Hannah Audino: Hello and welcome to an all new episode of our Economics in Business podcast. My name is Hannah Audino, and I am back to continue this podcast with Laura Gatz after a career break, traveling around South America, but I am very excited to be back.
I am joined with Barret Kupelian today, a senior economist in our team. He has authored our annual predictions Global Economy Watch, and we will be talking today about the key themes we expect next year and their implications for the global economy.
Thank you for joining me today Barret.
Barret Kupelian: Hi Hannah, thanks for having me – and welcome back.
Hannah: Thank you very much.
So, you have three key themes for 2019, can you tell a little bit about these please?
Barret : Yes. So, three themes as you said. The first one is that global economic growth will slow down. The second one is that workers and wages will come to the fore and in some large advanced economies, wage growth bills take over. And the third one is that trade conflicts around the world will deepen.
Hannah: Can you elaborate on the global growth theme?
Barret : I think, it’s fair to say that the global economy, and in particular some of the advanced economies, enjoyed the miniboom between the end of 2016 and early 2018, but that phase is now over as more cyclical highs and lows in the economy sort of elapsed. We now expect the G7 economies to return to their long-term growth rates.
Hannah: Do you have any examples of this?
Barret: Well, the US is a classic example, where the boost from the fiscal stimulus is gradually expected to fade, and higher interest rates may gradually dampen consumer spending, and a strong dollar is expected to pose a drag on their exports.
We expect economic growth rate to slow down from an estimated 2.8 in 2018 to around the 2.5 to 2.3 mark in 2019. In the Eurozone, uncertainty relating to global trade tensions, Brexit, Italy, as well as the fact that the European Central Bank is expected to offer less support to the economy, is gradually expected to slow economic growth there as well, below the 2% mark.
Just to give you an emerging market example as well. In China, we expect growth there to be slower relative to 2018. Although the government will try to ensure that the slowdown is minimal, the impact with US tariffs and the ongoing negotiations as well, as well as the need to control private debt levels are also going to result in a deceleration in its growth rate.
Hannah: The second theme on workers?
Barret: Yeah, workers and wages is the other theme we identified. If we just cast back to the last couple of years, in 2017 and 2018, most of the stories, in advanced economies in particular, centred around job creation. In 2018, for example, 4.5 million jobs got created in the G7, half of that in the US, but as unemployment rates are now hitting their structural floors in many economies, we expect the new stories to start emerging and that is the story of wage growth.
For businesses, this means that they need to be much more mindful of their cost base, and for central bankers, this means that they need to be much more mindful of inflation levels increasing.
Hannah: Finally, trade wars?
Barret : Yeah trade wars, we expect trade wars to continue in 2019. That is likely to generate uncertainty for policy makers and businesses. Policy makers will try to assess the impact of potential tariffs on growth rates and inflation, while business will attempt to mitigate the impact of tariffs on their supply chains and customers. But, the main focus of trade tensions is likely to be centred around the US and the US and China as well, but there is a risk that this could escalate into a wider trade conflict, and as we always recommend to our clients, businesses should and would in this sort of situation plan for different scenarios.
Hannah: Which country does the US have the largest trade deficit with?
Barret : Actually, if you look at the US’s biggest bilateral goods trade deficits, the first one in China, and the US is currently negotiating with China on tariffs. The third one is Mexico, and the US has entered into a new updated joint trade deal with Canada. The fourth one is Japan and the US is starting negotiations there. The second largest one is the EU, which could be an area that might be of focus in 2019. Also, note that I’ve focused on the goods deficit, so that’s tangible goods. If you look at the service side of things, there is a different story developing there, where the US is the world’s largest services exporter, but that doesn’t get talked about that much.
Hannah: Moving on to your predictions, let’s talk about the UK first. Now obviously there is still considerable uncertainty regarding outcome of Brexit, as we speak, but what can we say about the outlook for the UK next year?
Barret : As you say, it’s very fair comment. The UK’s situation is currently very fluid, and keeps on changing very fast, which makes our job of making projections about the future quite difficult, but in our main scenario projections, we expect UK economy to grow on an average rate of around 1.5% for 2019 and 2020.
Now crucially, we are assuming that a withdrawal agreement of some sort is agreed with the EU, and that there is a transition to a new trading arrangement in the future. But, even if this materialises, we still think that the UK is at risk of dropping from its 5th largest economy rank in the world to the 6th largest economy rank in the world losing the spot to France.
Now, it won’t be the first time this has happened. The UK and France have switched positions historically, and that’s because they have similar levels of development and population, but the factor that usually changes this is the exchange rate. A lot of what happens in 2019 would ultimately depend on the strength of the Euro and the strength of Sterling. But, I need to stress that these comparisons are in market exchange rates. If you start ranking economies on a much more sophisticated basis, one of which is the purchasing power parity basis, and that takes into account the different price differentials across the different economies that the UK becomes the 9th largest economy in the world, but I understand the appeal of using market exchange rates for comparisons, because businesses trade in market exchange rates.
Hannah: Sure, now moving on to the US, you predict that the US deficit is going to move back in to the 1 trillion dollar zone?
Barret : Yeah we do. I think, there are wider more interesting points, particularly before economists, and that point is this. Typically when economies are booming, and the US is booming right now, you would expect the government’s deficit to start shrinking, and that’s because the government doesn’t need to support the economy as much, but also because on the receipt side of the things with the government, the government receives more money from the private sector, which is growing in fast rates. But that is at odds with what the US is currently experiencing, because in the US, government spending has increased, particularly on the defence side of things, but also because government’s receipts aren’t as vibrant or they are not growing as strong as they would have had the tax cuts not come through.
