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‘Escalating’ Risks Threaten Global Economic Growth

The global economy is experiencing steady growth heading into the second half of the year, but “gathering storm clouds” could dim prospects, the “June World Forecast Flash” from Global Insight by IHS Markit warned.

While forecasting world real gross domestic product (GDP) growth to hold at 3.3% this year before easing to 3.2% in 2019 and 3 percent in 2020, chief economist Nariman Behravesh and executive director of global economics Sara Johnson said the steadiness in growth belies the possible impact of several crisis.

“First, the increasingly belligerent trade stance of the United States could trigger a damaging trade war,” they wrote. “Second, higher oil prices will erode growth—although at current levels the impact will be limited. Third, rising political risks in Europe, especially in Italy and Spain, could hurt growth prospects. Finally, increasing financial pressure on key emerging markets, including Argentina, Brazil, South Africa and Turkey, is darkening the outlook.”

The economists said, “None of these looks like a recession trigger—yet.”

In the U.S., real GDP growth is projected to strengthen to 4.1% in the second quarter after slowing to a 2.2% annual rate in the first three months of the year, and “incoming data suggest that growth could be even higher,” they wrote. The IHS Markit forecast for 2018 has now been raised 0.2% to 3 percent.

“After this year, we expect real GDP growth to slow as interest rates rise and the boost from fiscal stimulus subsides,” Behravesh and Johnson wrote. “While equity prices are higher than in last month’s forecast, a stronger dollar and higher oil prices will hurt. In the next two years, we predict real GDP growth of 2.8% and 1.8%, respectively. The unemployment rate will reach a five-decade low of 3.4% next year before beginning to turn up.”

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In Europe, the economists see an underlying slowdown, with political risks escalating. In particular, they said rising oil prices are curtailing household real incomes.

The price of a barrel of light sweet crude oil closed down 78 cents at $65.07 on Tuesday. This compares to $42.50 a barrel a year ago.

The Oxford Institute for Energy Studies said in a new report, “In a rising market characterized by declining stocks and low availability of spare capacity, the ability of the oil market to absorb any unexpected disruptions in supply (or demand for that matter) is limited, and therefore concerns about the future availability of oil supplies put significant upward pressure on oil prices.”

The Oxford report, “OPEC at the Crossroads,” by Bassam Fattouh and Andreas Economou, predicted in 2018, the average annual Brent crude oil price is expected to increase to $75 a barrel, 35 percent higher than 2017, followed by a further annual increase of about $4 a barrel in 2019.

The IHS economists said of Europe, “Foreign trade and industrial production data have also softened. Despite favorable financing conditions, an investment switch-off remains a downside risk because of rising uncertainty on the trade and political fronts.”

The report cited “potentially unstable governments in Italy and Spain—a coalition of populist left-wing and right-wing parties in Italy, and the support needed by the new government in Spain of separatist parties,” as ominous signs for economic conditions. Consequently, the economists forecast Eurozone real GDP growth to slow to 2.1% this year and 1.7% in 2019 from 2.6% in 2017. Similarly, IHS Markit has revised U.K. growth down to only 1.1% this year and 1.2% in 2019.

The latest economic data backs the IHS Markit outlook for a moderate slowdown in China’s economic growth. The report said, “The government will try to strike a fine balance between deleveraging and maintaining a relatively supportive environment for growth. Broadly based weakness in domestic demand, particularly slowing retail sales and infrastructure investment growth in May, indicates a slowdown in the second quarter.”

In addition, the continuing monetary tightening could increase borrowing costs, restraining growth in the second half. On top of that, “the United States’ protectionist trade policies increase the potential risks to China’s exports and manufacturing growth,” the report said. These trends combine for a projection for China’s real GDP to slow to 6.7% this year, 6.4% in 2019 and 6.1% in 2020 from 6.9% last year.

While the momentum for emerging markets like Argentina, Turkey, Brazil and South Africa remain strong, “stiff headwinds of rising U.S. interest rates and a strengthening dollar are triggering an outflow of capital from some emerging markets and forcing their central banks to raise interest rates,” according to economists.

Argentina and Turkey have been feeling the biggest impacts, as central banks were forced to substantially tighten monetary policy recently, the report noted. Brazil, Indonesia, and South Africa have also come under some pressure. The most vulnerable emerging markets are those that are highly reliant on foreign capital for financing because they have high debt coming due in the next year and don’t have enough dollar reserves to cover them, the report noted.

“The good news is many emerging markets, especially those in Asia and the Middle East, are not in the “danger zone,” as measured by standard indicators of vulnerability,” the economists added.

The bottom line, the report concluded, is that, “The outlook for global growth remains steady this year and next, thanks mostly to strong U.S. growth. But after that, fading stimulus in the world’s largest economy will lead to a global slowdown.”