Exiting 2018, Goldman’s economic team published a series of its “favorite” chart meant to “illustrate the key themes of the global economy that stood out in 2018.”
Here are the key observations from Jan Hatzius and team:
- Global growth slowed notably. Goldman’s global current activity indicator (CAI) fell from over 5% at the end of last year to 3.4% in December. This moderation was felt throughout the world, with EMs most sharply hit.
- A broad tightening in financial conditions was one of the major drivers of the softening. Goldman estimates that the global FCI impulse went from a 0.4 percentage point (pp) boost in late 2017 to a 0.4pp drag in late 2018. However, fiscal policy became much more supportive until recently.
- Meanwhile, slack continued to narrow in a number of economies, and in several places this brought a welcome bout of higher wage growth. In some countries—especially in the Euro area—this could feed through into price inflation, though the pace of pass-through is uncertain. And there remains a wide margin of spare capacity in some key DM and EM economies.
- Trade tensions continued to rise. Initially broadly directed at all US trading partners, tariff proposals became more focused on China during the year, ultimately covering half of all Chinese imports into the US. Even so, Goldman’s analysis points to a relatively small direct impact of these tariffs on global growth, and there were some encouraging signs of progress, such as the completion of a new trade deal between the US, Canada, and Mexico.
- Though many central banks, led by the Fed, continued to hike rates the combination of weaker growth and tighter financial conditions shifted the policy narrative. The Fed saw through four hikes but it indicated a dovish shift into next year, while the risk of a 2020 ECB liftoff intensified. Meanwhile in China, policy started easing as credit supply started to drag meaningfully on growth.
- Finally, despite fading growth momentum, the broader risks to the global economy look contained. As a result, Goldman’s team is more sanguine than many market participants about the risk of recession in the US, primarily because economic and private sector financial imbalances look limited, and we continue to expect a “bumpy deceleration” rather than a hard landing in China.