Now you have a situation where the US is expected to have the worse government deficit out of all of the advanced economies in 2019.
Hannah: What will the implications of this be?
Barret : That has particular implications for the federal reserve, because if the government continues to stimulate the economy, then that leads to the building up inflationary pressures, and the job of the federal is to keep inflationary pressures in check.
Potentially what the federal could resort to, is to increase the interest rates, so its policy rate, at a faster pace than expected. Now, that in turn comes with risks as well, because if you increase your interest rates at a too fast of a pace, then you risk slowing down the economy too much and then you could end up hard landing the US economy.
Hannah: Now an accelerating theme over recent years has been declining workforces in G20 countries, what are your predictions regarding this going forward?
Barret : The World Bank expects seven out of the G20 economies to experience declining workforces, but I think for me the real story lies in Eastern Europe, where a lot of economies there, both EU and non-EU member states are already experiencing declining workforces. So, an example of a non-EU state is Ukraine, where the workforce is expected to shrink by almost 1.5% in one year, and that’s equivalent to half a million people. An EU member state example is Bulgaria, where we are expecting the workforce to shrink by an equivalent percentage, but that’s about 60 to 70 thousand people.
Hannah: What are some of the key economic complications of this, and then what can governments do to try and reverse these trends, and reduce the adverse impact on society?
Barret: Well, I think, governments need the help and coordination of the business community, and both the sectors, both the governments and the business community need to act in tandem to deal with these issues.
I can see three things the governments and businesses can do to deal with the issue of shrinking workforce. The first one is increasing the participation rate of your labour force. That basically means getting more people of working age back into the labour force. This can be done using a three pillar approach, and that can be integrating all the workers better into the workforce, so that they don’t fall out of the workforce, they don’t retire early, becoming better at integrating, younger workers into he workforce, and then finally also integrating women in the workforce. So, Japan is a classic example, where in the past five years, they’ve done quite a successful job in integrating women into the wider workforce.
Hannah: Just as quickly on this point, listeners if you are interested, you can read more on these reports – our Women in Work Index report and Youth Employment Index, where we rank economies based on how successfully they have been in these areas.
What about getting more out of your existing workforces?
Barret: That’s the second point, which is getting more out of your existing workers or basically increasing your productivity levels, but that takes time to do. You need a quite nuance approach, joint approach, where the government and business work together, and they ensure that their hard infrastructure stuff, like roads, airports, etc.; as well as soft infrastructure, like education, are well integrated to meet future needs, but that’s quite tough to do, and it takes time.
The third approach, which some people would say is the easier approach, but it’s the much more controversial approach, is to increase immigration, because the more the workers you have the higher your productivity capacity and the faster your economic growth rate.
I think, it would be useful if I give an example from Eastern Europe given that we started with the focus on Eastern Europe. Hungary is a good example where they managed to increase the participation rate of its workforce. They haven’t been that successful at increasing productivity rates, as I said it’s a difficult thing to do, and as we know currently the authorities are quite averse to immigration. What is the end result I suppose is the key outcome people are interested in. Well, we have a low unemployment in Hungary. Actually, Hungary has one of the lowest unemployment rates in the European Union, at less than 4%, and then if you look at wages, because of these almost shortages in workers, Hungary has one of the fastest wage growth rates in the European Union, and the wage growth rates, they are growing at faster rates than productivity, which is in an optimal situation to be in.
There is other Eastern European economies, Armenia being an example, where they have been much better at integrating immigrants in the economy and they have been able to reap those benefits.
Hannah: I think lets end on a more positive note. So, let’s talk about some of the fastest growing economies next year.
Barret: I think, the one fast growing economy that people need to watch out for is India, well there are too many reasons why I am saying that, because India will be growing at quite fast growth rates, at around 7% we think, but also because India is a massive country, it holds more than a billion people, so it does make a difference to a lot of people’s lives.
Hannah: Great, thank you so much Barret, that’s been really interesting. Although it sounds that the global economies may face a few bumps in the road next year.
Listeners, if you would like to learn more, head to our global economy watch website by following the link in the description, and for other topics please subscribe to stay tuned for our upcoming episodes.
Now, just before we go, Barret, what’s been your best economic news story of the year?
Barret: Well, the best one I will go with is the classic one on poverty, which is that the percentage of people living in extreme poverty dropped to a new low of 10% in 2015, which is the latest available data point. So, that basically means that the number of people living on less than almost 2 dollars a day fell to around 730 million people, which is still large number, but that’s on a declining path.
Hannah: China has had a big role to play in this?
Barret: Yeah, that is correct. China has had a very big role in reducing the number people in extreme poverty over the past decade or so. Just to give you a couple of examples of how fast China is growing, how important it has become to the global economy. Twenty years ago in 1998, the Chinese economy grew by about 67 billion dollars, in 1998 price terms. So, that basically means adding an economy the size of the Czech Republic to the global economy in 1998. But fast forward that to 2018, now in 2018 we estimate that the Chinese economy grew by 1.4 trillion US dollars. The 1.4 trillion US dollars compared to 67 billion dollars, now that is the equivalent to adding an Australia to the global economy. So, you can really see the change there.
Hannah Audino: Yeah, absolutely.
Well, thank you so much, and wishing you all happy 2019.
Economist, PwC United Kingdom
Tel: +44 (0)207 212 8746
Senior Economist, PwC United Kingdom
Tel: +44 (0)20 7213 1579