Credit rating agency Fitch Ratings published a report Sept. 9 noting that trade policy disruptions, including recent sharp escalation in the U.S.-China trade war and significant risks of a no-deal Brexit, are darkening the global economic outlook.
In an update of the company’s global economic outlook (GEO) forecasts, Fitch has made significant downward revisions to China and Eurozone GDP growth forecasts over the next 18 months. Fitch expects China’s growth rate to fall to 6.1% in 2019 and 5.7% in 2020, down from 6.2% and 6.0%, respectively, in the June GEO.
Eurozone growth is now forecast at 1.1% in both 2019 and 2020, compared to 1.2% for 2019 and 1.3% for 2020. U.S. growth forecasts also have been lowered to 2.3% in 2019 and 1.7% in 2020, compared to 2.4% and 1.8%, respectively, in June. Eurozone growth prospects would be materially lower in the event of a no-deal Brexit, a risk that has risen further over the summer.
Fitch notes in the forecast that, while global growth slowdown witnessed over the last 12 months reflected a variety of causes — including an earlier move toward more restrictive credit conditions in China, tightening of global dollar liquidity through 2018 and significant macro challenges in some large emerging markets — the primary cause of the deteriorating outlook for the next 12 to 18 months is trade policy.
Specifically, the U.S. severely intensified its tariff measures on Chinese imports over the summer by raising the existing tariff rate on roughly $250 billion of goods to 30% from 25% (effective from the start of October) and introducing a new 15% tariff on the remaining approximately $300 billion of Chinese imports (to be fully phased in by December). Current U.S. policy plans would see the overall effective tariff rate on imports from China rising to over 20% by the end of this year, with virtually all goods affected.
Fitch’s initial estimates suggest that this shock will reduce China’s growth in 2020 by 0.3 pp relative to the rating agency’s June GEO baseline, even allowing for additional policy easing, including through cuts to banks’ reserve requirement ratios. According to the forecast, it continues to expect a restrained policy response, with any further credit stimulus to be relatively modest so as not to reverse the deleveraging campaign.
Domestic demand growth has remained sluggish in China with manufacturing investment curtailed by trade uncertainty, soft consumer spending growth — partly reflected in car sales, which are down by over 10% year-on-year so far this year — and slowing housing starts.
The impact of China’s slowdown on the global economy is increasingly pronounced and has been an important factor in recent growth disappointments in the Eurozone.
Eurozone GDP was weaker than expected in 2Q19 and more recent dataflow has continued to surprise on the downside, particularly for for Germany, where the economy contracted in 2Q19.
Germany’s economy is highly open and the country’s large current account surplus leaves growth reliant on global demand, including in the auto sector, where global sales have been falling.
The impact of China’s slowdown on the global economy is increasingly pronounced and has been an important factor in recent growth disappointments in the Eurozone, according to the Fitch forecast.
Fitch maintains that Eurozone growth prospects are also at risk from the real possibility of a no-deal Brexit, a scenario that could spark a significant U.K. recession in 2020. In an illustrative no-deal scenario that sees U.K. GDP fall by 1.4% next year, Eurozone growth could be 0.4 percentage points weaker than the rating agency’s baseline.
U.S. economic growth has shown greater resilience of late with robust consumption growth, tight labor market conditions and a widening federal fiscal deficit supporting domestic demand, according to the forecast. Nevertheless the manufacturing sector has slowed markedly and companies are becoming more cautious on investment spending in the face of rising trade policy uncertainties. Fitch forecasts for investment growth have been revised down and show a sharp slowdown compared to 2018.
Intensification of downside global risks since the Fed cut interest rates in July now looks likely to prompt another 25 bp cut in December, justified along the lines of “insurance” against a sharper U.S. slowdown. The relative strength of consumption, tight labor markets and stable inflation, however, mean a series of further rate cuts is unlikely and Fitch sees the Fed on hold through 2020.
Fitch maintains that the European Central Bank is likely to announce significant fresh accommodation very soon, including a restart of asset purchases in October. Financial market anticipation of such a move has likely been a key factor in the recent collapse in German government bond yields into negative territory, a development that has had strong global spillovers on other bond markets.
There are questions, however, as to how effective looser global monetary policy will be in restoring growth, particularly where business investment is being adversely affected by trade policy uncertainty.