The trade war continues, with risks for global growth tilted significantly to the downside
The OECD cut its estimates for global GDP growth in 2019, by 0.3 pps compared with its previous projections in November 2018, to 3.2% yoy, versus 3.5% yoy in 2018 and 3.7% yoy in 2017 (the strongest outcome since 2011). The deceleration is mostly due to trade tensions leading to weaker global trade and business investment in view of uncertainty regarding future terms of trade.
Risks are tilted to the downside, including a further escalation in trade tensions, a more-pronounced-than-expected slowdown in the Chinese economy and a “no-deal” Brexit. Notably, these estimates do not incorporate the latest round of tariff increases by the US and China, which -- according to the OECD -- could shave 0.2% - 0.3% of GDP in both countries, cumulatively, by 2021. In the event that tariffs of 25% are implemented on all US – China bilateral trade (US goods imports from China: c. $550 bn | China imports from the US: c. $120 bn), the negative impact would reach 0.6% of GDP for the US, 0.8% for China and 0.3% for global GDP, by 2021.
Regarding Brexit, political developments in the UK have taken a turn, following PM May’s announcement that she will resign as the head of the ruling Conservative party on June 7th. Boris Johnson is the front-runner to take over as PM, according to the latest polls. Thus, there will be increased political uncertainty ahead of the 31st October deadline.
Officials’ rhetoric suggests tensions continue between the US and China, following the ban on transactions by US companies with the Chinese tech giant, Huawei. Note that non-US companies involved in sale or transfer of US technology to Huawei will also need a license by the US Bureau of Industry and Security for any such transaction. The negative repercussions are aggravated by the complexity of global supply chains in the sector.
In that context, concerns for global growth prospects increase, as reflected, inter alia, in business confidence surveys (e.g. euro area PMIs - see Economics). Moreover, according to the account of the ECB monetary policy meeting on April 10th (published on May 23rd), officials cited less confidence regarding a rebound in the euro area economy in H2:19 (note that the meeting took place before the recent escalation in trade tensions).
Growth concerns fed through to a further decline in government bond yields, with the US Treasury 10-Year yield at its lowest since November 2017 (-7 bps wow to 2.32%), its German Bund counterpart at its lowest since September 2016 (-1 bp wow to -0.12%) and the UK Gilt 10-Year yield at a 2-year low of 0.96% (-8 bps wow).
Global equities declined for a 3rd consecutive week (MSCI ACWI: -1.0% wow | +10.1% ytd). Information Technology (-2.6% wow) and Energy (-2.4% wow) stocks led the decline, the latter due a sharp decrease in oil prices (WTI: -6.9% wow to $58.4/bbl), in view of lower expectations for economic growth resulting in weaker prospects for oil demand. On a positive note, markets appear to have welcomed the results of the European Parliamentary elections (SXXE: +0.4% on Monday | -2.1% in the past week), with Eurosceptic/populist parties increasing their electoral base by somewhat less than expected.