Global economic growth is on track to be the weakest since 2008 as a result of the U.S. - China trade war. Despite making substantial progress in reaching a potential truce, the markets have been reacting negatively. Additionally, heightened political tension in the Middle East is creating additional pressure on the economy. The International Monetary Fund (IMF) predicted global growth of 3% for 2019, down .2% from the previous forecast in July, and U.S. growth of only 2.4%, down from 2.9% in 2018. IMF economists predict that it is possible we might not even reach these projections if trade tensions do not ease.
This past week, the U.S. and China reached a temporary cease-fire in the trade war, with President Donald Trump agreeing to suspend his planned $250 billion tariff hike on Chinese products. However, the Trump administration has stated that it plans for an additional $160 billion of tariffs planned for December 15, 2019 still remain in effect. As a result of the trade war, growth in global trade slowed to 1% in the first half of 2019 - the weakest annual growth rate since 2012. According to Kristalina Georgieva, IMF's new managing director, recent trade disputes could result in almost $700 billion in output losses by the end of 2020 which is equivalent to 0.8% of world output - this is equivalent to the size of Switzerland's entire economy.
What is even more concerning is that this slowdown is still ongoing despite the fact that the Federal Reserve and other central banks have been deploying quantitative easing measures to boost the economy such as cutting interest rates to encourage consumer and business spending. The central banks are running out of ammunition to offset the economic slump. Further, Britain's exit from the European Union could potentially result in more disruption. The IMF is urging policymakers to tread carefully and avoid potentially economically damaging mistakes.
Germany's economy, the largest in Europe, is expected to grow at .5% this year and rise to 1.2% in 2020. China's growth is projected to fall to 6.1% and 5.8% in 2019 and 2020, respectively. This will be the slowest rate since 1990 when China was also subject to sanctions. Japan is expected to experience growth of .5% and Russia is forecast to grow from 1.1% to 1.9%. Mexico is also forecast to grow by 1.3% next year, much better than this year's .4% growth rate.
The trade war has not only resulted in direct costs for both the U.S. and China but also in market turmoil, reduced investment and manufacturing activity and overall lower productivity due to disruptions in the supply chain. According to IMF Chief Economist, Gita Gopinath, "The weakness in growth is driven by a sharp deterioration in manufacturing activity and global trade, with higher tariffs and prolonged trade policy uncertainty damaging investment and demand for capital goods.... To rejuvenate growth policymakers must undo the trade barriers put in place with durable agreements, rein in geopolitical tensions and reduce domestic policy uncertainty".
Global economic growth could be weakest since 2008 due to trade wars. Recently the White House announced a so-called "Phase 1" of negotiations with China. Trump stated that he expects a trade deal to be signed with China by the time the Asia-Pacific Economic Cooperation meetings, which take place November 16 and 17. The administration also announced that China has agreed to buy almost $50 billion of U.S. farm products annually as part of the first phase of trade deal talks. However, Gopinath says that we should remain cautious as this is tentative and we do not have much information at the moment.