Trade Wars Will Reduce 2020 GDP by 0.80 Percent, says IMF
This weekend’s Brexit disorder lent credence to the International Monetary Fund’s (IMF) dour outlook for global growth. After losing a critical vote on the latest Brexit deal, Boris Johnson sent out two contradictory letters. One sent to E.U. President Donald Tusk, asked to delay Brexit until January 31, 2020. The other, sent to his own Parliament, stated he “will not negotiate a delay” with the E.U. The never-ending Brexit soap opera (note: the Financial Times is reporting this morning that Brexit will now pass by 5 votes), U.S./China trade wars, and Hong Kong unrest are some of the issues hampering the outlook for global growth.
According to the IMF, tensions have stalled international trade, elevated uncertainty, and weighed down the global economy. In data released last week, during their annual meeting held in Washington D.C., they expect to see slower growth across most economies during the next five years. For 2019, they expect global growth to fall to 3%. The IMF’s reduced outlook is not out of consensus, in fact it lags consensus. Most investors know global growth is slowing. Survey data coming out of Germany points to a massive slow-down. Policy makers across the world are responding.
This is the good news. According to the IMF’s analysis, without decisive action by the world’s central banks this year global output would have been a further 0.5 percent weaker. Central Banks worldwide have responded to slowing growth with lower rates. The effects of lower rates is being seen in the U.S. through stronger housing data and a yield curve that is no longer inverted. Other data released last week were less complimentary of the economy. The U.S. leading economic indicator declined month over month, as did retail sales. Industrial production is also weakening, although how much of this is due to the strike at GM is hard to decipher. Despite this data, the latest reading from the Federal Reserve Bank of Philadelphia, showed unfilled orders rising; this is not consistent with a recession.
Our forecast has not changed. Global growth has slowed in large part due to the U.S./China trade war. The IMF estimates that trades wars will leave global output 0.8 percent lower in 2020. This self-inflicted slowdown can be rectified. Last week’s halt on increased tariffs shows a willingness, or more likely a need, on both sides to ease tensions. This weekend, China’s Liu He praised the “substantial progress” achieved by both sides during the recent negotiations, suggesting Beijing is just as keen as Trump is to codify “phase one” of the trade deal. The ability for the White House to ratchet back trade tensions and the capacity for central banks to lower rates should result in continued economic expansion. We continue to believe the Federal Open Market Committee should and will cut rates later this month, although there will be pushback from some members. This past week, Philadelphia’s own Federal Reserve President, Patrick Harker, made the case for not cutting rates later this month.