Is the Trade War to Blame for the Low Global Economy Growth Rate?

It’s the mother of all battles and it’s threatening to slow down the world economy. You guessed it right, it’s the Trade War, one that has the world watching with bated breath.

China and the US have had an uneasy relationship on trade practices. Even though US President Trump and China President Xi Jinping consented to a 100-day plan for trade talks in 2017, the talks failed. Later, in August 2017, President Trump ordered a probe into China’s alleged intellectual property theft. This was perceived as the first direct trade action against China.

In March 2018, President Trump signed a memorandum imposing 25% tariffs on steel and 10% tariffs on imports of aluminium. China’s retaliation came in the form of tariffs on 128 American products, to the tune of $3 billion. Ever since, the two countries have been slapping tariffs on each other. In September this year, the US imposed fresh tariffs on more than US$125 billion worth of Chinese imports, including diapers/nappies, shoes and food.

This October, though, there’s been a glimmer of hope, as a phase one deal between the two nations has been worked out. Expectations are for the deal to be signed in November, and the phase two will kick off in 2020. However, considering the way the two countries have been handling the trade conflict, there are continued fears that one of the two heads of state will go back on the deal.

Trade-war impact

Whether or not that deal comes through, much damage has been done. According to a September 2019 Moody’s Analytics Report (1), the trade war has cost the US an estimated 0.3 percentage point in real GDP and nearly 300,000 jobs. Also, the Institute of Supply Management (ISM) manufacturing index for the US dropped to 47.8 in September, its lowest level since June 2009. Any number below 50 is a sign of a recession. The trade war has certainly made its impact on the US economy. The US GDP growth rate is expected to be 2.1% next year, lower than the 2.4% forecast for this year, according to the recently released World Economic Outlook Report by the International Monetary Fund (IMF).

In China, the official Purchasing Managers’ Index (PMI) and the Caixin/Markit PMI for manufacturing activity registered 49.8 and 51.4, respectively. Although these figures are better than expected, they still are an indication of the business perceive the economic environment, which is for sure hurting from the trade conflict.

Speaking about growth rate, the country registered its lowest GDP growth rate in nearly 30 years, at 6% for the quarter ending September, an impact of the trade war.

Global GDP to dip by 0.8 pc in 2020, says IMF

The IMF has noted that the global economy is in a “synchronized slowdown”. The IMF has downgraded growth for 2019 to 3%, its slowest pace since the 2008 financial crisis. It cites the trade war as one of the principal reasons for the slowdown of the world economy, among other reasons. “We estimate that the US-China trade tensions will cumulatively reduce the level of global GDP by 0.8% by 2020,” the IMF notes.

The IMF also mentions the uncertainty over the trade war, and higher tariffs as reasons for the dent in demand for capital goods. It also points out that in the first half of 2019, the volume of global trade stood just 1% above its value one year ago—the slowest pace of growth for any six-month period since 2012.

It’s not just the IMF that is ringing alarm bells for the world’s GDP growth rate. A Bloomberg Economics report puts the price tag for the global trade-war uncertainty at $585 billion. This will amount to a cut of 0.6% of global GDP, it says.

Yet another ratings agency, S&P Global Ratings, also predicts a slowdown in the Asia-Pacific region, owing to trade tensions. They predict a dampening of investor and corporate sentiment over the next one year.

If you are an investor, you certainly have been following the developments closely to understand how your investments are faring. If you have picked one of the mutual fund options, available on Bajaj Markets, know that financial tips and investment planning are a click away once you open an account. What’s more, you also gain access to comprehensive portfolio summaries and insights, which help you track the performance of your fund. Choose from a range of top-rated funds, which have diversified securities, lowering your risk from underperformance of one security and balancing it out with a top performing security. As a mutual fund investor, you can also avail tax benefits of up to Rs. 1.5 lakh on ELSS (Equity Linked Saving Schemes) under Section 80C of the Income Tax Act 1961.

Gain and pain caused by the trade war

While the trade war does make an impact on global growth rates, a February 2019 UNCTAD report (4) notes that some countries stand to gain from the tension. The report notes that countries which have the economic wherewithal to replace Chinese and US firms are expected to benefit. It points out that European Union exports are likely to get hold of about $70 billion of US-China bilateral trade. The list of countries that are predicted to benefit include Japan, Canada, Mexico, India, Pakistan, Vietnam, Brazil, Australia and the Philippines. The study does ring a note of caution when it says that even though some countries will see an increase in exports, the negative effects of the trade war across the global are still likely to dominate.

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Summing up, the global economy may see a slow growth rate but individual investors should never allow external factors to affect their financial goals. A prudent investor is like a long distance runner — staying focused on the goal while also pacing the run appropriately to get to the finishing line.

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