JAKARTA (TheInsiderStories) – Financial markets gave a thumbs-up to the announced trade truce between China and the United States (US), says IHS Markit’ Chief Economist Nariman Behravesh and Sara Johnson, Executive Director for Global Economics said in their latest report. Its impact on growth is likely to be imperceptible.
On the plus side, the agreement includes a freeze in current tariff levels, a delay in restrictions on Huawei Technology Inc., and a promise by China to buy more US agricultural products. On the negative side, unlike prior agreements, there is no timetable or deadlines—mostly, it is a case of “kicking the can down the road.”
In the meantime, the damage from the existing tariffs—albeit small, so far—is hurting trade volumes everywhere and shaving a few tenths of a percentage point off growth. The trade truce is unlikely to reverse the damage done so far.
If the China – US agreement puts a halt to any further escalation of hostilities, then the global growth outlook will likely not deteriorate.
The United States: Short-term support for growth
Real GDP growth increased at an annual rate of 3.1 percent quarter on quarter (QoQ) in the first quarter of 2019. In our forecast, GDP growth steps down immediately to an annual rate of 1.9 percent averaged across the final three quarters of 2019.
The step down reflects an unwinding of temporary factors that were boosting growth in recent quarters, including diminishing support from fiscal stimulus and a sharp slowing in the pace of inventory building from unsustainable levels in recent quarters.
Several developments will help to support the growth outlook, however, including a higher jump-off for equity values, an expected “insurance” rate cut by the Federal Reserves, and lower Treasury yields.
These supports are likely to be temporary. We predict annual real GDP growth to slow from 2.6 percent in 2019 to 1.8 percent in 2020 and average 1.6 percent in 2021–23.
Europe: Pervasive evidence of weakness.
While, European economies remain fragile. There seems to be no end to the bad news from the manufacturing and banking sectors. Retail sales, industrial production, exports, and construction output all point to slower growth.
The IHS Markit Eurozone Manufacturing PMI fell 0.1 point to 47.6 in June, as indexes of output, total new orders, export orders, and employment continued to decline. Real GDP growth is projected to slow from 1.9 percent in 2018 to 1.0 percent this year and next, before edging up to 1.2 percent in 2021.
In the United Kingdom, the risks of a “no-deal” Brexit have risen. Real GDP growth is projected to slow from 1.4 percent in 2018 to 1.1 percent this year and 0.8 percent in 2020, before recovering to 1.4 percent in 2021.
China: In the near term, government stimulus will mitigate the downside risks to growth
Real GDP growth slowed to 6.2 percent in the second quarter of 2019, down from 6.4 percent in the first quarter. The deceleration was driven by the industry and construction sector, where growth eased to 5.6 percent in annual basis (YoY) from 6.1 percent. Service-sector growth held steady at 7.0 percent YoY.
In June, an upturn in the automotive industry supported accelerations in retail sales, industrial production, and fixed investment. But the momentum looks unsustainable. More aggressive policy stimulus is expected in the second half.
Given the Chinese government’s resources and control of the financial system and the large state-owned enterprise sector, it should be able to achieve this year’ 6 percent growth target. The last time Beijing failed to hit the growth target was in the late 1990s during the Asian crisis, when the government pursued aggressive reforms of SOEs and state-owned banks.
The current deleveraging drive pales in comparison to the reforms of the late 1990s, both in terms of short-term impact on demand and long-term impact on productivity gains. Nevertheless, real GDP growth is projected to slow from 6.6 percent in 2018 to 6.2 percent this year, 5.9 percent in 2020, and 5.8 percent in 2021.
Other large emerging markets: There are no winners in this trade war.
While most of the attention has focused on the trade conflict between China and the US, the damage has not been confined to these two economies. Exports from Asia’ key emerging and advanced countries have taken hits in the first half of 2019.
Early on, there was a sense that some economies, such as Vietnam, would benefit from the China – US conflict as companies looked for other suppliers. However, this perception has recently invoked the ire of the White House, which has imposed 400 percent tariffs on the imports of steel from Vietnam and threatened to do much more.
In response, the Vietnamese government has raised tariffs on imports from China to limit transshipments to the US via Vietnam. Meanwhile, there has been little progress between the United States and India on that trade conflict.
More worrisome is Congressional delay in ratifying the US-Mexico-Canada Agreement. The Trump administration has repeatedly threatened to pull out of the North American Free Trade Agreement, which could do huge damage to North American trade volumes.
“We are a long way from being out of danger with respect to the trade wars. Despite the US-China truce, the broader conflict is far from over,” they said.
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