The Forward View – Global: October 2019
US opens new fronts in the trade war.
- The deterioration in the global trade environment has continued – with the US announcing new tariffs on a range of imports from the European Union (in retaliation for EU subsidies for its aerospace sector). Meanwhile, tensions between the US & China could extend beyond trade, with reports suggesting the US is considering restrictions on financial flows with China. These developments highlight the risk of further escalation in tensions that could negatively impact global activity.
- India’s economic slowdown is a key driver of weakness in 2019 (given that India is the world’s third largest economy on a PPP basis) – largely reflecting its domestic issues rather than global trade. The Reserve Bank of India has aggressively cut its policy rate, which we expect to support an investment-led recovery, however downside risks to consumption persist.
- More timely indicators of activity – such as PMI surveys – suggest that any upturn in Q3 is unlikely. On average, global manufacturing and services readings were weaker in Q3 than Q2, and the recent upturn in manufacturing PMIs reflect the surprisingly strong outcome in China (given weakness in other industrial indicators).
- Our forecasts for global economic growth remain unchanged this month. We expect the global economy to expand by a sub-trend 3.1% in 2019, with little improvement in 2020 (3.2%) before recovering to the long term trend of 3.5% in 2021.
- Critical to the recovery in coming years is the lagged effects of easier monetary policy and cyclical recoveries in India and Latin America. These forecasts also assume no escalation in trade restrictions between the US and trading partners or worsening in geopolitical tensions – with potential tariffs on EU imports and Chinese financial flow restrictions highlighting downside risks.