Fitch: China trade war dims economic prospects

China’s 2020 growth forecast has been revised down to 5.7% from 6.0% and the Eurozone forecast has been cut to 1.1% from 1.3% in June. The U.S. forecast has been lowered by 0.1% to 1.7%.

U.S. tariff measures announced in August will result in the effective tariff rate on Chinese imports rising to nearly 25% by the end of 2019, Fitch notes in the GEO. The new measures represent a shock that is three-quarters of the size of Fitch’s “worse-case” downside scenario for the trade war. China will ease domestic macro policies to a degree in response to decelerating growth, but Fitch does not envisage an aggressive credit stimulus, as policy-makers continue to balance growth and financial stability considerations.

Lower growth in China will prolong the slump in global trade and manufacturing, which will, in turn, continue to pressure Eurozone expansion. Germany has been particularly affected due to a highly open economy, and Fitch predicts a technical recession in the third quarter of the current year. 

Fitch warns that the U.S. is not immune, with exports, manufacturing and business investment deteriorating. However, its more closed economy – external trade accounts for a relatively small share of GDP – continues to see robust consumer spending, a tight labor market and expansionary fiscal policy, and Fitch predicts a slowdown rather than a recession ahead.

The U-turn in global monetary policy direction was completed in the third quarter of this year with two interest rate cuts from the Federal Reserve (Fed), one interest rate cut from the European Central Bank (ECB) and the ECB announcement of a restart of quantitative easing asset purchases on an open-ended basis.

“Global central banks have delivered the most rapid and geographically broad-based shift to monetary policy easing since 2009,” according to Coulton.

Fitch does not, however, envisage recent mid-cycle insurance-based rate cuts from the Fed to mark the beginning of a protracted series of rate cuts; Fitch expects the Fed to remain on hold through 2020. There are also doubts as to how effective monetary easing can be in an environment of sharply rising trade policy uncertainty and its deleterious impact on business investment.

Financial market implications of the monetary policy turnaround have been pronounced although, as evidenced by the sharp decline in global bond yields. The impending return of sizable global quantitative easing asset purchases in 2020 has been an important contributing factor, according to Fitch.