- Just like Sisyphus rolling a boulder up a mountain, only to see it roll down again upon reaching the top, the global economy seems to have gone back to the 2015-16 limbo after two years of strong growth. We expect +2.7% global growth in 2019 and 2020. This way “back to purgatory” finds its roots in a regime of persistently high uncertainty (trade and political risks) and the drawbacks of financial repression, which coalesce into a self-defeating equilibrium.
- New measures confirmed our “trade feud” scenario until the end of 2019 and unforeseen transmission channels turned out to have a stronger than expected impact, particularly in terms of financial market reactions (flight to quality, super dovish Central Banks, lower commodity prices), and the uncertainty cost on the economy. Emerging markets have started to feel the pain. The only reason for a limited pass-through are low inflationary pressures, which could be halted with a stress on the Hormuz strait. As a consequence, we have revised our trade forecasts to the downside for 2019 and 2020 (+2.2% in volume terms this year, and +2.5% in 2020, after +3.8% in 2018).
- Political risk is not abating. The trade feud could include several battlefields beyond the U.S.-China rivalry. Moreover, all key positions in Europe will be different three months from now, pointing to possible surprises on the policy stance, while several pivotal elections loom ahead in emerging countries. Interventionism, public profligacy and challenging dogmas seem to continue to create market noise, but limited effects are visible on household and corporate confidence.
- In the end, recession could be a self-fulfilling prophecy and come from excesses built by financial actors. Inflation expectations and a generalized trend of yield curve flattening mirror poorer economic perspectives. The consensus of economists has significantly revised its forecasts on GDP growth over the last few months, accompanying the loss of confidence observed in the fixed income market. For now there is a disconnect between fundamentals and the equity market, which positively reacted to the dovishness of central banks. We continue to believe a credit event in the corporate segment could occur in the U.S., following a deadlock in budgetary discussions — and a confidence shock. Shallower and shorter-lived than the last recession, the next downturn will test the ability to do the right things at the right time when faced with recession since traditional policy tools and international cooperation are weakened. Private buffers will matter.
- Taking into account the size of the current shock of global uncertainty (the U.S.- China trade dispute is expected to last until the end of the year, while U.S. public debt will be a source of instability from Q4 2019), the U.S. economy is expected to grow by +2.5% y/y in 2019 and by +1.7% in 2020, while China is expected to grow by +6.3% and +6.2% respectively. The Eurozone will significantly decelerate at +1.2% y/y in 2019 and 2020 compared with +1.9% y/y in 2018. We also expect seven out of ten countries to register an increase in corporate insolvencies in 2019 and one of two countries to end 2019 with more insolvencies than posted annually before the 2008-2009 global crisis. The upside trend would be even more broad based. Our Global Insolvency Index is forecasted to increase by +7%, both in 2019 and 2020, with a still noticeable increase in Asia (+15% in 2019), a rebound in Europe (+3%) and a gradual trend reversal in the U.S. by 2020.
In Greek mythology, Sisyphus was punished for his pride, sentenced for eternity to roll a boulder up a hill, only to see it roll down again. The analogy with the world economy in 2019 is striking. Between 2015 and 2018, the world economy, like Sisyphus, committed a sin of pride by constantly deferring its natural condition of evolving in a low growth- low inflation regime, post the sub-prime crisis. Those four years saw a succession of gigantic stimulus packages and unconventional monetary policy in Europe (2015), the U.S. and China (2016, 2018). Now, a day of reckoning has come. The anger of the gods has materialized in a U.S.-China dispute embodying a so-called trade feud scenario, which has and will continue to impair the world trade and investment cycle. Global political risk, currently close to a historical high, represents another self-defeating process. Moreover, financial repression is progressively turning into a vicious cycle, where extremely low levels of interest rates struggle to keep economies afloat while nurturing risks over the medium-term. In this context, we expect world GDP growth at +2.7% in 2019 and 2020, compared with +3.1% in 2018, while insolvencies will be on the rise by +7% both in 2019 and 2020.
The inconvenient truth of a trade feud scenario
Trade uncertainty has impacted global trade much more than tariffs via four channels: investment (delays in investment plans), consumption (saving rates increase globally), inventories and prices. We estimate that while U.S. tariffs hampered global trade growth by -0.3pp in 2018, U.S.-led trade uncertainty cost -0.5pp.
In May 2019, President Trump announced a new round of tariffs despite positive rumors preceding his decision, as well as new sanctions on Huawei. He decided to hike the average level of tariffs on USD 200 bn of imports from China to 25% from 10%. Then, at the end of June 2019, during the last G20 summit in Japan, China and the U.S. agreed to resume talks for a new agreement, putting on hold the interdiction on U.S. companies selling products to Huawei against the promise by the Chinese authority of buying more U.S. agricultural products. Despite these slight improvements, the decision of imposing a 25% tariff on USD 200 bn of U.S. imports from China was not backtracked, while the uncertainty surrounding USD 325 bn of remaining U.S. imports from China will persist in the coming month. To this regard, the decision of May 2019 put us until the end of 2019 in a trade feud scenario. It will cost in aggregate -0.5pp of global GDP growth, and -2pp of global trade growth over the next two years. The GDP growth forecast would be cut by -0.6pp in Europe, -0.5pp in the U.S. and -0.3pp in China. We are now expecting +2.7% of world GDP growth in 2019 and 2020, compared with +3.1% in 2018. We have revised our trade forecasts to the downside for 2019 and 2020 (+2.2% in volume terms this year, and +2.5% in 2020, after +3.8% in 2018).
Figure 1 – Average US import tariffs by scenarios