The US-China trade war seems to be the perfect recipe for the world’s two biggest economies to self-destruct. Figures coming out suggest that economic growth is slowing down in both countries. In its outlook the International Monetary Fund predicts China’s real Gross Domestic Product will slow down from the 8% seen in 2018 to 6.3 percent. For the US real GDP is expected to slow down from last year’s 2.9% to 2.3% in 2019.
Is the US heading for recession?
The struggling manufacturing sector in the US is among the earliest sign suggesting the trade war with China is starting to cut into the country’s growth. Chris Williamson who is the Chief Business Economist at IHS Markit, said among manufacturers this issue and signs of slower sales were major concerns.
Data from IHS Markit’s Purchasing Managers’ Index shows that overall business activity in May 2019 was the slowest since May 2016. Williamson said job growth in May was also the weakest seen for over two years. “Business confidence has meanwhile slumped to its lowest since at least 2012, causing firms to tighten their belts, notably in respect to hiring.”
In his opinion piece on Bloomberg Peter Coy says GDP has expanded at a slower pace when compared to the previous period of uninterrupted economic growth. Coy says that while the 1990-2001 boom saw GDP increase by 43%, from 2009-2019 growth has been lacklustre, expanding by only 22%.
Meanwhile some economists are already forecasting a possible recession that could hit the US in 2020. That is if economic expansion remains slow. The National Association for Business Economics’ 53 member panel of forecasters has real GDP slightly above the IMF’s outlook, and predict that it will slow to 2.6% in 2019, and then to 2.1% by 2020.
Gregory Daco, the survey’s panel chairperson, said while the risk of a recession seems low in 2019, it will rise rapidly in 2020. “Panelists put the odds of a recession starting in 2019 at 15%, climbing to 60% by the end of 2020”.
China
Has also seen its purchasing its manufacturing purchasing managers’ index decrease by 0.7% in May to 49.4% despite efforts to stimulate the economy. Anything under 50% is regarded as negative.
Source: National Bureau of Statistics of China
China’s attempt to encourage banks to lend more, however, seems to be achieving some results thus far. In May Chinese banks are expected to have extended loans worth 1.225-trillion yuan - a bounce back of about 13% compared to April. According to Reuters, in April lending had dipped to1.2 trillion yuan following the stronger performance of 1.69 trillion yuan in March.
The International Monetary Fund expects that moves by the Chinese central bank to stimulate the economy will also help stimulate global growth in the second half of 2019. Still, global GDP is expected to slow down from the 3.6% seen in 2018 to 3.3% in 2019.
According to the IMF’s recent World Economic Outlook, titled “Growth Slowdown, Precarious Recovery”, developing economies are expected to perform better than advanced economies in 2020. Growth in advanced economies will slow down from last year’s 2.2% to 1.8% in 2020, and then be trimmed further to 1.7% in 2021. Emerging markets and developing economies, however, growth will crimp by slightly less from 4.5% to 4.4 percent. In 2021 IMF predicts that growth in these economies will start picking pace in 2020 and by 4.8% and 4.9% in 2021 respectively.
Trade weakness continues
Trade growth has also slowed down. In his overview of the World Trade Organisation’s activities 2018, (WTO) Director General, Roberto Azevêdo, said the slowdown in trade figures was due to mounting tensions - particularly tariffs. He said increase in trade-restrictive measures and continuing economic uncertainty created challenges.
“These factors and a deceleration in overall economic activity slowed momentum in global trade, restricting merchandise trade growth to 3 per cent compared with 4.6 per cent in 2017.” He expects the downward trend to continue in 2019 with a dip to 2.6% for the year.
While the IMF expects global economic growth to be firmer in the second half of 2019, the WTO expects merchandise growth to remain below trend in the second quarter. The first three months already saw worrying figures. WTO has warned that the outlook for trade could worsen if heightened trade tensions are not resolved.
“If trade growth is to bounce back in 2020, it is vital we resolve tensions and create an environment where trade can play its full part in driving economic growth and reducing poverty," Azevêdo said.
The WTO’s World Trade Outlook Indicator shows a decline at the end of the first quarter compared to the same period last year.
Readings of 100 indicate growth in line with medium-term trends; readings greater than 100 suggest above trend growth, while those below 100 indicate the opposite. The direction of change reflects momentum compared the previous month. Source: World Trade Organisation
Source: World Trade Organisation
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