US trade tensions with China are likely to deteriorate this year and hamper global economic growth in 2019, according to a report by Moody’s.
The rating agency said on Thursday it anticipates the implementation of further tariffs on US imports from China, in addition to the initial 25 per cent tariffs on $50 billion worth of imports, and the steel and aluminium tariffs already in effect.
“We expect to see more restrictions on Chinese acquisitions of firms in the US and Europe, and our base case scenario now assumes that the US administration will go forward with some of the proposed restrictions on imports from China,” Elena Duggar, chair of Moody’s Macroeconomic Board said in a foreword to its quarterly global outlook.
Talks between US and Chinese officials aimed at resolving the escalating trade dispute ended on Thursday with no major breakthrough, according to media reports. Instead, both countries activated another round of tariffs on $16 billion worth of each other’s goods.
Likely retaliatory measures by the Chinese government are expected to shave off up to 0.3-0.5 percentage points from China’s real GDP growth in 2019, according to the Moody’s report.
Economists say a prolonged trade war would stifle business activity in both the US and China, and dent global economic growth.
However, Moody’s said that moderate fiscal policy and liquidity easing measures planned in China could offset most the effects. For the US, the underlying economic momentum remains “very strong”. Trade restrictions are expected trim off around one quarter of a percentage point from real GDP growth to 2.3 per cent in 2019.
Most of the impact of trade restrictions on economic growth will be felt in 2019, said Madhavi Bokil, Moody’s vice-president and lead author of the report.
“The magnitude of the macro impacts will depend on market sentiment,” he wrote. “Tightening of financial conditions through asset price and currency adjustment and a broader hit to business and consumer confidence are now more likely than a few months ago and have the potential to derail the global economy.”
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The near-term growth prospects for most of (the advanced) G-20 economies remain solid – they are projected to grow at 3.3 per cent in 2018 and 3.1 per cent in 2019, according to the report. The G-20 emerging markets will be the main drivers of global growth this year and next, with average GDP growth forecast at 5.1 per cent.
However, many major emerging market countries – including Turkey, Argentina and Brazil – have suffered a decline in economic activity due to higher oil prices, mounting trade tensions and tightening of financial conditions.
“Escalating trade frictions further add to overall uncertainty,” Moody’s said. “Those with weak fundamentals and relatively shallow, but open, capital markets are particularly vulnerable.”
Financial market volatility and reversals of capital flows away from emerging markets are expected if global financing conditions tighten, the report added.
The International Monetary Fund in July also warned that global economic growth could slow in the medium term as a result of the US-China trade row.