the ECB we expect a package of easing measures, including a 10 bps cut to the deposit rate and a resumption of the ECB's asset purchases.

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