JAKARTA (TheInsiderStories) – August saw another intensification of the trade conflict between the United States (US) and China. Then, in mid-September, the attack on Saudi Arabian oil production facilities resulted in an oil price spike.
Both are bad news for the global economy, coming at a time when growth is already slowing. Partly because of the trade war, IHS Markit again downgraded the growth forecasts for all the major economies during the past month.
Our September forecast was completed before the Abqaiq and Khurais attacks. The economic impacts will depend on the magnitude and duration of supply disruptions. A sustained oil price increase of US$10‒20 a barrel could cut global growth 0.1–0.2 percentage point.
While the damage of an oil shock to the US economy will be much less than in the past, the harm to large net oil-importing economies such as China, Japan, and Europe could be significant.
Second-quarter real GDP growth was reported at a 2.0 percent annual rate, a pace that will likely be sustained for several quarters. High-frequency data signal near-term strength in consumer spending but weakness in business fixed investment.
The outlook for the next few years has been lowered in response to the Trump administration’s new 15 percent tariffs on most goods imports from China that had previously escaped tariffs, and an increase in the tariff rate to 30 percent on imports from China that had been subject to a 25 percent rate.
These tariff changes, being implemented in steps from Sept. 1 to Dec. 15, are expected to boost consumer prices and the cost of capital, softening the outlook for personal consumption expenditures, business fixed investment, and GDP.
We now project annual real GDP growth of 2.3 percent in 2019, 2.1 percent in 2020, and an average of 1.7 percent growth in 2021‒23.
The slowdown in eurozone real GDP growth in the second quarter to 0.2 percent quarter on quarter (QoQ), from 0.4 percent in the first quarter, is expected to be followed by a further deceleration to 0.1 percent in both the third and fourth quarters. Exports and manufacturing are the principal sources of weakness.
IHS Markit predicts another quarter of decline in Germany (a mild recession, so far), and many quarters of contraction in Italy, with both 2019 and 2020 showing annual declines in real GDP. The French and Spanish economies are expected to avoid recession.
All told, eurozone real GDP growth is predicted to slow from 1.1 percent this year to 0.9 percent in 2020. Meanwhile, the chaos around Brexit continues, as Prime Minister Boris Johnson and the British’ parliament have clashed over the fate of a no-deal outcome and whether to hold an early election.
The European Union has signaled its willingness to extend the Brexit deadline for a third time. This signal increases the chances of avoiding a no-deal scenario with an associated deep recession.
Japan’ second-quarter real GDP growth was revised down from 1.8 percent to 1.3 percent QoQ annualized, reflecting lower capital expenditures than initially reported. IHS Markit now expects real GDP to increase 0.9 percent this year (marked down from 1.1 percent) and 0.3 percent in 2020.
Front-loaded demand ahead of the consumption tax increase from 8 to 10 percent on Oct. 1 will modestly boost the third quarter. However, we predict a contraction in real GDP in the fourth quarter, as consumer spending falls back.
July and August data point to a further loss of momentum. Industrial production and construction have led the deceleration in China’ economy. Automobile sales in August declined for the 14th time in 15 months.
Meanwhile, China’ exports fell 1.0 percent in August (YoY), as exports to the United States fell a stunning 16.0 percent compared to last year. Imports also declined, a sign of weakness in domestic demand.
The new and increased US tariffs on Chinese exports will shave China’ near-term real GDP growth by around 0.2 percentage point. Some of this drag will be offset by additional fiscal and monetary stimulus. China’ real GDP growth is projected to slow from 6.6 percent in 2018 to 6.2 percent this year, 5.7 percent in 2020, and 5.6 percent in 2021.
Other large emerging markets
The global challenges facing the emerging world include slowing growth in advanced countries, falling commodity prices, fallout from the trade war, industrial weakness in the key economies (especially in Europe and China), and a strengthening US dollar.
These challenges have been exacerbated by local problems, including short-sighted macroeconomic policies, lack of structural reforms, and political instability. The extreme difficulties facing some economies (e.g., Argentina and Turkey) are a function of negative global and local dynamics.
Special factors such as sanctions affect others (e.g., Iran and Russia). While many emerging markets will continue to grow in the near term, they are losing steam. India is of particular concern due to the slow pace of reforms. Growth has been slowing since the beginning of 2018 and recently hit a six-year low of 5.0 percent in the June quarter.
We concluded, the risks of a recession have risen because of the escalating trade war and the oil shock. Nevertheless, given the momentum of growth and expected additional stimulus, a recession can probably be avoided.
Written by Chief Economist Nariman Behravesh and Sara Johnson, Executive Director, Global Economics, at IHS Markit