Protectionism choking global growth prospects, says Fitch

Trade policy disruptions – including the recent sharp escalation in the US-China trade war and significant risks of a ‘no-deal’ Brexit – are darkening the global economic outlook, says Fitch Ratings.

In an update of its global economic outlook (GEO) forecasts, Fitch has made significant downward revisions to China and Eurozone GDP growth forecasts over the next 18 months. China’s growth rate is now expected to fall to 6.1% in 2019 and 5.7% in 2020, down from 6.2% and 6.0%, respectively, in the June 2019 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 in June. US growth forecasts have also 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.

The following are the views of Fitch Ratings.

While the global growth slowdown witnessed over the last 12 months reflected a variety of causes – including an earlier move towards more restrictive credit conditions in China, the 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 12-18 months is trade policy.

Specifically, the US 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 (roughly) $300 billion of Chinese imports (to be fully phased in by December). Current US 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.

Our initial estimates suggest that this shock will reduce China’s growth in 2020 by 0.3 pp relative to our June GEO baseline, even allowing for additional policy easing, including through cuts to banks’ reserve requirement ratios. We continue 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% yoy 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 growth was weaker than expected in 2Q19 and more recent dataflow has continued to surprise on the downside, particularly for Germany where the economy contracted in 2Q19. Germany’s economy is highly open and its large current account surplus leaves growth reliant on global demand, including in the auto sector, where global sales have been falling.

Eurozone growth prospects are also at risk from the real possibility of a ‘no-deal’ Brexit, a scenario that could spark a significant UK recession in 2020. In an illustrative ‘no-deal’ scenario that sees UK GDP fall by 1.4% next year, Eurozone growth could be 0.4pp weaker than our baseline.

US economic growth has shown greater resilience of late with robust consumption growth, tight labour market conditions and a widening federal fiscal deficit supporting domestic demand. Nevertheless, the manufacturing sector has slowed markedly and firms are becoming more cautious on investment spending in the face of rising trade policy uncertainties. Our forecasts for investment growth have been revised down and show a sharp slowdown compared to 2018.

The intensification of downside global risks since the Fed cut interest rates in July now looks likely to prompt another 25bp cut in December 2019, justified along the lines of “insurance” against a sharper US slowdown. However the relative strength of consumption, tight labour markets and stable inflation mean a series of further rate cuts is unlikely and we see the Fed on hold through 2020.

The ECB 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 question marks, 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.

The September GEO will be published later this month and will contain updated forecasts for 20 large economies.