Trade Wars Causing Collateral Damage To Global Economic Outlook: Report

US auto tariffs and a no-deal Brexit will amplify the shock and take a much bigger toll on the eurozone

Threats to global growth outlook from protectionism have become much more significant in recent months which raise the possibility of disruptions to trade and investments, according to Fitch Ratings Inc.

Breakdown of US-China trade negotiations, the US Section 232 investigation into auto imports, recent use of a US tariff threat to pressure Mexico to change migration policies and the rising chance of a no-deal Brexit could have a much bigger impact on the world economy than anything seen over the course of 2018.

Fitch said the global gross domestic product (GDP) is forecast to decline from 3.2 per cent in 2018 to 2.8 per cent in 2019 and 2.7 per cent in 2020 despite still robust labour market conditions in advanced economies supporting consumers.

If the United States does impose the new tariffs and China retaliates, global growth will fall to 2.4 per cent in 2020 even allowing for a monetary policy easing response. While falling short of a global recession, said Fitch, this will be the weakest global growth rate since 2009 and slightly worse than 2012 when the eurozone sovereign debt crisis was at its peak.

US auto tariffs and a no-deal Brexit will amplify the shock significantly and take a much bigger toll on the eurozone.

A sharp slowdown in global manufacturing at the end of last year has continued over the past few months. World industrial production growth has now fallen below 1.5 per cent year-on-year, the lowest rate since late 2015 and early 2016.

Several factors lie behind the manufacturing downturn, including the simple fact that cyclical swings in China are having a bigger and bigger impact on global industrial production. But two specific factors are worth highlighting, said Fitch.

First, the deterioration in business investment prospects is curtailing demand for capital goods. The orders have slowed sharply since last summer in the United States, eurozone and Japan. Second, the global car market remains in the doldrums.

The auto sector has a particularly large multiplier impact on other industries through supply-chain linkages and is a key driver of the global manufacturing cycle.

With downgrades to forecasts for business investment in the United States and China and world car demand expected to be broadly flat this year -- after declining in 2018 for the first time in nine years -- global industrial production growth is likely to remain weak.

This, in turn, implies that growth in world merchandise trade is unlikely to recover significantly, even without a further escalation in tariffs. Capital goods and autos are highly integrated global industries with strong international supply-chain linkages, said Fitch.

Sluggish growth in world trade and industrial production has historically been associated with weak GDP growth in emerging markets excluding China. Germany's economy is also highly exposed to global manufacturing and trade.

The manufacturing downturn also reflects a weakening outlook for business investment and the knock-on impact on weaker demand for capital goods. At the same time, the impact of the global slowdown on the US economy has become more evident in recent months.

Along with a more accommodative outlook for monetary policy and credit conditions that were previously anticipated, it still seems most likely that the US economy will see a slowdown over the next year rather than a sharp correction, said Fitch.

In India too, a slowdown over the past year has been driven by steadily cooling activity in the manufacturing sector and -- to a lesser extent -- agriculture. Weaker momentum has been mainly domestically driven, though export growth has also faltered more recently.

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Source: Ndtv.com

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