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In its latest World Economic Report, the International Monetary Fund (IMF) has lowered its growth forecast, concluding that the ten-year phase of rapid growth might come to an end. In addition to certain regional factors, the trade dispute instigated by US President Donald Trump and the rising debts of some countries are contributing factors, the IMF emphasized while presenting the highly anticipated report at the outset of its annual meeting.

For 2018 and 2019, the IMF expects a slight dampening of global economic growth to 3.7 per cent respectively; a step down from the 3.9 per cent growth the IMF economists had predicted in their spring forecast.

The estimates for Austria, on the other hand, have been raised. For 2018, the IMF expects a gross domestic product (GDP) increase of 2.8 per cent, where recent forecasts saw it at 2.6 per cent. The estimate for 2019 was raised from 1.9 to 2.2 per cent. However, the 2018 forecast for Austria’s most important trading partner and Europe's largest economy, Germany, was lowered from 2.5 to 1.9 per cent, and the IMF economists expect this figure to remain unchanged in 2019.

IMF experts view the international trade dispute as a major risk factor for the global economy and financial markets. An escalation in the trade conflict could “undermine investor confidence and also damage economic growth,” according to the IMF report on financial stability.

Trump’s economic policy only yields short-term benefits for US

According to experts, the USA itself will reap benefits from Trump’s economic policy in the short term only. For this year, the fund still expects the US economy to grow by 2.9 per cent due to the tax relief granted by Trump’s government. However, the IMF forecast for 2019 was lowered from 2.7 to 2.5 per cent and is expected to drop significantly further to 1.8 per cent in 2020.

Trade policy could turn out to be a boomerang in this regard, as the IMF expects negative effects from US import tariffs on Chinese products starting in 2019. The procyclical economic policy of the USA, consisting of tax relief and protectionist measures, could also become a risk, as the financial boosters are largely debt-financed.

The IMF experts also warn that growth in many developing and emerging countries is heavily reliant on debt. Public and private debt accumulate to 182 trillion dollars, around 60 per cent more than before the financial crisis in 2007. In addition, developing countries are facing further challenges from the US interest rate policy. If the US Federal Reserve continues to raise interest rates in an effort to prevent Trump’s economic policy from overheating the US economy, the resulting US dollar increase could pose a problem for emerging markets, which often take out loans in USD.

IMF chief Christine Lagarde therefore issued an urgent warning about the impending consequences of Trump’s policy: the trade dispute is slowing down world trade and thus endangering the achievement of important sustainability goals. The IMF experts are also concerned about the consequences of the trade conflict for the global distribution of wealth. Lagarde called for country-level measures to improve the trade system, as history shows that import restrictions hurt everyone, especially poorer consumers.

Disclaimer:

Forecasts are not a reliable indicator for future developments.

Ten years ago, the investment bank Lehman Brothers’ insolvency escalated the financial crisis, driving the global economy to the brink of collapse. Although the worst consequences of the crisis have been averted and stock markets have risen again, the after-effects of the crisis can still be felt today.

The crisis on the US real estate market began with mortgage banks increasingly granting badly secured real estate loans. These were securitised and placed with investors as a form of investment. When US housing market prices plummeted, rendering many mortgages worthless, global interdependencies caused a cascade. This reached its peak with the bankruptcy of the renowned US investment bank Lehman Brothers in September of 2008.

The Lehman bankruptcy made huge waves in the stock markets; distrust of the financial system spread rapidly around the globe. World trade saw a significant dip, plunging many countries into a recession.  In the US, the economy shrank for four consecutive quarters, and unemployment rose to its highest level since the 1980s.

Bailout packages and rate cuts saved banks and markets from collapse

Governments and central banks responded to the crisis with immediate emergency measures. The US as well as many European countries provided massive government aid and bailout packages, saving numerous banks and insurers from collapse. A few weeks after the Lehman bankruptcy, the world’s premier central banks lowered their key interest rates in a theretofore unseen concerted effort.

With further cuts, the central banks lowered their key interest rates to zero in order to re-ignite loans and investments, and boost the economy. The European Central Bank (ECB) successively lowered its interest rates until 2014 and finally even demanded penalty interest rates for bank deposits. Meanwhile, central banks attempted to lower interest rates on the financial markets through large scale bonds acquisition. The ECB began buying bonds in 2010, with an extensive EUR 60bn-per-month purchasing program to follow later.

