Skip to main content

How Trade Policy Uncertainty Stripped US GDP of $100 Billion

A new research paper by IHS Markit estimates that a surge in news-based and earnings-call-based indexes of trade policy uncertainty (TPU) in the past two years has lowered U.S. capital spending and real gross domestic product (GDP) by $100 billion, or 0.5 percent.

IHS Markit chief economist Nariman Behravesh and executive director Sara Johnson wrote in their new “Global Economic Forecast Flash” that the greatest impact has been felt in manufacturing sectors, where the exposure to trade is the greatest. The economists noted that indexes of TPU are now three to five times higher than they were in 2015.

They said the ramifications are also seen in world GDP growth, as evident in IHS Markit projections of a significant drop to 2.5 percent in 2020 from 3.4 percent in 2017.

In the U.S., recent data dulled the outlook in the consumer sector. Real GDP growth slowed to a 2 percent annual rate in the second quarter, down from 3.1 percent growth in the first quarter. Third-quarter data is likely to show a further deceleration, IHS noted.

On the plus side, housing market indicators point to an improved outlook for residential investment, while data on U.S. financial accounts through the second quarter show considerably more household wealth than previously reported.

“While this will support consumer spending in quarters to come, recent monthly data on consumer spending and retail sales were disappointing,” Behravesh and Johnson said. “The strike against GM is also estimated to shave 0.1 percentage point from third-quarter GDP growth. IHS Markit predicts U.S. real GDP growth will average 2 percent in 2020 and 2021, well below the 2.6 percent average of the previous two years.”

Related Stories

In China, they cited “further evidence of short-term softness and longer-term challenges.” For example, industrial production, fixed-asset investment and housing activity have slowed in recent months, and auto sales, exports and imports continued to decline.

“The damage from the trade war is evident in plunging exports to the U.S.,” the economists said. “Our forecast shows real GDP growth slowing from 6.6 percent in 2018 to 6.2 percent this year and 5.7 percent next year. A focus on the short-term fragilities of the Chinese economy misses the more formidable longer-term challenges.”

In particular, they said a large drop in growth of total factor productivity (TFP) from an annual average rate of more than 5 percent in the 2000s to 1 percent in the current decade “is alarming” because “it suggests China’s model of state-controlled development is running out of steam and China is at risk of falling into the middle-income trap of diminished growth potential.” TFP is a ratio of economy-wide production to the weighted average of inputs such as labor and capital.

The Euro Zone is experiencing overall “weakness,” as industrial output, construction and retail sales have all declined recently. The data points to flat real GDP in the third quarter, with contractions in Germany and Italy, IHS said. Euro Zone real GDP growth is projected to slow to 1.1 percent this year and 0.8 percent in 2020 from 1.9 percent in 2018.

While growth is slowing in all large emerging markets, a series of rate cuts by their central banks will limit the downside risks, “absent a large global shock,” the economists said. India’s economic growth slowed to a six-year low of 5 percent year on year in the quarter through June from 5.8 percent in the previous three months.

In Brazil, the Central Bank lowered its currency interest rate by 50 basis points in August and September, bringing it to 5.50 percent. The report said it anticipates further reductions to 5 percent before the end of 2019, as inflation remains low, which “will help to lift growth a little next year.”

The bottom line, according to the Behravesh and Johnson, is, “Monetary stimulus, with a possible assist from fiscal policy, will help to put a floor under global growth, so long as the risks from the trade war can be contained.”