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Forecasting is a Walk on the Wild Side

February 10, 2019

We have previously highlighted the difficulty of running economic forecasting models that cannot absorb the wild deviations caused by geo-political events. The impact of an administration caught up in trade disputes, border walls and government shutdowns in the United States and the Brexit troubles in Europe – along with the Franco-Italian war of words and Germany potentially shifting its focus away from Euro-centric to “Germany First” – are undermining best efforts in projecting the direction of the world economy and trade.

 

China reported a drop in exports for December, reflecting what is now seen as a global economic slowdown compounded by the trade war with the United States. The official gross domestic product forecast for 2019 by the Xi government has dropped to 6.5 percent and will likely end up closer to 6.0 percent. The backdrop to this is faltering consumer demand, and reduced imports and exports.

 

Europe is in a downward spiral with Germany reporting negative growth in the third quarter of 2018 and the likelihood that the fourth quarter results will also be negative. That translates into a German recession. Italy is already officially in recession and France may well be headed in the same direction with its weekly yellow-vest protests.

 

The US economic climate is better, with growth in industrial production and manufacturing but declines in the forward-looking Purchasing Managers Index. The Federal Reserve appears to have slowed down the pace of interest rate increases; is that the result of political pressure or worries about the future economic direction? 

 

Containerized imports to North America, however, continue to be robust, with retailers and other businesses trying to beat potential tariff increases in March since they can see that trade talks are not progressing smoothly. The problem here is that warehouses and storage facilities are running out of space.

 

Imports in 2018 ended with a 6.2 percent increase over 2017 with the East Coast up 7.9 percent vs. the West Coast at only 4.7 percent. Some of that can be attributed to the pattern of ship operations and warehousing. Our projection for 2019 remains in positive territory but with year-on-year growth only a third of last year. Exports, on the other hand, have been hit by the trade disputes, particularly in the agricultural sector.

The question is how long can the US economy out-perform the global economy as further economic downturns are anticipated in Europe and Asia?

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