In Europe, the crisis exacerbated Greece’s financial situation. Starting in 2010, the EU partner countries and the International Monetary Fund saved the debt-ridden country from bankruptcy with a total of EUR 289bn in subsidised loans. The Greek debt crisis reached its peak in 2015, when Greek banks were forced to close for three weeks following the country’s imminent insolvency. In the summer of 2017, the last part of the euro bailout package for Greece expired, so the country has to carry its own weight again financially.

In the meantime, the stock markets have recovered again. Leading international indices such as the Dow Jones and the German DAX have returned to their pre-crisis levels and climbed to new all-time highs, and the US recession has long since passed. However, key interest rates paint an ambiguous picture. While the US Federal Reserve has already begun to raise its interest rates again, the ECB’s interest rates practically remain at zero. The crisis is also affecting the real estate market; in countries such as Germany and Austria, prices for apartments have risen sharply in view of record low interest rates. The general conditions in the financial sector have also changed as a result of the crisis: since 2008, international supervisory authorities’ strict capital requirements have forced banks to be more robust.

Disclaimer:

Forecasts are not a reliable indicator for future developments.

As expected, the US Federal Reserve reacted to the current robust US economy by raising the key interest rate for the third time this year on Wednesday. The target for the Fed Funds Rate was raised by 0.25 percentage points to a range of 2.0 to 2.25 per cent. A further increase towards the end of the year is likely, going by the central bankers’ outlook for the interest rate. Three further hikes are currently planned for 2019.

While the financial markets pretty much regarded the interest rate hike as a done deal, the accompanying comments on the Fed’s further steps were awaited with anticipation. The central bankers’ assessments regarding inflation and the labour market are considered important indicators for future interest rate policy, seeing as the Fed’s monetary policy strives to achieve maximum employment as well as price stability.

Robust economy, but trade conflict is a potential risk

The Fed now confirmed its assessment of the economic situation, noting that the labour market continues its consolidation, while economic activity grows at a rapid pace. Consumer spending and corporate investment have increased, while inflation remains close to the Fed’s two-per-cent target. However, a possible risk the currency guardians see is the global trade conflict, which is fueled by US President Donald Trump’s protectionist economic policy.

An increasing number of companies is worried about the dangers of rising costs and growing uncertainties, said Fed Chairman Jerome Powell. Fears include supply chain disruptions, loss of market access and a general decline in investment willingness.

Meanwhile, U.S. President Donald Trump fears that the Fed’s interest rate hikes will have a negative impact, as rising interest rates make loans more expensive for businesses and consumers. After repeatedly criticising the Fed’s monetary policy in the past, he also took issue with the Fed’s latest interest rate decision.

Eighth increase since 2015 interest rate turnaround

The Fed has now raised its key interest rates for the eighth time since the start of the interest rate turnaround in late 2015. The interest rate hikes were accompanied by increasing stock market prices, with the Dow Jones stock index, among others, climbing to new all-time highs in September.

Interest rates and stock prices are thus continuing to recover from the aftermath of the 2008 financial crisis. At the time, the US Federal Reserve had tried to slow the economic downturn by slashing interest rates, keeping the key interest rate at the then-all-time low of 0 to 0.25 per cent between the end of 2008 and 2015.

Disclaimer:

Forecasts are not a reliable indicator for future developments.

US retailers are looking forward to another high-turnover summer season leading up to the start of the school year. During the summer holidays, many parents buy books, notebooks, writing utensils, smartphones, laptops and clothing for their children, generating massive sales for the retailers. Back-to-school season plays an important role in the US and is regarded as the second-strongest sales driver after Christmas season.

Matthew Shay, president of the National Retail Federation (NRF), expects very strong back-to-school business this year, thanks to solid consumer confidence: a study commissioned by the NRF projects USD 27.5bn spendings by US families. According to the trade association, there have only been two years with higher sales in the past ten years – 2012 (30.3bn) and 2017 (29.5bn).

A recent study by consulting firm Deloitte comes to similar conclusions and estimates the market volume at 27.6 billion dollars. According to the study, the lion share of this figure, 15.1bn, goes towards new clothes, followed by school materials (6.0bn), computers (3.7bn), and other electronic devices such as tablets or smartphones (2.8bn).

