IHS Markit sees the United States (US) and Iran conflict has been limited, suggesting the impact on global economic growth will be small - Photo: AP

JAKARTA (TheInsiderStories) – IHS Markit sees the United States (US) and Iran conflict has been limited, suggesting the impact on global economic growth will be small. Oil markets are still oversupplied and the vulnerability to an oil shock in the US and global economies is much less than a few decades ago, the agency said on Monday (01/20).

Oil prices held steady on Monday as fears of conflict between the US and Iran eased, with investors shifting their focus to this week’s scheduled signing of an initial US-China trade deal, which could boost economic growth and demand.

Brent crude was up 1 cent at US$64.99 per barrel at 0737 GMT, while West Texas Intermediate (WTI) crude was up 5 cents at $59.09 a barrel from the previous session. Global benchmark Brent touched $71.75 per barrel last week, before ending on Friday below $65.

Oil prices surged to their highest in almost four months after a US drone strike killed an Iranian commander and Iran retaliated with missiles launched against US bases in Iraq. But they slumped again as Washington and Tehran retreated from the brink of direct conflict.

Offsetting factors leave the US growth outlook unchanged and the vulnerability to an oil shock is much less than before. The January IHS Markit US forecast incorporates the first-quarter suspension of Boeing production of the 737 MAX jetliner. It also assumes the rollback of tariffs as part of the phase-one trade deal with China.

“Given slightly lower near-term inflation, we have finally delayed our assumed reversal of monetary policy until mid-2021. The net effect of these changes is little revision to our forecast of solid expansions in real consumer spending and GDP,” said Nariman Behravesh, Chief Economist at IHS Markit.

Downward growth pressures are easing a little in Europe, the agency said. Reduced uncertainty about Brexit and US tariffs, decent real wage growth, and a weak trade-weighted euro will help to underpin growth. On the other hand, the expectations of less monetary stimulus and rising geopolitical tensions could act as growth drags.

IHS Markit sees eurozone growth slowing from 1.2 percent in 2019 to 0.9 percent in 2020, before picking up to 1.0 percent in 2021 and 1.2 percent in 2022. A similar, but slightly more pronounced growth pattern is expected for the UK economy, given the uncertainty surrounding the implementation of Brexit.

Meanwhile, Japan’s near-term outlook is a bit brighter because of its fiscal stimulus. Japan’s real GDP likely contracted in the fourth quarter, mostly because of the sales tax hike (from 8 to 10 percent) at the beginning of October. To limit the damage, on 4 December, the government announced $121 billion worth of fiscal spending. After an estimated 1.1 percent gain in 2019, real GDP is projected to increase by 0.6 percent in 2020, 0.7 percent in 2021, and 0.4 percent in 2022.

Then, the rate of deceleration in China may proceed at a more moderate clip. Some signs of stabilization in the Chinese economy are emerging. The economy is supported by the gradually ramped-up stimulus as the government aims to strike a balance between the dual and conflicting policy objectives of financial de-risking and stabilization of short-term economic growth.

The recent phase-one US-China deal should provide some support for exports and reduce business uncertainty. Yet, the fundamental forces causing China’s current slowdown have not materially changed. These include a productivity deceleration due to a lack of structural reforms and constrained credit growth due to high indebtedness. The real GDP growth is projected to slow from 6.2 percent in 2019 to 5.8 percent in 2020, 5.6 percent in 2021, and 5.5 percent in 2022.

While other large emerging markets will be under global trends and geopolitics while facing domestic woes. Far from being “decoupled,” emerging markets are at the mercy of economic trends in the G7 countries and China, the rise and fall of commodity prices, trade wars, and geopolitical confrontations.

These global challenges are occurring at a time when many emerging markets are having troubles of their own. The collapse in India’s growth rate from more than 8.1 percent in the fiscal year 2016 to 4.5 percent year on year in the September quarter is particularly troubling.

“On the other side of the world, protests in Bolivia, Chile, Colombia, and Ecuador have raised the specter of another lost decade,” the agency ended.

Written by Lexy Nantu, Email: lexy@theinsiderstories.com