The escalation of trade tensions will exacerbate the decline in China-US bilateral trade that has already been observed, as well as the slowdown in world growth. However, the resynchronisation of the world's major economies and the decision by central banks to increase liquidity once again could paradoxically limit the risks of a destabilisation of the bond and foreign exchange markets.
For 2019, we have revised and lowered our growth forecasts for China to 6.4%, and for emerging countries from 4.8% to 4.1%. We continue to expect 2.7% growth in the US and 1.4% in the eurozone. Taxing all China-US trade would cause Chinese growth to fall to 5.1% by the end of 2019, without any other changes, but, in this case, Xi Jinping’s government would implement new measures to support the economy.
Conversely, an agreement between Donald Trump and Xi Jinping at the margins of the G20 meeting in Japan on 28th and 29th June could lift nominal growth expectations. But this would lead to an abrupt rise in sovereign yields and an appreciation of the dollar that would be disruptive to financial markets.
The negative impact of the trade war increases
The escalation of the trade war instigated by the US should have a greater negative impact on China-US bilateral trade and world trade than we have observed to date:
- Firstly, the scope of goods affected by the higher tariffs has broadened, as well as the amount.
- Secondly, investment should continue to slow in the US, with a slight knock-on effect from the “Tax cuts and jobs Act”. The US remains the world’s biggest importer, ahead of the European Union and China.
- Thirdly, the Chinese stimulus plan has an offsetting effect on the fall in exports but is not calibrated to generate an acceleration in growth beyond 6.5% in 2019. This has a negative impact on demand for commodities. Emerging countries will therefore be penalised by the Chinese government’s new growth target of between 6% and 6.5% vs. around 6.5% previously.
China and emerging countries affected by the fall in exports to the US
Chinese exports to the United States fell by 30% between Q4 2018 and Q1 2019. Exports to Asian countries also fell, contrary to what was observed at the end of 2018. While the Chinese stimulus plan led to an increase in infrastructure investment, its effects on consumption and industrial production are still limited.
China's growth could therefore stabilise at around 6.4%, which is not enough to generate a spill-over effect to emerging countries. US exporters will therefore have more difficulty finding markets as alternatives for China.
The activism of central banks and eurozone growth factors curbing global growth
The activism of central banks could limit the extent of the slowdown in world growth. Furthermore, US growth is set to decelerate, but remain solid thanks to tax reductions dependent on productive investment remaining in place. In addition, greater productivity tends to support growth.
Eurozone growth could accelerate slightly thanks to budgetary support and an increase in household purchasing power, to 1.5% at-end 2019 according to our forecasts. The fiscal easing implemented in France, Italy, Germany and Spain could generate an average of 0.4 percentage points of additional GDP in the eurozone, according to our calculations. In addition, while the slowdown in US imports will reduce European exports, the possible increase in trade tariffs on European car imports into the US has been postponed until the autumn. Lastly, whoever becomes the new President of the European Central Bank, will not be able to significantly change its monetary policy. Indeed, the Eurosystem is facing a further credit crunch in Southern European countries. Credit to private sector companies declined in Italy by -0.4% in the first quarter and by -1.7% in Spain year-on-year, while it increased by 6.5% and 6.1% on average in France and Germany, respectively. The Eurosystem will therefore continue to favour an accommodative monetary policy by recommending the implementation of macro-prudential measures to avoid creating bubbles, which notably has already been the case in France and Belgium. In addition, the reinvestment policy for maturing sovereign bonds and the new refinancing operations that it may still announce would curb any increase in risk premiums.
For reasons inherent to the United States and the Eurozone, and despite the intensification of the trade war, the growth differential between the two regions could narrow over 2019. This would contribute to limiting the extent of the global slowdown in a context of an increase in world liquidity. However, a new wave of US reprisals would shave 1% off global GDP according to our calculations.