Highest spending in northeastern USA, classic retailers continue to outperform online shops

The Deloitte study finds clear differences in spending volume between regions. While spending in the northeast of the USA averages 568 dollars per household and in the west 513 dollars, the midwest (493 dollars) and the southern states (488 dollars) fall short of the US average (510 dollars).

Traditional shops remain the preferred choice for shoppers: 57 per cent of the planned spendings occurs in physical stores, while only 23 per cent is spent in online stores. At the time of the survey, the 1,200 households surveyed by Deloitte were undecided where to spend the remaining 20 per cent.

Back-to-school-season has even bigger impact when considering purchases for college students. The expenditures for the start of the semester are expected to reach record level this year, explains Shay. According to the NRF-commissioned study, conducted by Prosper Insights and Analytics, spending for school and college students is expected to total USD 82.8bn this year, just short of the 83.6 billion of the previous year.

Shay expects the biggest change in purchasing behaviour in the electronics sector. Laptops, tablets and smartphones are now a natural part of every household, and parents are no longer waiting for school to start to buy them, explains the NRF president. On the other hand, children’s influence on their parents’ purchasing behaviour appears to be increasing. Due to social media and other channels, children are ever better informed and selective, says Shay.

Disclaimer:

Forecasts are not a reliable indicator for future developments.

Germany is not only the largest, but also one of the strongest economies in the Eurozone and the EU. This is reflected, among other things, in its stable economic growth. In 2017, Germany’s GDP increased by 2.2 per cent compared to the previous year, only slightly less than the total eurozone growth of 2.4 per cent.

Despite the risks posed by the ongoing trade wars, forecasts predict a comparable growth rate for the current year, with the International Monetary Fund (IMF) expecting a GDP increase of 2.2 per cent in 2018. Germany was already well on the way to achieving this goal in the first half of the year: German economy grew by 0.4 per cent in Q1 compared to the previous quarter; Q2 saw growth of 0.5 per cent. The DIW Institute now expects 0.4 per cent growth for the third quarter.

While higher energy prices have recently dampened consumer sentiment somewhat and inflation remained at a comparatively high level of 2.0 per cent in August, the sentiment among exporters has improved for the second consecutive month. The industry's Export Expectations indicator, calculated by the ifo Institute on the basis of a survey, rose by 0.6 to 14.4 points in August. Although the number of unemployed individuals in Germany rose to 2.351 million in August, this is the lowest figure for this month since 1991.

One of the German economy’s key factors is the current account. This balances all imported and exported goods and services in an economy against each other. If there is a surplus in a country’s balance, it exports more than it imports. In case of a deficit, on the other hand, more goods and services are imported than exported, i.e. more is consumed than is produced in the country itself. In regards to this balance, Germany is likely be the world leader yet again in 2018, as the German ifo Institute forecasts a current account surplus of 262.5 billion euros (USD 299bn) for the entire year. This puts the country in first place, followed by Japan at a comfortable distance with 200 billion dollars trade surplus.

German industry positive about surplus, IMF and EU Commission sceptical

The reason for Germany’s large current account surplus is the country's export strength, with the German industry seeing the situation in a positive light. “[The surplus] highlights the performance of German companies and the attractiveness of their products – in a currently difficult international environment, no less,” said Volker Treier, Head of Foreign Trade of the German Chamber of Industry and Commerce (DIHK).

The IMF and the EU Commission, however, are sceptical. The Commission considers a continuous surplus of more than 6% of GDP a threat to stability, owing to the disparity between countries with surpluses and countries with deficits that are indebted. According to the ifo Institute, Germany's current account constitutes 7.8 per cent of GDP in 2018. Since 2011, the current account surplus has contributed more than six per cent to Germany's GDP.

Germany has a particularly strong goods trade balance, which is also a thorn in the side of other countries. In recent months, US President Donald Trump has already repeatedly threatened punitive tariffs on Germany's no. 1 export product, cars. So far, however, he has not followed through on the threats, and after his meeting with EU Commission President Jean-Claude Juncker in July, it is unlikely that he will anytime soon. Under these considerations, it looks like smooth sailing for the German economy for the time being.

Disclaimer:

Forecasts are not a reliable indicator for future developments.