A confluence of issues is coming together to paint a less-than-pretty picture for the future of the global economy to the point of the “R” word rearing its ugly head in a new report from IHS Markit.
“While a global recession is probably still a year or two away, there are storm clouds on the horizon, which are starting to look more than a little threatening,” wrote Nariman Behravesh, IHS Markit chief economist, and Sara Johnson, executive director of global economics, in the firm’s “October Forecast Flash from Global Insight.”
Behravesh and Johnson’s conclusion was based on economic and political conditions that have become inseparable. That’s particularly impactful to the apparel, footwear and textile supply chain, with its long tentacles reaching across borders, trade agreements and international relationships.
“The good news on the trade front is that the United States, Mexico and Canada have agreed to a revised North American trade treaty,” they said. “The bad news is that the trade tensions between the United States and China seem to be escalating inexorably.”
The economists noted one symptom of the contentious trade environment is a decline in the IHS Markit purchasing managers’ index (PMI) for global export orders for the first time in more than two years. Another key concern is the recent rise in oil prices above $80 per barrel. Combining these factors, IHS Markit forecasts world gross domestic product (GDP) growth will slip to 3.1 percent in 2019 and 2.9 percent in 2020, from 3.2 percent this year.
The report said recent strength in employment and income, improvement in household net worth and high consumer sentiment in the U.S. have generated economic momentum at the same time as tariffs on $200 billion of imports from China went into effect.
“In our view, the higher tariff rates will reduce demand for imports from China, but two factors will mitigate this effect: Chinese exporters will temporarily reduce the pre-tariff price to preserve market share, and some imports will be re-sourced outside of China to avoid paying the tariff,” wrote the report’s authors. “We also expect higher post-tariff import prices to pass through to domestic prices and weigh on real income and wealth, reducing domestic demand.”
IHS Markit now forecasts real GDP growth in the U.S. to rise to 2.9 percent this year, before slowing to 2.8 percent in 2019, 2 percent in 2020 and 1.6 percent in 2021.
In Europe, the increase in oil prices could hamper growth considerably, while an economic slowdown in much of the rest of the world is taking a toll on exports.
“This drag is even bigger owing to the ongoing impact of trade tensions and the rise in the euro and sterling against emerging-market currencies, including the Chinese renminbi,” the report said. “In addition, the standoff between the European Union and bond markets, on the one hand, and the populist Italian government, on the other, over the latter’s aggressive budget is sending tremors through eurozone financial markets. At the same time, the risk of a “no deal” Brexit is on the rise.”
With those issues in mind, IHS Markit has reduced its outlook for Eurozone real GDP growth rates in 2019-21 by an average 0.2 percent a year. Its forecast for the Eurozone economy is for 2 percent growth this year, followed 1.6 percent expansion in 2019 and 1.3 growth in 2020.
In China, it’s plain and simple, IHS Markit said: “The trade war is beginning to take its toll.” The latest U.S. import tariffs on $200 billion of Chinese goods are being imposed in two phases—10 percent last month and rising to 25 percent on Jan. 1.
“These tariffs will have a direct impact of shaving 0.3 percentage points off real GDP in 2019,” the report said. “This negative effect will be partially offset by the government’s stimulus policies.”
Beijing has announced personal income tax cuts, as well as increases in export tax rebates on a select list of products, the report noted. The People’s Bank of China has also lowered the reserve requirement by 100 basis points for many banks, aiming to increase liquidity.
“The trade war’s spillover effects have been visible,” the economists wrote. “Business confidence is slipping, the growth in fixed asset investment has slowed sharply, and China’s currency and stock market have been hit hard.”
Real GDP growth in China is now projected to slow to 6.1 percent in 2019 and 6 percent in 2020 from 6.7 percent in 2018.
As for other large emerging markets, they “cannot seem to catch a break,” the report said. During September, many currencies, including the Russian ruble, South African rand and Turkish lira, saw gains against the dollar, only to reverse course in October.
“The recent surge in oil prices is becoming a major drag on oil-importing countries, especially those in the emerging world,” the report concluded. “Even countries whose finances are relatively strong, such as India, are affected. Given that IHS Markit predicts oil prices to remain high and global interest rates to keep rising, the pain will not end anytime soon.”