Coronavirus, US-EU trade war and US-Iran conflict top threats to global economy

Growth outlook for 2020 is bleak as geopolitical uncertainties and coronvirus limit rise in investments

The IEA cited slowdown in China, where the government restricted the movement of its population to contain the virus, as the main factor behind its outlook.. AFP.
The IEA cited slowdown in China, where the government restricted the movement of its population to contain the virus, as the main factor behind its outlook.. AFP.

The spread of the coronavirus, a rise in US-EU trade tensions and a potential US-Iran conflict are among the top risks threatening global economic growth in 2020, according to a new study.

Worldwide growth is forecast to stand at 2.9 per cent this year, close to decade lows, as geopolitical uncertainties and the emergence of the deadly virus are expected to dampen a rise in confidence and investments, the Economist Intelligence Unit (EIU) said in a report on Wednesday. “The global economic impact of the coronavirus outbreak is set to be more profound than that of Severe Acute Respiratory Syndrome [SARS], owing to the much larger role that China plays in the global economy today,” said Agathe Demarais, the EIU’s global forecasting director. “Disruption of international trade will become entrenched as supply chains are diverted from China.”

Mounting coronavirus, or Covid-19, cases across the Middle East, Europe and Asia have sparked concern the outbreak is widening into a pandemic. The number of deaths globally reached around 2,764 so far and about 80,991 infections.

The EIU study detailed five scenarios regarding the effect that geopolitical tensions and a slowdown in economic activities could have on the world economy this year.

Top on the list are concerns of a potential conflict erupting between the US and Iran after the American assassination of a top Iranian commander in January, which could lead to a spike in oil prices, the EIU said.

Secondly, tensions between the US and EU are projected to intensify this year. The recent signing of a phase-one US-China trade deal has now shifted Washington’s attention to EU’s trade surplus with the world’s biggest economy.

The EIU estimated there is a 25 per cent chance of a trade war breaking out between the US and the European bloc.

“A further escalation in tariffs involving the US and EU auto industries cannot be ruled out,” the report said. “In addition, progress on trade talks will remain frustratingly slow, with the EU particularly unlikely to give significant ground on agriculture.”

Third on the list of risk scenarios is if the coronavirus outbreak will take a “lasting toll” on the global economy, though the extent of the impact depends on the duration of the disruption by the epidemic.

The EIU’s baseline scenario, based on assessments by medical professionals, showed public health emergency within China will be under control by end of March, prompting the government to lift quarantine measures, and economic activity will “normalise”, it said.

The Chinese government will also implement strong fiscal and monetary stimulus for economic recovery, resulting in a rebound in growth in the second half of the year, both in China and globally, the report said.

The EIU gave a 20 per cent probability the virus will not be contained in China until mid-2020, and a 5 per cent chance it will remain uncontained beyond this year. In that worst-case scenario, disruption of international trade would deteriorate as supply chains are diverted from China, with some countries possibly placing heavy restrictions on bilateral trade.

“US-China trade tensions are more likely to re-escalate, particularly if China proves unwilling or unable to deliver the import commitments agreed under the recent first-phase limited trade deal,” Ms Demarais said. “A growing number of international exporters might experience financial distress, as a persistent shortfall in Chinese demand depresses commodity prices and export revenues.”

Taking into account the direct effect of weaker demand in China, as well as potential economic disruption in other countries should the virus spread further around the world, the EIU forecasts global economic output could fall below 2.5 per cent this year.

Another potential risk is that “ultra-loose” monetary policy among the world’s major central banks may trigger new debt crises in emerging markets.

“Fragile economies that have recently seen a stabilisation in their currencies, such as Turkey and Argentina, could rapidly fall back into crisis, and new crises emerge,” it said. “Across a wider range of emerging markets spending would be cut back, potentially tipping large parts of the world into recession.”

Rounding off the top five risks is a chance that political protests in Hong Kong, which began last June, would lead to an exodus from Asia’s biggest financial hub.

This could mean a swift departure of foreign talent that lubricates Hong Kong’s economy and prompt many foreign businesses in the city to close or relocate to other Asian cities, such as Singapore, Tokyo, Taipei or Bangkok, the report said.

Updated: February 26, 2020 03:51 PM

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