It may be too early to say the global growth story is over, but hints of a new, less sanguine chapter are increasing. Arguably the easiest place to look would be to the US, where one can see stomach-churning movements in equities, disappointing small-cap performance, and mounting concerns on rising rates.
BlackRock, the world’s largest asset manager, doesn’t see it as the start of a recession, but a return to normal conditions. In fact, its base case is one of global growth lead by the US — though it does see one significant risk to that outlook.
“We believe surging trade tensions remain the biggest risk to the US-led economic expansion,” said Elga Bartsch, head of Economic and Markets Research at the BlackRock Investment Institute.
A BlackRock paper Bartsch co-wrote with two other analysts, titled The danger of elevated trade frictions, pointed at the escalating situation between the US and China as the eye of the brewing storm. China has responded in an almost tit-for-tat fashion, but because the US buys more goods from it than it does from the US, the paper noted, China will have to explore other strategies.
“If the tariffs on $250 billion of US imports from China are raised to 25% at the start of 2019 from 10% now, as planned, the effective US tariff rate would rise to a level not seen since the 1970s,” the paper said. “Largely due to the US moves, average global tariff rates would rise to the levels of the early 1990s – just before the launch of the World Trade Organisation.”
While most model-based estimates of trade actions point to a modest impact of tariffs on trade activity, the paper pointed out that many of those simulations do not account for deeply integrated global value chains (GVCs). “Many macroeconomic models fail to capture the potential for a much bigger hit to global activity as trade barriers disrupt supply chains or sales via foreign affiliates,” the paper noted.
Bartsch and her co-authors pointed out drawbacks that they believe exist in many models used to simulate trade shocks. Models such as the International Monetary Fund’s Global Integrated Monetary and Fiscal model (GIMF), they said, “do not explicitly account for deeper trade integration via GVCs – and shows only a modest direct impact for that reason.” They estimated that the indirect impact on growth because of GVC channels could be more than double the impact from the direct drag tariffs.
Citing figures on trade growth from a nowcasting model they developed, the paper’s authors said trade growth has slumped from around 5% last year to a projected annualized pace of 2% over the next few months — “a subdued level given the strength of global growth.” While they did not name tariffs as a main drag, they said it was a likely factor in the slowdown.
“It’s intuitive to link this year’s global trade slowdown to rising trade tensions, but our work doesn’t find a statistical connection and the cooling of trade activity preceded the implementation of tariffs,” Bartsch said. “We would become wary on the global growth outlook if there were a significant increase in tariffs and other trade barriers or if confidence indicators were being hit.”
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