The Global Economy Is Rising. Could Protectionism Destroy It?

The world’s economy is going strong, and the general outlook is bright, but global risks like protectionist measures are also on the rise and threaten to curb momentum, according to two new economic reports.

The March World Forecast Flash from Global Insight by IHS Markit, written by chief economist Nariman Behravesh and executive director for global economics Sara Johnson, noted: “A year ago, IHS Markit said the outlook was brighter and the risks higher than in early 2016. Today, the outlook is brighter still than in early 2017, but the risks are also higher.”

After a 3.2 percent expansion in 2017, the report said global real gross domestic product is forecast to rise 3.4 percent in 2018 and 2019, followed by 3.2 percent growth in 2020. From 2017 to 2020, the world economy is expected to see the strongest back-to-back growth rates since the mid-2000s, it noted.

“Yet risks to the expansion have risen in recent months,” the economists wrote in their report, released last week. “The biggest concern is that the imposition of steel and aluminum tariffs by the United States could be the opening salvo of a more extended trade war, which could derail the global recovery. If additional U.S. tariffs and any retaliation are limited (the most likely scenario), then the impact on global growth will be small.”

The metal tariff imposition happened on Thursday, when President Donald Trump said the U.S. will impose tariffs on at least $60 billion in Chinese goods imports to retaliate against the alleged theft of American intellectual property. And since then, China has responded with $3 billion worth of tariffs of its own.

Expressing a similar concern for impending threats to the global economy, the Interim Economic Outlook from the Organization for Economic Cooperation & Development said, “The global economic expansion is strengthening as robust investment growth, an associated rebound in trade and higher employment drive an increasingly broad-based recovery. The pace of expansion over the 2018-19 period is expected to be faster than in 2017, but tensions are appearing that could threaten strong and sustainable medium-term growth.”

The OECD outlook cited a boost to short-term growth expected from new tax reductions and projected spending increases in the U.S., plus an expected fiscal stimulus in Germany, but it also pointed out “a number of financial sector risks and vulnerabilities, as well as those posed by a rise in protectionism.”

“In this environment, an escalation of trade tensions would be damaging for growth and jobs,” OECD acting chief economist Alvaro Pereira said. “Countries should rely on collective solutions like the Global Forum on Steel Excess Capacity to address specific issues. Safeguarding the rules-based international trading system is key.”

The outlook underlines a range of policies that would help to sustain growth. It urges countries to “add dynamism to structural reform efforts, particularly in the areas of taxation and skills, to boost employment and inclusive growth over the long term.”

According to the Global Insight forecast, U.S. real GDP increased at a 2.5 percent annual rate in the fourth quarter of 2017.

“We forecast a temporary slowdown to 1.8 percent growth in the first quarter, mainly due to sluggish consumer spending,” the IHS Markit economists said. “Beyond the first quarter, the outlook is bright, thanks to additional federal spending legislated in the Bipartisan Budget Act of 2018. This more than offsets weaker initial conditions, raising our GDP growth forecast, especially in 2019. We now look for real GDP growth of 2.7 percent this year, 3 percent in 2019 and 2.2 percent in 2020.”

In Europe, growth is beginning to peak as political risks increase, they said. The latest data indicates that Eurozone growth will remain solid in the first half of 2018, but leading indicators have declined off long-term highs.

“Nevertheless, low inflation, solid employment gains and ultraloose monetary policy will sustain growth through this year and into next,” according to the report. “Results of Italy’s March 4 election suggest political gridlock, with none of the main parties or coalitions able to secure a parliamentary majority. The resulting political uncertainty threatens to unwind the recent improvement in consumer and business confidence, limiting Italy’s real GDP growth to 1.3 percent in 2018.”

In China, the moderate slowing trend is likely to continue this year, IHS Markit said, projecting growth rates of 6.7 percent this year, 6.4 percent in 2019 and 6.1 percent in 2020.

“Further long-term slowing in China’s economy is a function of a rapidly aging population—not compensated for by a commensurate improvement in productivity growth,” the forecast noted. “In the near to medium term, the challenges are also daunting. Chief among them are environmental degradation, massive amounts of leverage and a large overhang of excess industrial capacity.”

The OECD projects that the global economy will grow 3.9 percent in both 2018 and 2019, with private investment and trade picking up on the back of strong business and household confidence, while inflation is set to rise slowly.

Editor’s Note: This story was reported by FN’s sister magazine Sourcing Journal. For more, visit Sourcingjournal.com.

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