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Around the last quarter of 2018, economists across the world maintained that the United States (US)-China trade war and tightening financial conditions would trigger the next downturn, thus dimming the outlook for global growth in 2019. This is in contrast with an optimism expressed unanimously about a robust global economic outlook at the start of 2018.
A Reuters poll in October last year had found that more than 500 economists downgraded the global economic outlook for 18 of the 44 economies surveyed, with 23 unchanged for 2019. Only three were marginally upgraded.
Risks from trade protectionism have been consistently highlighted by Reuters polls since January 2017. The latest indicated that growth in about 70 per cent of 44 economies surveyed has already peaked in 2018.
As reasons, economists have pointed to the dynamic that is playing out in the global economy right now. While the US is booming, most of the other nations are slowing down or stagnating. The stresses caused by this divergence are playing out badly in many emerging markets. Last year, the US Federal Reserve raised interest rates to prevent the US economy from overheating. This constrained the policy options of countries where financial conditions are tightening and trade tensions intensifying.
The latest shift in growth expectations follows a sell-off in financial markets, especially emerging ones, largely driven by trade concerns. Nearly 150 economists told the Reuters that the top two triggers for the next global downturn are further escalation of US-China trade tensions, and tightening in financial conditions driven by a deep sell-off in global equities or a rapid rise in government bond yields. There would be no winners from a global trade war.
Some economists have reasoned that even if the aggregate costs are modest and skewed towards more open economies, all countries would ultimately be facing difficult times compared to the status quo. This would inflict lasting damage to global economic growth. There will also be a permanent loss of output.
US President Donald Trump's administration has threatened duties on US $267 billion worth of Chinese goods on top of tariffs already levied on US $250 billion-worth of Chinese products to the US previously-amounting to almost all imports. Beijing retaliated. Economists feel that the US economic policy towards China is likely to be more confrontational in the coming years.
The US economy remains the current major driver of global growth. It still has faster-than-expected increases in the US interest rates compared to the previous survey, which points to a substantial slowdown in the US economy by late 2019. But few economists expect US wage growth to pick up meaningfully before the next recession.
The risk of a self-inflicted wound in the US is also rising. The dominant downside risk to the global outlook remains in spite of the Trump administration's attempt to rebalance trade with China through tariff policy. The consequences of escalating trade actions are undeniable: higher prices in China and the US, less purchasing power for consumers in these countries, higher input costs, heightened financial market volatility, and possibly higher interest rates.
These effects are likely to spill over from these countries. While global growth in 2018 held strong, unchanged at July's 3.8 per cent prediction, the consensus for 2019 is 3.6 per cent. This is a cut for the first time since survey began for that period in July 2017. This is lower than the International Monetary Fund's projection of 3.7 per cent for 2019.
Despite additional economic and political concerns from Italy and Brexit negotiations mounting, the European Central Bank was not expected to extend its bond-buying programme beyond last year. But with no let-up in the US-China trade war, growth forecasts point to more pain ahead - not just for developed but also emerging market economies like Bangladesh.
From China to Turkey and Africa to Latin America, growth forecasts for this year was downgraded leading to an abrupt stop of capital flows to emerging markets (EM) over recent months. This has created painful consequences for EM with large external deficits.
Sarwar Md. Saifullah Khaled is a retired Professor of Economics, BCS General Education Cadre.