JAKARTA (TheInsiderStories) – United States (US) trade tensions with China are more likely to deteriorate this year and will dampen global growth in 2019, Moody’s Investors Service says in its quarterly Global Macroeconomic Outlook update.

“We expect to see more restrictions on Chinese acquisitions of firms in the US and Europe, and our base case scenario now assumes that the US administration will go forward with some of the proposed restrictions on
imports from China,” Elena Duggar, Chair of Moody’s Macroeconomic Board says.

Moody’s anticipates an implementation of further tariffs on US imports from China, in addition to the initial 25 percent tariffs on US$50 billion worth of imports as well as the steel and aluminum tariffs currently in effect. Moreover, retaliatory action by the Chinese government is likely to follow.

These measures are expected to shave up to 0.3-0.5 percentage points from China’s real GDP growth in 2019. However, such measures will likely be met
with moderate fiscal policy and liquidity easing measures in China designed to offset most of the effects.

For the US, the underlying economic momentum remains very strong, with the economy adding more than 200,000 jobs a month even with a historically low unemployment rate of 3.9 percent in July. The credit rating agency estimates trade restrictions will trim off about one quarter of a percentage point from real GDP growth to 2.3 perent in 2019, offsetting some of the strong momentum attributable to the fiscal stimulus.

“Most of the impact of the trade restrictions on economic growth will be felt in 2019,” adds Madhavi Bokil, Moody’s Vice President and the lead author of the report.

“The magnitude of the macro impacts will depend on market sentiment. Tightening of financial conditions through asset price and currency adjustment and a broader hit to business and consumer confidence are now more likely than a few months ago and have the potential to derail the global economy.”

For most G-20 economies, growth prospects remain solid and the near-term global outlook for many advanced economies is broadly resilient. G-20 countries are expected to grow 3.3 percent in 2018 and 3.1 percent in 2019.

The advanced economies will grow by 2.3 percent in 2018 and 2.0 percent in 2019, while G-20 emerging markets will remain the growth drivers, at 5.1 percent in both 2018 and 2019. However, overall there are early signs growth has peaked.

Many major emerging market countries have experienced a decline in economic activity owing to elevated oil prices, mounting trade tensions and tightening of financial conditions, while external headwinds additionally
constrain others.

According to Moody’s, financial market volatility and reversals of capital flows away from emerging markets are to be expected amid tighter global financing conditions. Given the mix of weak macroeconomic fundamentals, loose monetary policy and economic dependence on foreign financing, it is not surprising that Argentina and Turkey have been under most stress.

A risk of wider disruptive contagion event engulfing other emerging market countries remains small, given relatively better fundamentals. Investors’ need for portfolio rebalancing has led to increased exchange market pressure in a number of countries.

In the case of Turkey, however, economic policies in particular have contributed to a worsening of its credit fundamentals, making its economy uniquely vulnerable.

Email: linda.silaen@theinsiderstories.com