Geopolitics, Trade Impasses Weigh Down Global Economy
Date: Thursday, March 21, 2019
Source: Sourcing Journal
Two interrelated and troubling developments are coloring the global economic picture.
The first is that trade growth is slowing sharply, Global Insight by IHS Markit said Tuesday in its March forecast. IHS Markit chief economist Nariman Behravesh and executive director for global economics Sara Johnson cited the IHS Markit purchasing managers’ index (PMI) for new exports has been falling for six months in a row, the largest decline since 2016.
The second key factor is the stagnation in the industrial sectors. The economists said the manufacturing sectors in key economies Japan, China and the Euro Zone are in recession.
“While U.S. protectionist policies have worsened the outlook for trade volumes and factory output in many parts of the world, the industrial recession in China–brought on by the government’s deleveraging campaign–is, arguably, a bigger drag,” Behravesh and Johnson said. “The good news is the Chinese government has (once again) begun to provide modest stimulus. This move will stabilize the manufacturing in China and the other parts of the world. Equally encouraging is the lack of ‘contagion’ from manufacturing to services. Both these trends will sustain growth for a while.”
The report said the U.S. economy is moderating and set for a slowdown. Real gross domestic product (GDP) grew at a 2.6 percent annual rate in the fourth quarter of 2018, with full-year growth at 2.9 percent, boosted by tax cuts and federal spending increases.
“In the very near term, GDP growth has slowed sharply, to about 1.3 percent, reflecting a sharp, but temporary deceleration in consumer expenditures in the wake of December’s financial market turbulence and a reversal of a weather-induced surge in utility bills late last year,” they said. “Real GDP growth is forecast to increase 2.4 percent in 2019 and 2.1 percent in 2020, as the boost from fiscal stimulus first peaks and then fades.”
After 2020, IHS Markit projects GDP growth to ease to a 1.7 percent annual average through 2023.
In Europe, the economists said there is more evidence of weak growth, but a recession is still not likely. Eurozone real GDP growth in the fourth quarter of 2018 came in at a soft 0.2 percent compared to the previous quarter, while year-on-year growth was revised down slightly to 1.1 percent–the lowest rate in five years.
“The industrial sector was already in recession in the second half of 2018, as evidenced by the IHS Markit PMIs,” the economists wrote. “The risk of an economy-wide recession stems from ongoing spillovers and event risks, such as a ‘no-deal’ Brexit and U.S. auto tariffs.”
Euro Zone real GDP growth is projected to slow to 1.2 percent in 2019 and 1 percent in 2020 from 1.8 percent last year, before edging up to 1.2 percent in 2021.
In China, the report said the Lunar New Year distorted the data, “but the underlying fragility is apparent.” At the opening of the recent National People’s Congress, Premier Li Keqiang announced China’s 2019 real GDP growth target will be 6 percent to 6.5 percent, a range consistent with the IHS Markit forecast of 6.3 percent, the report noted.
“Growth momentum will moderate with a weakening in real estate markets and foreign trade,” the analysts said. “Faster growth in infrastructure investment and tax cuts will help to counter the slowdown.”
Looking at emerging economies, they noted that some countries, like Argentina, Iran and Turkey, have already slipped into recession. Others such as Brazil, India and South Africa “have seen growth fall below expectations,” they said.
Some countries like India, the Philippines and Vietnam “will continue to grow at robust rates,” the economists said, while the likes of Brazil, Saudi Arabia and South Africa will struggle to achieve growth rates above 1 percent to 2 percent.
“The industrial recession in key economies, especially China, is hurting emerging-market exports,” the report said. “So is the trade war between China and the United States.”
Export growth in South Korea and Taiwan, for example, has been impacted by those factors.
“Geopolitics is also a growing risk,” the economists added. “The escalating tensions between India and Pakistan are a big threat to a region that has performed better than most over the past few decades.”