With the global trade outlook tenuous at best thanks mainly to the ongoing U.S.-China trade war, the economies of those countries and the rest of the world seem stuck in neutral, according to economists.
For Global Insight by IHS Markit chief economist Nariman Behravesh and executive director Sara Johnson, the global economic outlook is “an ongoing slowdown.”
Writing in their July Forecast Flash, Behravesh and Johnson said while financial markets reacted positively to the announced trade truce between China and the U.S., which is already showing signs of unraveling, “its impact on growth is likely to be imperceptible.”
The agreement did include a freeze in current tariff levels and a promise by China to buy more U.S. agricultural products, but there are no firm timetables or deadlines, the economists noted.
“In the meantime, the damage from the existing tariffs–albeit small, so far–is hurting trade volumes everywhere and shaving a few tenths of a percentage point off growth,” they said. “The trade truce is unlikely to reverse the damage done so far. If the China-U.S. agreement puts a halt to any further escalation of hostilities, then the global growth outlook will likely not deteriorate.”
The IHS report noted that real U.S. gross domestic product (GDP) increased at an annual rate of 3.1 percent in the first quarter. Its forecast now has GDP dropping to an annual growth rate of 1.9 percent averaged across the final three quarters of 2019.
“The stepdown reflects an unwinding of temporary factors that were boosting growth in recent quarters, including diminishing support from fiscal stimulus and a sharp slowing in the pace of inventory building from unsustainable levels in recent quarters,” Johnson and Behravesh said. “Several developments will help to support the growth outlook, however, including a higher jump-off for equity values, an expected ‘insurance’ rate cut by the Federal Reserve and lower Treasury yields.”
But these supports likely will be temporary, and the economists predicted annual real GDP growth to 1.8 percent in 2020 from 2.6 percent in 2019, and average 1.6 percent from 2021 to 20–23.
Offering another view, the Conference Board of Canada said in a new report that “U.S. economic expansion will continue over the near term, despite the increasing possibility of a recession.”
“In June, the U.S. economic expansion, which started toward the end of 2009, reached the 10-year mark and, barring a major shock to the global economy, will soon become the country’s longest on record,” Kip Beckman, principal economist, said.
Corbin Advisors’ latest industrial survey had the trade conflict cited as the top concern for the fourth consecutive quarter, with 81 percent of respondents expressing “high concern” and 64 percent believing a favorable resolution to the dispute over the next six months is only “somewhat likely.”
The survey also found that 65 percent of executives feel the U.S. economy is “losing steam,” although 63 percent “do not” believe it will enter a recession in the next 12 months.
Looking at China, the report contended that “in the near term, government stimulus will mitigate the downside risks to growth.” It noted that real GDP growth slowed to 6.2 percent year on year in the second quarter, down from 6.4 percent in the first quarter.
“In June, an upturn in the automotive industry supported accelerations in retail sales, industrial production and fixed investment, but the momentum looks unsustainable,” the IHS economists said. “More aggressive policy stimulus is expected in the second half.”
Real GDP growth is projected to slow to 6.2 percent this year from 6.6 percent in 2018, then fall to 5.9 percent in 2020 and 5.8 percent in 2021.
Europe and emerging markets
At the same time, European economies remain fragile, according to the outlook. “There seems to be no end to the bad news from the manufacturing and banking sectors,” the report said. “Retail sales, industrial production, exports and construction output all point to slower growth.”
Real GDP growth is projected to slow to 1 percent this year and in 2020 from 1.9 percent in 2018, before edging up to 1.2 percent in 2021.
As for large emerging markets, Johnson and Behravesh noted that for some time there was a sense that some economies, such as Vietnam, would benefit from the China-U.S. conflict as companies looked for other suppliers, but “this perception has recently invoked the ire of the White House,” which imposed 400 percent tariffs on the imports of steel from Vietnam and threatened to do more.
In response, the Vietnamese government raised tariffs on imports from China to limit transshipments to the U.S. through Vietnam.
“More worrisome is Congressional delay in ratifying the U.S.-Mexico-Canada Agreement,” the IHS economists said. “The Trump administration has repeatedly threatened to pull out of the North American Free Trade Agreement, which could do huge damage to North American trade volumes.”