Another turbulent quarter in markets has passed. Elsewhere, we explain why countries such as Turkey, Argentina and South Africa have gotten into trouble – and why we do not expect any lasting spillover to emerging economies across the board . There have also been plenty of unnerving headlines in developed markets on Italy's budget negotiations, ongoing Brexit talks and continuing trade tensions. In U.S. politics, the mid-term elections loom large. And in China, there have lately been surprisingly many signs of disagreement among the ruling elite. With the possible exception of some emerging-market hotspots, you would not be able to guess any of this from glancing at our revised forecasts. For the Eurozone, we have slightly reduced our expectations for gross-domestic-product (GDP) growth, from 2.2% to 2% in 2018, and from 1.9% to 1.8% in 2019. That remains comfortably above European trend growth and reflects downward revisions to economic growth in the first half as much as evolving risks. The biggest of these continue to be global trade tensions.
China's ongoing trade conflict with the U.S. has clearly taken its toll on the Middle Kingdom. For 2019, we expect GDP growth to slow to 6.0%, compared to the 6.3% we had previously penciled in. For 2018, we continue to expect 6.5%. The further slowdown reflects two competing trends. With the latest round of U.S. tariffs, some 44% of Chinese imports will now be subject to new tariff levies of some sort. This corresponds to Chinese goods worth some 250 billion dollars, using 2017 trade figures. Part of this will probably be reflected in higher prices, shrinking volumes and re-rooting of exports to other markets. Moreover, the drag on growth will likely be partly offset by various policy measures to boost China's domestic demand.
Over the next year, the net impact on GDP and inflation is likely to be fairly modest on both sides of the Pacific. To be sure, there is plenty of uncertainty and indeed scope for positive surprises if tariffs are lifted quickly. Moreover, U.S. tariff rates on the latest 189 billion dollars' worth of goods have initially been set at 10% in September. This rate is set to increase to 25% on January 1, presumably to spare U.S. consumers from even heftier price increases until Christmas. The inclusion of some 60 billion dollars' worth of Chinese consumer goods suggests the U.S. is starting to run low on targets in other areas. China has retaliated by slapping tariffs ranging from 5% to 25% on an additional 60 billion dollars’ worth of U.S. exports.
This will leave plenty of unsatisfied customers but is unlikely to derail the global economic cycle. That would probably take administrative measures such as quotas, directly threatening global supply chains. Import tariffs and quotas both reduce economic efficiency and productivity growth in the longer run. Tariffs tend to do less and less lasting damage as customers can still get their hands on imports they really need. Tariffs can still cause plenty of disruption. Just like even a particularly badly designed sales tax, however, tariffs are unlikely to derail an otherwise robust recovery. Indeed, we very slightly increased our U.S. GDP-growth forecast to 2.8%, from 2.7% for 2018. Our forecasts for 2019 are unchanged at 2.4%, partly reflecting the fading benefits of this year's U.S. tax cuts.
Taken all together, we expect the world as a whole to continue growing at 3.8% in both 2018 and 2019. Much of the world remains well away from any tangible signs of recession risks. So far, so good then, right? Well, yes and no. We remain sanguine for the next 12 months and can easily imagine a scenario where growth continues beyond that – potentially much longer. However, it is also worth keeping in mind that troubles in financial markets can and do impact real economies in surprising ways. Add angry voters, fickle elected officials and the fading effects of quantitative easing in developed markets to the mix, and the scope for policy mistakes is certainly increasing. History shows as much, most recently in Turkey.
With the latest round of U.S. tariffs on imports from China, a growing number of goods and services will start to feel the impact.
Sources: Citigroup Inc., DWS Investment GmbH as of 09/2018
Global economic growth continues to be robust, but the composition is changing, partly reflecting slightly slower economic momentum in the Eurozone
Source: DWS Investment GmbH as of 9/18/18
1. The Economist neatly summed things up in a recently headline. "Why tariffs are bad taxes: Uneven and discriminatory, they can often have unintended consequences". The Economist, July 31st, 2018, available online at https://www.economist.com/the-economist-explains/2018/07/31/why-tariffs-are-bad-taxes