Editor's note: This article is part of the Policy Preview Report for G20 Summit in Argentina.

This time a year ago, the world economy seemed to be getting on a better plane. A number of cyclical indicators all suggested the world economy was growing around a 4 percent rates in the latter half of 2017, raising hopes that this would allow a multi-year end to the decade of 4 percent growth shared by many countries. These indicators included South Korean trade exports, the first country to report trade every month, that for the year as a whole reported the fastest rise in exports it had ever. Many countries were reporting accelerating monthly business confidence surveys as shown for example by purchasing managers indices (PMI). And some particularly troubled areas from earlier in the decade such as the eurozone, were showing especially encouraging signs. And at last year's annual IMF meetings, the fund revised up their world GDP estimate, something that continued at their spring meeting this year.

Now one year later, an only too familiar trend of this decade has returned and at the recent IMF meetings, the fund revised down their forecasts for 2018 and 2019. Those same cyclical indicators I referred to, with the slight exception of the United States, are all turning lower. The monthly German IFO index for example, a very useful barometer of both German and euro area business activity has turned lower for a number of months, as have most euro area PMI surveys. South Korean export data has generally trended softer as the year has gone on, and a number of countries have got worrying signs, ranging from Argentina to Turkey. And of course, China is showing plenty of cyclical weakness even without the trade spat with the US. The US has been enjoying a cyclically strong 2018 so far but I share the views of many that much of this has been purely due to the large fiscal stimulus that President Donald Trump introduced but will fade into 2019.

There are also some specific policy issues that have grown that I shall discuss.

In Europe, we have some very peculiar political developments breaking out, the latest of which is the apparent decline of the two major centrist political parties in Germany, the CDU and the SPD. This has resulted in the news that Chancellor Angela Merkel will step down in 2021 but has immediately announced she is stepping down as head of her CDU party. This has potentially important implications given how stable the German political scene has been for years. And then of course, a standoff has developed between the Italian populist government and the European Union over Italy's unconventional fiscal plans. I have some sympathy that Italy needs policies to help it achieve stronger nominal GDP growth, not least as there is no way of that country can reduce its debt ratio without stronger nominal growth. But they cannot openly flout agreed EU rules as this would destroy the central premise of EU economic policy. Of course, given Italy's debt, neither they nor Europe could afford anything close to the crisis that Greece endured. This is a worrying thing that hangs over Europe on top of the cyclical weakness.

Then we have the usual consequences of a tightening US monetary policy and the usual dilemmas this always seems to bring for global financial markets, especially those massively dependent on the role of the dollar. Countries with large external current account deficits such as Turkey, and a number of others, often requiring to refinance dollar denominated debt at a time of rising US interest rates and weakening local currencies, will face considerable uncertainties. An oddity of this situation is that this repeatedly reoccurs even though the US economy is not as important to the rest of the world as it is to global financial markets. This is a structural weakness of the world financial system and ultimately is not helpful for the US economy. The US exports more to many of these countries than it once did, and any weakness overseas will feed back into the US which means 2019 doesn't look great for the US economy in my view.

This is compounded by the style of the US trade dispute that Trump has chosen to take to China. Between the two countries, nearly 85 percent of all global nominal GDP this decade has come from them, so a genuine persistent trade dispute between them almost by definition is negative for both and the world in general. One can only hope that Trump will agree a deal with China, rather than take even more extreme steps. It may be true that China has adopted some unfair trading practices but the idea that this particularly punishes the US in terms of trade is hard to objectively support. After all, Apple, an iconic modern US company sells as many expensive iPhones to Chinese consumers as it does to US ones.

Even without this trade problem, China was experiencing some serious fresh challenges . It appeared to deliberately accept a lower path for economic growth as it tries to conquer some of the domestic corporate and local regional debt burden, but it hadn't bargained for this trade challenge from the US at the same time, all on top of the rising dollar, and the same challenges of a dollar denominated debt that many other countries face. China will need to consider more domestic fiscal stimulus especially for its consumers, and give some concessions on trade, especially ones that may have some justification.

This forthcoming G20 meeting may be a more important one than many of us conceived of, even a few months ago. I hope the spirit of 2008 cooperation can be pursued 10 years later!

Jim O’Neill is chair of Chatham House. The author contributed this article to China Watch exclusively. The author contributed this article to China Watch exclusively. The views expressed do not necessarily reflect those of China Watch.

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