Fitch: China Trade War Dims Economic Prospects

The outlook for the global economy has deteriorated significantly due to escalation in the U.S.-China trade war, according to Fitch Ratings' Global Economic Outlook (GEO). The credit rating agency forecasts world growth in 2020 to fall to the lowest rate since 2012.

"There can be few precedents since the 1930s of global growth prospects being affected so significantly by trade policy disruptions," according to Brian Coulton, chief economist at Fitch.

Fitch's world gross domestic product (GDP) growth forecasts for both 2019 and 2020 have been lowered by 0.2% since the June GEO in response to the sharp escalation in the U.S.-China trade war over the summer. Global growth is projected to fall to 2.6% this year and to 2.5% next year from 3.2% in 2018. This would be the slowest pace of expansion since 2012 when the Eurozone crisis was at its peak.

The current global slowdown is highly synchronized with 19 out of the 20 countries covered in the GEO expected to record lower growth in 2019 than last year. Fitch's growth forecasts for 2020 have been revised down for no less than 16 countries since June.

China's 2020 growth forecast has been revised down to 5.7% from 6.0% and the Eurozone forecast has been cut to 1.1% from 1.3% in June. The U.S. forecast has been lowered by 0.1% to 1.7%.

U.S. tariff measures announced in August will result in the effective tariff rate on Chinese imports rising to nearly 25% by the end of 2019, Fitch notes in the GEO. The new measures represent a shock that is three-quarters of the size of Fitch's "worse-case" downside scenario for the trade war. China will ease domestic macro policies to a degree in response to decelerating growth, but Fitch does not envisage an aggressive credit stimulus, as policy-makers continue to balance growth and financial stability considerations.

Lower growth in China will prolong the slump in global trade and manufacturing, which will, in turn, continue to pressure Eurozone expansion. Germany has been particularly affected due to a highly open economy, and Fitch predicts a technical recession in the third quarter of the current year. 

Fitch warns that the U.S. is not immune, with exports, manufacturing and business investment deteriorating. However, its more closed economy – external trade accounts for a relatively small share of GDP – continues to see robust consumer spending, a tight labor market and expansionary fiscal policy, and Fitch predicts a slowdown rather than a recession ahead.

The U-turn in global monetary policy direction was completed in the third quarter of this year with two interest rate cuts from the Federal Reserve (Fed), one interest rate cut from the European Central Bank (ECB) and the ECB announcement of a restart of quantitative easing asset purchases on an open-ended basis.

"Global central banks have delivered the most rapid and geographically broad-based shift to monetary policy easing since 2009," according to Coulton.

Fitch does not, however, envisage recent mid-cycle insurance-based rate cuts from the Fed to mark the beginning of a protracted series of rate cuts; Fitch expects the Fed to remain on hold through 2020. There are also doubts as to how effective monetary easing can be in an environment of sharply rising trade policy uncertainty and its deleterious impact on business investment.

Financial market implications of the monetary policy turnaround have been pronounced although, as evidenced by the sharp decline in global bond yields. The impending return of sizable global quantitative easing asset purchases in 2020 has been an important contributing factor, according to Fitch.

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