Thursday, October 17, 2019

Tariff war and policy uncertainty leading to synchronized global slowdown

In its latest World Economic Outlook (October 2019), the IMF argues that the global economy is in a synchronized slowdown, thanks to rising trade barriers and increasing geopolitical tensions. It has downgraded global growth for 2019 to 3%, the slowest pace since the global financial crisis a decade ago. Specifically,
  • US-China trade tension will reduce the level of global GDP by 0.8% by 2020
  • Growth is affected by idiosyncratic country-specific factors in emerging market economies. Growth in Argentina, Iran, Turkey, Venezuela, Saudi Arabia, India, Russia, Brazil, Mexico, China, etc are expected to slowdown
  • Growth weakened in China because of regulatory efforts needed to rein in debt and macroeconomic consequences of increased trade tensions
  • Growth slowed down in India because of corporate and environmental regulatory uncertainty in addition to the concerns regarding the soundness of nonbank financial sector. 
  • Growth is also affected by structural factors such as low productivity growth and aging demographics in advanced economies
So, what is causing the weak growth? 
  • Sharp deterioration of manufacturing activity 
  • Global trade affected by higher tariffs
  • Prolonged trade policy uncertainty affecting investment and demand for capital goods

What is supporting growth?
  • Services sector is keeping labor markets afloat and wage growth and consumption spending healthy in advanced economies. This may not last long due to weaknesses in the US and Euro area.
  • Monetary policy is supporting growth by easing policies amidst the absence of inflationary pressures and weakening economic activity. 

What are the risks to growth?
  • Heightened trade and geopolitical tensions including Brexit-related risks
  • These could lead to shift in risk sentiment, financial disruptions, and a reversal of capital flows to emerging market economies 
  • Low inflation is constraining monetary policy and its effectiveness

What is needed to rejuvenate growth, especially to boost confidence and reinvigorate investment, manufacturing, and trade?
  • Undo the trade barriers, rein in geopolitical tensions, and reduce domestic policy uncertainty. Tariffs should not be used to target bilateral trade balances. Cooperation to resolve roots of dissatisfaction is needed (resolve deadlock over WTO dispute settlement mechanism; modernize WTO rules to encompass e-commerce, subsidies and technology transfer, etc)
  • Monetary policy needs to be coupled with fiscal support where fiscal space is available. If borrowing costs are low, then countries should borrow more to invest in social and infrastructure capital 
  • If monetary policy is supporting growth, then macroprudential regulation should be the norm to prevent mispricing of risk and excessive buildup of financial vulnerabilities
  • Sustainable growth requires structural reforms to boost productivity, improve resilience, and lower inequality. These reforms are more effective when good governance is already in place (applies to emerging market and developing economies)

Although global growth will inch up to 3.4% in 2020 it is still a downward revision from the April 2019 projection. This is supported by growth rebound in emerging market and developing economies. The ‘recovery’ is not broad-based and remains vulnerable because of the expected slowdown in major economies like the US, Japan, and China.

South Asian outlook
  • Nepal is clocking in the highest GDP growth in FY2019. In FY2020 Bhutanese economy is expected to grow at 7.2%, followed by Indian economy 7.0% and Nepali economy 6.3%.
  • Nepal is projected to have the highest inflation rate, 6.1%, in FY2020.
  • Maldives is expected to have the highest current account deficit, 15.7% of GDP, in FY2020, followed by Nepal (10% of GDP)
GDP growth
Economy
FY2019
FY2020
Bhutan
5.5
7.2
India
6.1
7.0
Nepal
7.1
6.3
Maldives
6.5
6.0
Bangladesh
5.9
6.0
Sri Lanka
2.7
3.5
Inflation
Economy
FY2019
FY2020
Nepal
4.5
6.1
Bangladesh
5.5
5.5
Sri Lanka
4.1
4.5
Bhutan
3.6
4.2
India
3.4
4.1
Maldives
1.5
2.3
Current account balance (% of GDP)
Economy
FY2019
FY2020
Maldives
-20.4
-15.7
Nepal
-8.3
-10.0
Bhutan
-12.5
-9.6
Sri Lanka
-2.6
-2.8
India
-2.0
-2.3
Bangladesh
-2.0
-2.1

No comments:

Post a Comment