Looming trade wars, political uncertainties — which include how countries respond to U.S. tariffs — and high fuel costs are likely to slow global economic growth, according to IHS Markit’s latest “World Flash” report.
Top economists at the firm said while global economic growth this year “looks steady” driving it is an accelerating economy in the U.S. while “almost every other major economy” suffers from deceleration. There are also shifts occurring in the global market, which includes India overtaking the U.K. in economic size, according to a separate report from the firm.
The IHS outlook report comes as President Trump‘s threat of tariffs against China and the European Union forces nations across the globe to rethink trade strategies. At the recent China-E.U. leaders annual meeting in Beijing, policymakers sought to strengthen ties amid tariffs imposed by the U.S. on a variety of goods and materials from steel and aluminum to car parts and textiles. Europe, which is China’s second-largest trading partner, inked deals involving signed agreements on emissions and intellectual property as well as creating a more “circular economy.”
In the U.S., analysts are expecting consumers to face higher overall costs on goods and services due to tariffs as well as inflationary pricing on fuel. But economists don’t see tariffs negatively hurting GDP growth in the U.S.
In the IHS Markit’s July World Forecast Flash report, chief economist Nariman Behravesh and executive director of global economics Sara Johnson said the “timing of the trade war could not be worse. It is occurring as monetary stimulus is beginning to wear off, oil prices are elevated, and political risks are on the rise. Global growth is beginning to slow — the only question is, how much?”
Behravesh and Johnson described current economic growth as “peaking” but also “vulnerable to a trade war.”
“While top-line global economic growth looks steady in 2018, it is the result of the United States accelerating and almost every other major economy decelerating,” authors of the report explained. “After a spurt in late 2017 and early 2018, the momentum in the world economy is slowing. Moreover, there are looming risks that could further restrain growth, including high oil prices, a potential trade war and political uncertainty in many parts of the world.”
Behravesh said one “manifestation of these trends” was the drop in the firm’s manufacturing purchasing managers index for developed countries, which fell to its lowest levels since the summer of 2017. “Because of these developments, IHS Markit has made downward adjustments to the 2019 and/or 2020 growth forecasts for the U.S., the U.K., China, India and Brazil,” Behravesh said. “The world’s real GDP growth is now projected to slow from 3.3 percent in 2018 to 3.1 percent in 2019 and 2.9 percent in 2020.”
By region and country, the economists expect Europe to “hold steady” — at least for the moment. “Recent evidence suggests real GDP growth will remain near a 0.4 percent quarterly rate into 2019,” Johnson and Behravesh said in the report. “Escalating global trade tensions are a key concern, with potential spillovers to domestic demand through multiple channels, including a potential hit to investment.”
Some of the potential headwinds cited include overall “market stress” in Europe as well as political developments in Italian. “Real GDP growth is projected to slow from 2.6 percent in 2017 to 2.1 percent this year, 1.7 percent in 2019 and 1.6 percent in 2020,” the economists said adding that with Brexit-related uncertainty “delaying investment projects and export growth waning, U.K. real GDP is projected to expand just 1.2 percent in 2018, 1.1 percent in 2019 and 1.4 percent in 2020.”
In Japan, the same level of economic deceleration is expected but for different reasons. IHS said in the report that Japan would be impacted by a trade war between the U.S. and China. “A drop in export orders raises concerns about the impact of trade frictions,” Behravesh said. “The United States and China each buy about 19 percent of Japan’s exports. Growth in Japan’s exports to China and other Asian countries has been led by high-tech machinery and components, which could be vulnerable in a trade war.”
In China, the country also faces a slowing growth rate — from 6.7 percent this year to an estimated 6.1 percent in 2020. “The trade actions so far will cut GDP growth a little further,” Johnson said. “With the economy showing signs of slowing, the Chinese government will likely shift its policy balance toward growth support and ease efforts aimed at deleveraging.”
For the U.S., the economists have GDP growing 3 percent this year, but slowing to 1.7 percent by 2020. The slowing comes after economists raised their initial forecast. “Since last month, we have added 0.7 percentage point to our estimate of second-quarter real GDP growth [in the U.S.], raising it to 4.8 percent annualized,” IHS said in the report.
“The largest single contributor to the markup was a strong May report on international trade in goods,” Behravesh and Johnson said. “Some of this strength was due to a surge in exports of soybeans, which we expect to be reversed in the second half of this year. Growth in domestic demand was also robust in the second quarter. We forecast 3 percent real GDP growth this year, 2.7 percent in 2019, and 1.7 percent in 2020. This forecast incorporates 25 percent tariffs on $34 billion of imports from China and tit-for-tat Chinese tariffs on U.S. exports. These tariffs have little impact on predicted GDP growth.”
In regard to emerging markets, Behravesh and Johnson said the “collateral damage from the trade war has been limited so far, but it is occurring at a time of intensifying financial pressure.”
“Rising trade tensions are occurring at a difficult time for most emerging markets, many of which have come under increasing pressure from rising U.S. interest rates and an appreciating U.S. dollar,” the authors of the report said. “The main dangers of the U.S.-China trade war will be the erosion of confidence and greater financial market volatility.”
Behravesh and Johnson said to consider India, “where capital outflows and further pressure on the rupee would stoke domestic inflation.”
“The Reserve Bank of India started raising interest rates in June and could respond with a more aggressive monetary policy tightening,” they added.
Meanwhile, in a separate report from Rajiv Biswas, Asia-Pacific chief economist at IHS Markit, India is seen growing its economy to become the fifth largest by 2019, pushing aside the U.K.
“India has just overtaken France to become the world’s sixth largest economy in 2018,” Biswas said. “India’s economic ascendancy as a rising global economic power is set to continue in 2019 when Indian GDP is forecast by IHS Markit to overtake U.K. GDP. This will make India the fifth largest economy in the world in 2019, after the U.S., China, Japan and Germany.”
IHS has India’s economy pegged to reach $3 trillion by 2019, which is about 60 percent of Japan’s economy, the firm noted. “India’s economic ascendancy has significant economic implications for the APAC region and the global economy, as India has become the APAC region’s second most important growth engine after China,” Biswas said.
“By 2024, IHS Markit forecasts that India’s economy will overtake Japan to become the world’s third-largest economy,” Biswas added. “The implications of India’s economic ascendancy are of great strategic significance for governments and multinationals. The rising importance of India’s industrial economy and consumer market are making India an increasingly important trade and investment partner for other Asian nations, as well as a key growth market for multinationals across a wide range of industries.”
According to reports from media in India, the country’s textile industry generates about $108 billion a year, and is poised to grow to $223 billion by 2021.