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Economists Warn Subdued Trade Could Yield 10-Year Low Economic Growth

Two new global economic forecasts warn that a recent stabilization is being threatened by heightened trade tensions, financial policy uncertainty and key trouble spots, like China.

The Organization for Economic Cooperation and Development (OECD) said while global growth slowed sharply in late 2018, it is now stabilizing at a moderate level. However, it noted, “Escalating trade conflicts and dangerous financial vulnerabilities threaten a new weakening of activity by undermining investment and confidence worldwide,” according to the OECD’s latest Economic Outlook.

The May Forecast Flash from Global Insight by IHS Markit similarly said, “global economic growth is firming, but the risk of a policy mistake has risen sharply.”

Chief economist Nariman Behravesh and executive director of global economics Sara Johnson said, “Early readings on first-quarter economic activity around the world point to a mild strengthening of momentum. Growth rates in the United States and Eurozone were stronger than expected, while Chinese growth remained stable. Yet, the downside risks have once again risen.”

The report said global manufacturing and services purchasing managers indexes (PMIs) compiled by IHS Markit for JP Morgan dropped in April, highlight this fragility.

“Even more worrisome is the increase in policy risks,” the economists wrote. “The raising of U.S. tariffs on Chinese imports on May 10 and Chinese retaliation could lead to a damaging upward spiral of trade hostilities and seriously hurt growth. Meanwhile, the escalation of military tensions in the Persian Gulf could push up oil prices more, which would have large negative consequences for global growth.”

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The global economy, according to OECD, is expected to achieve “moderate but fragile growth over the coming two years.” Its Economic Outlook said, “Vulnerabilities stem from trade tensions, high policy uncertainty, risks in financial markets and a slowdown in China, all of which could further curb strong and sustainable medium-term growth worldwide.”

Based on OECD projections, the global economy will grow 3.2 percent in 2019 and 3.4 percent in 2020. The outlook includes downward revisions for many major economies and warns that current growth rates are insufficient to bring about major improvements in employment or living standards.

The outlook noted that world trade is projected to grow just over 2 percent this year, which would mark the lowest rate in a decade. The current cycle of trade disputes, according to the outlook, is “hurting manufacturing, disrupting global value chains and generating significant uncertainty that is weighing on investment decisions, and highlights the risk of further disruption.”

China still remains key to global economic growth, OECD said. Significant fiscal policy stimulus has buffered the economy there as it rebalances from investment and export-led growth to a more domestic footing and that a sharper slowdown would pose risks to global growth and trade prospects.

“The fragile global economy is being destabilized by trade tensions,” OECD chief economist Laurence Boone said. “Governments need to work harder together to ensure a return to stronger and more sustainable growth.” OECD calls on governments to act now to ensure a stronger economic future, including a return to international cooperation and multilateral dialogue to restore predictability in policy and relaunch trade.

IHS Markit’s forecast said the U.S. economy is off to strong start in 2019, with first-quarter gross domestic product (GDP) growth reported at 3.2 percent, up from 2.2 percent in the fourth quarter of 2018.

However, IHS economists said, “The robust first-quarter pace is expected to be temporary, as it was driven by two sources of strength that could easily reverse in the second quarter: inventory investment and net exports…We expect real GDP growth to moderate beginning in the second quarter and we look for a 2.7 percent rate in calendar year 2019. We predict annual growth will decelerate to 2.1 percent in 2020 and 1.8 percent in 2021.”

In Europe, the drag from net trade appears to have eased, with export growth somewhat improving. Eurozone real GDP growth is projected to slow from 1.8 percent last year to 1.2 percent in 2019 and 1.1 percent in 2020, before edging up to 1.2 percent in 2021.

“Meanwhile, the uncertainty about Brexit continues, as the decision deadline has been extended to the end of October,” the economists said. “The U.K. economy will lose some momentum in the second and third quarters.”

China’s economic growth held steady at 6.4 percent year-to-year in the first quarter, helped by rebounds in the industrial sector and exports.

“Unfortunately, China’s economy is not out of the woods yet,” IHS said. “Real GDP growth has decelerated steadily from 7.4 percent in the second quarter of 2017 to 5.7 percent in the first quarter of this year. Moreover, the first-quarter stabilization was largely due to surging exports, mostly to the European Union and the Association of Southeast Asian Nations. The sustainability of the export rebound is questionable–in fact, exports fell in April. An even bigger risk is the recent increase in U.S. tariffs on Chinese exports, which will lower growth by about 0.2 percentage points this year and next.”