MENU

Trade War Knocks Global Growth Down to 2.7% in Final Quarter Shows UBS 'Now Cast' Model

© Adobe Stock

- World Bank cuts growth forecasts as UBS flags sharp slowdown.

- "External sector" headwinds mount for economies the world over.

- But scope for U.S.-China deal means it's too early to write off 2019.

The global economy entered the New Year on shaky foundations after having turned from bad-to-worse during the final months of 2018, according to analysts at UBS, although the year ahead cannot be written off just yet.

Global growth had been running at an annualised pace of around 3% when UBS' analysts last checked their "now-cast" model at the beginning of December. Only now, that same model suggests the global economy grew at an annualised pace of only 2.7% during the final quarter of 2018. 

For context, the global economy grew by 3.7% in real terms for the 2017 year as a whole and as recently as October 2018, was projected by the International Monetary Fund (IMF) to remain at that level in both 2018 and 2019. The World Bank said Tuesday it now expects a global expansion of 2.9% this year, down from 3% in 2018 and a reduction of 0.1 percentage points from its June forecast. Growth for China was revised downwards by 0.1% to 6.2%, while the U.S. was left unchanged at 2.5% and Japan was revised up by 0.1% to 0.9%.

UBS' now-cast model uses 210 economic indicators from 25 different countries to produce live estimates of the pace of global GDP growth. The model's forecasts continuously liable to change but nonetheless, provide insight into the likely pace of growth long before official numbers are produced.

At the time of December's reading the model had only a small portion of the data required to produce a reliable estimate of growth in the October month alone, but it now has more than half the data required to estimate growth for the final quarter as a whole. 

"We now have all of October, 75% of November and 25% of December data (updated through to last Friday), which substantially narrows the uncertainty band around the now-cast. Unfortunately, things have gotten worse, not better," says Arend Kapteny, an economist at UBS, in a note to clients.

Much of the deterioration in the global economic picture flagged by UBS' model is derived from the "external sector".

In other words, economic weakness at the individual country level is overwhelmingly the result of a tougher environment for international trade. 

This is in keeping with the "trade war" theme that has dominated financial market headlines over recent months.

President Donald Trump's tariff fight with China has after all, seen the world's two largest economies go head-to-head in an economic conflict that resulted from differences over acceptable practice in international trade. 

"A lot of the weakness relates to indicators that are correlated with the global trade cycle (order books, PMI data, industrial production, the trade data itself). Global import volume growth is running at 0% YTD compared to +5.3% in 2017, and trade prices have also rolled over," says Kapteny. 

Trump has imposed 10% tariffs on $250 billion of China's annnual exports to the U.S., accounting for around half of all its goods trade with America. He is threatening to raise the tariff and target the rest of China's U.S-bound exports if a deal addressing its "unfair trading practices" is not reached before March.

Kapteny says another UBS model is suggesting that global trade flows will decline in 2019. His findings about the economy and trade echoe the tone of messages given off repeatedly by individual sets of statistics from China, the Eurozone, U.S. and elsewhere during recent weeks.

U.S. economic growth is already slowing from the more-than four-year high of 4.2% reached back in the second-quarter of 2018 and many analysts are forecasting that it will continue to decelerate throughout 2019. 

Quarterly Eurozone economic growth fell by half, from 0.4% to 0.2%, during the three months to the end of September and data released in the New Year suggests it probably fell even further during the final quarter. 

"November’s decline in German industrial production adds to the evidence that the euro-zone’s largest economy grew at a meagre pace in Q4," says Jack Allen, a European economist at Capital Economics. "The big picture is that the German economy – and the euro-zone more generally – has clearly shifted down a gear."

China's economy has turned southward too. Both Caixin and China Federation of Logistics and Purchasing surveys released last week showed China's manufacturing sector falling into recession during December. 

Those numbers came little more than a fortnight after official data revealed that industrial production growth fell to an annualised pace of 5.4% in November, from 5.9% previously. Markets had looked for it to hold at 5.9%. 

Retail sales growth declined even further, coming in at just 8.1% for November, which marks a record low for spending growth among Chinese consumers. 

All the above Chinese data continued a trend established in March 2018 when the White House announced it would levy tariffs on imports of steel and aluminium into the U.S. each year, the first shot in the so-called trade war.

"The new orders PMI slid to a 35-month low to 49.7, and both the new export orders and import sub-indices fell deeper into contractionary territory, suggesting weaker domestic and external demand. Q4-2018 growth may have decelerated further to 6.3% y/y from 6.5% in Q3, dragging annual 2018 growth to 6.6% from 6.9% in 2017," warns Shuang Ding, chief economist for Greater China and North Asia at Standard Chartered

The global economy may already have seen its best days as far as the current cycle is concerned, but much of the negative economic news released over recent months has at least to some extent been the result of the U.S.-China trade conflict. So if that conflict is resolved, which it may yet be, then the global economy could still stabilise.

And on that note officials from both the U.S. and China held another round of talks Monday and Tuesday in an attempt to reach a settlement on some of the Chinese trade practices the White House finds most contentious, ahead of an end-February deadline for a deal to be done. 

“There’s a very good chance that we’ll get a reasonable settlement that China can live with, that we can live with, and that addresses all the key issues,” Wilbur Ross, U.S. Commerce Secretary, said following Tuesday's talks. 

 

Advertisement
Bank-beating exchange rates. Get up to 5% more foreign exchange by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here

Sirelo banner