Growth to slow as trade wars escalate

Schroders Economics Team

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For the second consecutive quarter, we have downgraded our global growth expectations and forecast slower growth in both 2018 and 2019. Much of the slowdown can be attributed to the effect of trade wars.

Europe and Japan disappoint

Two of the world’s most export-oriented economies, Europe and Japan, both posted disappointing growth figures in the first half of this year, with softer export growth a notable feature amid escalating trade wars. Although domestic demand remains firm in Europe, it is not enough to offset sluggish external performance. The prospects for a turnaround in export growth appear grim with new orders weakening.

As a result, we see slower growth in both Europe and Japan having a negative effect on global growth.

Despite the challenging growth outlook, neither central bank is expected to alter its gradual tightening stance. In Europe, we anticipate that quantitative easing will be over by the end of Q4 this year and that the authorities will raise rates twice in 2019, ending the era of negative policy rates in the eurozone.

The Bank of Japan (BoJ) is not expected to move again over the forecast period. Although we expect the Bank to eventually tighten, we see this happening outside of our forecast horizon due to subdued inflation and too narrow a window to move ahead of the consumption tax hike in Q4 next year.

China to slow

In China, growth has recently eased and according to our internal activity monitors, it is set to continue to do so for the rest of the year. At the moment, stronger trade data is supportive but we expect this to fade with the imposition of tariffs; a frontloading ahead of tariffs on agricultural products was apparent earlier in the year, and we expect something similar is occurring now.

We expect this slower growth to bring a measure of policy accommodation, including an easing from the central bank. It will take time, however, for a shift in policy to translate to growth. Further support will be needed next year as the escalation of the trade war really begins to bite. We downgrade our growth expectations to reflect the expected impact of tariffs and trade tensions on exports and investment.

UK also impacted

Weaker net trade is also behind our lower forecast for the UK. In fact, it appears as though final sales (which exclude inventories) is actually in a technical recession having contracted for two consecutive quarters. We have therefore been forced to downgrade growth for 2018 and 2019, as we expect the economy to continue to struggle post Brexit. On the monetary policy front, having just raised interest rates, the Bank of England is likely to remain on hold until after Brexit in 2019.

Lengthy trade war anticipated

We now anticipate a deeper and more prolonged trade war between the US and China. This is expected to persist beyond the US mid-term elections and result in tariffs on all goods traded between the two nations, with China also applying non-tariff barriers to US companies. Recent comments from both sides suggest this will be a drawn-out affair. Global trade, capital investment spending and therefore overall global growth will suffer from the uncertainty created.

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