Looking at 2019: More uncertainty and global slowdown

Muhammad Mahmood | Published: January 05, 2019 21:40:46 | Updated: January 08, 2019 21:14:32

TRUCE IN TRADE WAR: US President Donald Trump and Chinese President Xi Jinping attending a working dinner after the G20 leaders summit in Buenos Aires, Argentina on December 01, 2018 —Reuters

The global economy reached its strongest point in 2017 since the global financial crisis (GFC), and that trend has continued despite risks from trade protectionism initiated by President Trump in the first quarter of 2018. The US economy has been performing very well while rest of the world slowing or stagnating. The US Federal Reserve (Fed) has been tightening its monetary policy by raising interest rates to prevent the US economy from overheating. China, the second largest economy in the world, recorded its slowest growth rate at 6.6 per cent since the GFC. East and South Asian countries have managed to achieve relatively high gross domestic product (GDP) growth over the last two decades but that is not the case with most of the least developed countries (LDCs). Many LDCs in fact experienced decline in their per capita income.

Now looking ahead to 2019, the outlook for global growth has rather dimmed despite high watermark for the global economy, in particular the US economy since the GFC. The growth forecast for this year has been downgraded for almost all the industrialised developed countries by the global multilateral agencies and other specialised organisations. The current revised global GDP growth forecast for 2019 stands at 3.5 per cent compared to 3.7 per cent forecast made in the middle of last year.

The US economy achieved a 3.0 per cent growth rate in 2018, the best performance in more than a decade.  A year-end stock market selloff and the return to volatility have put the economic expansion in question. The stock market is not the economy but it conveys certain information and expectations about the economy and are also affected by it. Now the Federal Reserve's interest rates hike has further added to the pessimistic outlook. The US economy is expected to grow by 2.6 per cent in 2019.

The Chinese economy is also slowing down and expected to achieve a growth rate of 6.5 per cent this year, the slowest growth rate since official data on GDP began publishing more than two decades ago. But the economic slowdown in China as recorded in the third quarter of 2018 had hardly to do anything with the Sino-US trade war, but was driven by weakening of domestic demand caused by previous domestic economic policy tightening. The latest available data clearly point to economic slowdown in Germany and France also.

According to the Asian Development Bank (ADB), the Bangladesh economy is expected to grow by 7.5 per cent in 2019 relative to 7.9 per cent in 2018. The ADB further estimated that per capita income is expected to grow by 5.8 per cent this year relative to 5.7 per cent in 2018. It also forecast a current account deficit of 3.5 (-3.5) of GDP. However, the International Monetary Fund (IMF) forecast is below that of the ADB at 7.1 per cent which is almost close to the forecast made by the World Bank (WB) at 7.0 per cent. The forecast of inflation rate is 6.1 per cent. Bangladesh has definitely proven that there are no ultimate barriers to growth for least developed countries (LDCs). But some very well-recognised barriers to growth for all developing economies, including Bangladesh, still remain in place for present - and for the future. They include domestic political instability, conflict and most importantly, the lack of economic diversification and continuing structural adjustments. While the climate change is a major factor that can contribute to exacerbating long-term economic growth prospects for all countries, a hostile climate is the ultimate  barrier to Bangladesh's long-term economic growth prospects given its geographic conditions and a very high population density.

But there are a number of economic and political issues which are quite often interrelated. These factors are at play and will ultimately shape the future direction of the global economy not only in 2019 but also beyond. These include conflicts in Syria and Ukraine and political crisis in the European Union (EU). Continuing uncertainty over the terms of Brexit further compounds the problems within the EU. In many ways the EU is increasingly looking like living on borrowed time as well as on borrowed money. Pax America is falling apart, but President Trump has no idea what to replace it with. Also added to the list is the growing trends in the rise of populist and authoritarian regimes flouting all the universally accepted norms of behaviour posing serious risks to the global economy - in effect these governments are behaving very badly. Many international political analysts believe that political risks are growing and some of the political flashpoints can derail economic growth this year. But economic nationalism remains the key source of political risk. The political risks can exacerbate financial and economic risks that would compound the challenges for policymakers.

But the top trigger for the global economic downturn remains the escalating US-China trade war driven by Trump's desire to make "America Great Again'. Despite all the political dramas enacted in Washington by the Democrats to unseat President Trump, there is a complete bipartisan consensus on China's economic rise which is considered as a challenge and great risk for the US. The US-China Economic and Security Review Commission Report prepared by a bipartisan Congressional panel clearly spelled out those risks emanating from China which include threats to technology supply chain, military expansion and undermining sanctions against North Korea, among many other threats. While there is a truce on trade war now, the dispute could signal the early stages of a prolonged economic cold war which US Vice President Mike Pence spelled out in his Hudson Institute speech in last October. Trade is also a major point of conflict between the US and the EU.

The US-China trade war now has emerged as the biggest single risk to the global economy. This trade war, even with the current levels of tariffs in place, will shave off an estimated 0.2 percentage point off the global economic growth. Global growth rate will be trimmed further if the trade negotiations fail and Trump imposes his tariffs on the remaining US$267 billion Chinese goods. As the trade war continues, growth forecasts point to a decelerating pace in growth not only for developed economies but also for developing economies.

Meanwhile, slowing global economy and strong dollar will dampen US exports and encourage imports. There is no sign of President Trump's efforts to balance his trade with China working. In effect, imports are still flowing with a strong dollar but from elsewhere other than China. So far the effects of the US tariffs on Chinese goods are asymmetric, with Chinese exports to the US rising while Chinese imports from the US declining. This is possibly due to time lags involved in responding to the US' changed trade policy parameters. Higher US tariffs will eventually hit Chinese exporters.  But the risk to the US will also rise resulting from trade flow disruptions. Also faster than expected increases in US interest rates (which also jack up the dollar making imports much cheaper) will further add to economic slowdown in the US.

The Chinese economy is also facing challenges arising from slow growth and sliding investment and problems besetting its financial sector. Furthermore, the key manufacturing index has plunged a record low in a year and a half. The Caixin purchasing managers index (PMI) fell 49.7 in December from 50.2 in November. All these indexes indicate a slowdown in China's manufacturing activity. But the biggest headwind for the Chinese economy remains the trade war with the US. And the trade war has already got entwined with US national security issues giving rise to the possibility of further escalating trade tensions. Robert Lighthizer is now advocating further increases of tariffs on Chinese goods even while the trade negotiation is underway with China.  Uncertainty arising from the trade war will hinder investment in export-related industries in China. The country's export growth is estimated to decline to 5.6 per cent this year relative to 11 per cent in 2018. This alone will push down the growth rate close to one percentage point.

There are no winners in any wars including trade wars - in fact, all will be losers. All countries will be worse off in the event of a trade war than in a rules-based multilateral global trading system. This trade war initiated by the US would cause lasting damage to the global economy resulting from a permanent loss of output and reduced consumption as that would be reflected in the production and consumption distortions arising from Trump's tariffs. The ultimate price will be paid by both consumers and producers in the US and China in higher consumer prices and producers' input costs. But the impact of the trade war between the two largest economies will also eventually negatively impact on other economies in the world.

Muhammad Mahmood is an independent economic and political analyst.


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