Global economy sprinting ahead but trade war could end the race

The global economy will expand this year at its fastest pace since 2010, but trade protectionism could quickly slow it down, the latest Reuters polls of over 500 economists worldwide suggest.

The risk of a trade war between the United States and China threatens to curb the economic momentum created by years of policy stimulus. That was the biggest worry of economists, foreign exchange and bond market strategists polled by Reuters .

In the latest global economic survey, three-quarters of over 250 economists said they were concerned the US-China trade war would significantly damage the global economy. Twenty-three respondents who said they were very concerned. Still, global growth was forecast to average 3.8 per cent this year, the highest since polling began for this period in October 2016. That would be the fastest growth since the 4.3 per cent struck in 2010.

The latest expectation was lower than the International Monetary Fund’s projection of 3.9 per cent. But the IMF also warned rising trade disputes may damage global growth. Current US-China trade restrictions would do little to overall global trade, but any escalation might cause more turmoil in financial markets. Stock markets have already halted their multi-year advance.

Impact of protectionism

“In our view, the risk of an imminent, all-out trade war seems limited. On the other hand, escalating protectionism is currently the greatest pitfall facing the global economy,” economists at CA-CIB said. “More importantly, protectionist worries have increased significantly over the past three months.”

“After applauding President Trump’s tax cuts, the equity markets are less charmed by his protectionist threats,” wrote economists at BNP Paribas in a note to clients. Just three months ago, most economists said threats to the global economy from protectionist policies, particularly President Donald Trump’s “America First” trade policy, was slowly fading. That changed after Trump imposed import tariffs on certain commodities and China retaliated.

The dispute is going to damage economies across the world from the Americas, to Europe and across Asia, according to nearly 90 per cent of 230 economists who answered a separate question on the regional impact from the ongoing trade spat.

Inflation worries

It is expected to restrain euro zone economic growth, as well as the US economy, dulling an expected boost to growth from the administration’s fiscal stimulus. Still, the view on inflation and the interest rate path for major central banks was largely unchanged. The dilemma for central bankers remains the same: inflation is modest and in most cases below target despite expectations for solid growth and low unemployment.

A decade after the global financial crisis and late in the economic cycle, policy decisions are finely balanced between the need to raise rock-bottom interest rates and not raising them too fast, which risks bringing about the next recession.

There is a broad discussion “on how comfortable they are exactly with raising or tightening policy when inflation is still below target and likely to remain below target,” said Andrew Kenningham, global chief economist at Capital Economics.

After raising rates in March for the sixth time in the current cycle, three more increases are expected from the Federal Reserve this year. The European Central Bank is expected to end its 30 billion euros of monthly asset purchases by the end of the year and raise rates in second quarter of 2019. The Bank of England is expected to raise to 0.75 per cent as early as May; the Bank of Canada is forecast to raise rates twice this year.

India on top

The optimism on solid economic growth included emerging market economies, with India forecast to retain top spot as the fastest-growing major economy. Sub-Saharan Africa’s biggest economies were also expected to benefit from a global upswing this year.

“US has to import anyway, it is just a matter of where it imports from. In general, other emerging markets would benefit from the trade war between the US and China,” said Iris Pang, Greater China economist at ING.

But a year-long wave of optimism over Brazil's long-term economic prospects were fading on skepticism over the fate of structural reforms after this year's presidential elections.