TD Economics: Quarterly Economic Forecast - 'Peak Uncertainty'

On Thursday, TD Economics published its Quarterly Economics Forecast, entitled "Global economy: Peak Uncertainty." Below is the executive summary of that report. The full report can be found here.


Summary

The slowdown in global activity has intensified since November, particularly in Europe and East Asia. This is occurring due to a mix of temporary and more insidious influences that are muddying the waters on the underlying trend. Global economic growth is expected to track roughly 3.2% in 2019, which is a slight mark-down from our previous estimate of 3.4%.

Europe has the misfortune of a collision of two downdrafts. The first includes temporary production disruptions related to new environmental standards. This influence should slowly unwind in 2019. The second downdraft, however, has the potential to be more detrimental to the outlook. Early data signals point to an underlying malaise in core European economies that likely reflects the layering of elevated trade uncertainty, slowing foreign demand, and related declines in consumer and business sentiment. This bears closer monitoring for evidence of stabilization.

VIDEO: Bharat Masrani on TD's earnings, the economy and his broader outlook on 2019

Peak global uncertainty and slowing economic activity have caused policymakers to pivot towards greater patience. As a result, last year's global stock selloff has largely reversed, and other measures of financial market stress are easing. This relative calm in the market can easily be disrupted if the economic data consistently disappoint and/or political tensions reignite global uncertainty.

Political trade uncertainty remains the biggest near-term risk to market sentiment and global growth prospects. Despite some optimism recently expressed on a China-U.S. trade compromise, there is little scope for a quick resolution on the weightier topics of corporate malfeasance. Furthermore, a China deal would not remove trade risks altogether. The U.S. administration will then pivot to the EU as its next target. The U.S. continues to wield the threat of auto tariffs to enhance its position in trade negotiations this year.

U.S. economy slowing, but resilient

Economic activity decelerated at the close of 2018, but remained on steady footing at 2.6% in Q4. For the year as a whole, the economy likely expanded by 2.9%. These estimates remained consistent with our December forecast cycle.

The 2019 quarterly GDP pattern carries through a softening trend. This has been a main feature of our forecast for some time, as fiscal and monetary stimulus wanes. The 2019 forecast is tracking a tad softer than in December, at 2.4% (with Q1 carrying an extra weight from the government shutdown). Real GDP in 2020 is projected to be 2.0%, as fiscal stimulus shifts to fiscal drag.

Consumer spending has been a pivotal source of strength in 2018, despite December weakness due to a perfect storm from equity volatility and the government shutdown. Persistent strength in the job market still offers upside risk in this area of our 2019 consumer forecast profile.

U.S. consumer spending has been a pivotal source of strength in 2018, despite December weakness due to a perfect storm from equity volatility and the government shutdown. Persistent strength in the job market still offers upside risk in this area of our 2019 consumer forecast profile.

In contrast, slower global growth and softer business confidence will manifest in softer business investment in our upcoming forecast. Likewise, housing investment has remained soft, as we expected. The recent drop in mortgage rates should offer a helping hand. 

READ: TD Economics - Beyond Silicon Valley

Fiscal policy has not left the landscape as a downside risk. Although a second government shutdown has been averted, a bigger hurdle will present itself at the end of 2019, when Congress needs to reach a new spending deal. The alternative would result in damaging automatic spending cuts taking effect. All else equal, this would significantly compromise our 2020 real GDP growth estimate, bringing it to 1.3%. Given recent difficulties within Washington in agreeing to funding levels for the current fiscal year, this risk is as important as ever.

In the wake of a larger diffusion of softening economic momentum across countries and persistent downside risks, the Federal Reserve has shifted to a wait-and see stance. We removed rate hikes from our forecast, and any further move is highly conditional on solid economic momentum ultimately feeding into higher inflation expectations, which is currently lacking.

Canada: consumers set a slower tempo

The near-term outlook is unquestionably soft. Broad based weakness within domestic demand has left the economy treading water. Real GDP in Q4 2018 was a mere 0.4% and a slight contraction of output is expected in Q1 2019. However, more positive growth dynamics are expected to take hold thereafter, as oil production curtailment reverses course and labour markets remain healthy.

READ: TD Economics - The only thing we have to fear…is fear itself

The near-term outlook is unquestionably soft. Broad based weakness within domestic demand has left the economy treading water.

Near-term pressures constrain our 2019 GDP forecast as a whole to 1.2%, although acceleration to 1.8% is anticipated in 2020. This outlook should be sufficient to keep the unemployment rate near the 5.9% mark.

Our greatest current concern resides with the resiliency of Canadian household spending. In recent months, there have been larger than expected disappointments in consumer spending, particularly within purchases that tend to be more hitched to home sales and interest rates. We had always built in a “soft deleveraging” cycle into the forecast, and recent data appear to be playing forward this narrative, but perhaps with more vigour than is preferred. We are looking for confirmation in the data that the solid job market and more benign path for interest rates will remain supportive to the outlook.

Contributing authors: Beata Caranci, Chief Economist; Derek Burleton, Deputy Chief Economist; James Marple, Director & Senior Economist; Fotios Raptis, Senior Economist; Leslie Preson, Senior Economist; Brian DePratto, Senior Economist; James Orlando, Senior Economist.

Beata Caranci

Senior Vice President and Chief Economist

TD Bank Group