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Trade War Causing Collateral Damage to Global Economic Outlook

June 20, 2019, 09:00 AM
Filed Under: Economy

The trade war is weighing on investment prospects and has sharply increased downside risks to world economic growth forecasts, Fitch Ratings says in its new Global Economic Outlook (GEO).

"Even though our base case assumes that further US tariffs on China are avoided, our world growth forecast for 2020 has been lowered. Increased uncertainty about trade is already making firms more cautious on capex," said Fitch Chief Economist, Brian Coulton.

Deteriorating prospects for business investment, lingering weakness in consumer spending growth in China and a softer growth outlook for other emerging markets (EM) have culminated in more bearish forecasts for the world economy, This is despite better-than-expected GDP performance in the US, the eurozone and China in 1Q19 and robust labour markets supporting consumer spending in the advanced economies.

More accommodative global monetary conditions will only provide a partial offset. After raising interest rates four times in 2018, the Federal Reserve is expected to leave interest rates on hold in 2019 while the ECB looks increasingly likely to restart net asset purchases this year.

"Central bank responses will not fully compensate for the impact of rising trade uncertainties on investment spending and the adverse supply-side impact of tariff hikes and trade restrictions," said Coulton.

Incoming data since the last GEO signal a forthcoming slowdown in business investment in the US, while manufacturing investment has slowed sharply in China. While the eurozone looks likely to avoid recession, the growth outlook remains weak, weighed down by the slump in global manufacturing and trade. The latter is also weighing on prospects for other EM, where trade concerns are also impeding the benefits of looser global monetary conditions on capital inflows.

World growth is expected to fall to 2.8% this year from 3.2% in 2018. This forecast is unchanged from the March 2019 GEO. Modest upgrades to 2019 forecasts for the US, the eurozone, the UK and China after positive surprises in 1Q19 have been offset by forecast cuts for Brazil, Mexico, Russia, Korea, South Africa, Canada and Australia. World growth in 2020 has been revised down to 2.7% from 2.8% in the last GEO with cuts to both China (to 6.0% from 6.1%) and the US (to 1.8% from 1.9%) and, most significantly, Brazil (to 2.2% from 2.7%).

These baseline forecasts are predicated on the assumption that recently threatened US tariffs on the remaining USD300 billion of imports from China are avoided. In the event that these tariffs were to be implemented soon at a rate of 25% - and China retaliates - our scenario analysis suggests that world GDP could be reduced by 0.4pp (relative to the baseline forecast) by 2020. China and US GDP would be 0.8pp and 0.5pp lower than in the baseline forecast, respectively.

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