US trade tensions with China are more likely to deteriorate this year and will dampen global growth

   Release date: September 01, 2018      Hits: 412    Comment: 0    
Note: New York, August 22, 2018 -- US trade tensions with China are more likely to deteriorate this year and will dampen globa

New York, August 22, 2018 -- US trade tensions with China are more likely to deteriorate this year and will dampen global growth in 2019, Moody's Investors Service says in its quarterly Global Macroeconomic Outlook update.


"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 says.


Moody's anticipates an implementation of further tariffs on US imports from China, in addition to the initial 25% tariffs on $50 billion worth of imports as well as the steel and aluminum tariffs currently in effect. Moreover, retaliatory action by the Chinese government is likely to follow. These measures are expected to shave up to 0.3-0.5 percentage points from China's real GDP growth in 2019. However, such measures will likely be met with moderate fiscal policy and liquidity easing measures in China designed to offset most of the effects.


For the US, the underlying economic momentum remains very strong, with the economy adding more than 200,000 jobs a month even with a historically low unemployment rate of 3.9% in July. The credit rating agency estimates trade restrictions will trim off about one quarter of a percentage point from real GDP growth to 2.3% in 2019, offsetting some of the strong momentum attributable to the fiscal stimulus.


"Most of the impact of the trade restrictions on economic growth will be felt in 2019," adds Madhavi Bokil, Moody's Vice President and the lead author of the report. "The magnitude of the macro impacts will depend on market sentiment. 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."


Many major emerging market countries have experienced a decline in economic activity owing to elevated oil prices, mounting trade tensions and tightening of financial conditions, while external headwinds additionally constrain others.


According to Moody's, financial market volatility and reversals of capital flows away from emerging markets are to be expected amid tighter global financing conditions. Given the mix of weak macroeconomic fundamentals, loose monetary policy and economic dependence on foreign financing, it is not surprising that Argentina and Turkey have been under most stress. A risk of wider disruptive contagion event engulfing other emerging market countries remains small, given relatively better fundamentals.


 
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