GLOBAL economic growth will continue to suffer from the side effects of the US-China trade war in 2020, with most analysts lowering their forecasts for the coming year.
Other factors that may have an impact include the continuing uncertainty of Great Britain’s plans to exit the European Union — the so-called “Brexit”, US trade sanctions against Iran and Chinese technology giant Huawei, financial stress due to high levels of debt and geopolitical tensions affecting oil prices.
Among major institutions, the International Monetary Fund (IMF) remains the most upbeat about the world economy, projecting 2020 growth to inch up to 3.5 percent from 3.2 percent in 2019. The IMF, however, progressively lowered its 2019 and 2020 forecasts through the first half of the year as expectations for progress in US-China trade talks turned out to be misplaced.
A less optimistic view of growth prospects for 2020 is shared by the World Bank and credit ratings giant Fitch, both of which are predicting the global economy to expand by 2.7 percent. Fitch lowered its 2020 forecast from 2.8 percent in mid-June, citing weaker conditions in the US and Chinese economies.
Significantly, all three forecasts were based on the US-China trade conflict “stabilizing,” with no additional tariffs or retaliatory measures being imposed by either country. That presumption has been superseded in recent months, however, as both US and China have escalated the dispute — the US by expanding tariffs on Chinese goods and China by sharply devaluing its currency and filing a tariff dispute before the World Trade Organization (WTO).
Trade war effects spread
In spite of hopes that the trade conflict between the US and China would begin to cool down, both countries have seemed unwilling to make concessions. The impact is being felt among other world economies and, in some cases, punitive trade measures have been taken against other countries, expanding the conflict. For example, China recently banned imports of Canadian soybean meal, regarded as a serious blow against that country’s agricultural sector.
Consumer durable goods and machinery are the biggest components of global trade after petroleum and food, so any weakness in these is usually a sign of slower economic growth on a broader scale. In both advanced and emerging economies, according to the IMF, long-term spending by both businesses and households is slowing due to uncertainty over future economic prospects. The trend is not as sharp in emerging economies, many of which are still growing at a respectable pace, but some larger economies are showing signs of possible recession. In Germany, for example, mid-year data released at the beginning of September showed significantly slowing in factory orders, construction spending the lowest in five years and a retraction in industrial production, which was 0.6 percent lower in July than the previous month and 4.2 percent lower than the same period in 2018.
Impact of sanctions
Almost immediately upon taking office in early 2017, meanwhile, US President Donald Trump abrogated the multiparty nuclear agreement signed with Iran in 2015 and reimposed stiff economic sanctions on that country. Tensions have been steadily building and now pose a clear threat to the flow of oil through the Persian Gulf, with Iran on a number of occasions threatening to close the critical Strait of Hormuz and the US – along with the UK and Australia – increasing its naval forces in the region.
Oil prices have not reacted strongly to Middle East tensions through most of 2019 but they have been slightly elevated, and any interruption to traffic through the Strait of Hormuz — through which about one-sixth of the world’s crude oil and about one-third of its natural gas pass — would cause an immediate and potentially devastating spike in fuel prices.
The other major sanctions imposed by Trump in 2019 were directed at Chinese technology giant Huawei, which has been accused of various industrial misdeeds in the US including cooperating with the Chinese government in spying and theft of intellectual property. A virtual ban on US business with Huawei imposed earlier in the year was walked back by the Trump administration – under pressure from US tech firms that supply many of the components such as computer chips used in Huawei devices — But some analysts are concerned that the upcoming US elections in November 2020 – in which Trump is being seen as increasingly vulnerable – may provoke further actions. Trump, whose popularity has been declining as the US economy cools, may strike at Huawei again in order to gain points with his conservative, blue-collar base, with which protectionist policies have resonated strongly.
Mixed regional prospects
While economic growth in 2020 is expected to be tepid on a global scale, it is not expected to be uniformly disappointing. In its mid-2019 forecast for the coming year, the World Bank said that although “economic momentum remains weak,” some countries, particularly in emerging markets, will “move past periods of financial strain” and experience better than average growth. Areas where the World Bank foresees reasonably strong growth include South Asia, Africa and Central and Eastern Europe, driven respectively by strong consumer spending and business investment, higher oil prices and more stable supply chains and the emergence of Turkey from a period of financial crisis.
Regions where growth is expected to slow or remain flat include East Asia and the Pacific, largely due to trade pressures on China and large volumes of public and corporate debt; Western Europe, where slower exports and a sharp drop in investments due to the uncertainty about Brexit will be a drag on growth; and the United States, where the twin impacts of the trade war and uncertainty about the November elections have consumers and business investors increasingly adopting a “wait and see” attitude and curtailing spending.
However, the World Bank’s qualifications that the above outlooks were based on assumptions of progress in trade talks, supportive monetary policy among major economies and stable exchange rates for the most part have not been matched by reality through most of 2019. This could well mean that global growth will be somewhat slower than forecast in 2020 although as of now, few credible analysts have been willing to try to quantify a worse- or worst-case scenario.