As the year 2018 gradually inches towards the finish line, there are many concerns about the next year. Is economic growth going to be as good as the last? How will the major players active in the geopolitical scene try to push their agenda to gain the upper hand? Are we going to witness major upheavals in the oil market or extreme volatility in stock prices in the emerging markets as well as in Europe and the US? It is clear that, right now, there is uncertainty lurking around the corner in every global theatre.
Nobody captured the current mood in the international arena better than Laurence Boone, chief economist for Organization for Economic Cooperation and Development (OECD), in a piece entitled, “High uncertainty is weighing on the global economy”, Boone said. He then lamented that, “Less than 6 months ago, the global economy enjoyed healthy synchronised growth. Now, the landscape has changed.”
There are several uncertain events, both in the economic as well as the political realm, which loom large and are destined to affect the world economy in the coming months. First of all, the US mid-term elections on November 6 might result in a victory for the Democrats. Secondly, the Brexit negotiations could possibly stall or crash, resulting in UK leaving EU without a deal. Thirdly, the US-China trade war may heat up further dragging down the rest of the world. As the two combatants go after each other, world trade and economic growth will slow down. Let me expand on these three themes.
If the Democrats gain control of even one of the chambers of the US Congress, there will be a major shift in policy and the mood of the country. At the top of the Democratic agenda are items such as control over the runaway capitalism unleashed by President Trump, a return to a balanced policy regime of the past three decades, and economic pluralism. It needs to be seen how the stock market and the economy will react to the political change but it is a sure bet that the Trump Administration will be compelled to tone down anti-globalisation rhetoric and the trade war.
As for Brexit, there is still hope that an exit deal can be worked out between UK and the EU. However, time is running out because EU leaders decided last month that any deal must be approved by a special summit on the weekend of November 17-18. The chances are slim that a deal on immigration and Irish borders can be reached before that. However, there is one last option available to Theresa May.
There is a transition period effective March 29, when UK quits EU, during which EU rules and regulations would apply while the British government formulates and implements new policies to replace existing ones. This transition period runs until December 31, 2020. In case there is no deal, the two parties could decide to extend the transition period, or agree to give their seal of approval on any deal reached after March 29! That outcome would be less catastrophic than a no deal exit.
Finally, there is no end in sight for the escalating tariff war between USA and China. After almost a year of tit-for-tat, it is expected that they will start negotiations seriously with both sides claiming victory and work out a face-saving retreat plan. The effect of the trade war has already had some ripple effects beyond trade and commerce in Southeast Asia. If the trade war continues with another round of tariffs, the impact on USA, China, and a few other countries would be deeper, like “death by a thousand cuts”.
There are already some fallouts from the rising trade restrictions imposed by many countries, and manufacturers are reported to be in a limbo. Economic growth forecasts have been lowered, and emerging markets are feeling the effect of rising interest rates and US dollar appreciation.
We can predict with certainty that the coming year will be marked by the uncertainties of future trade relationships and tension among the major trading partners. On these accounts, OECD's latest economic outlook expects GDP for the world to be .1 and .2 percentage points lower for 2018 and 2019, respectively, than its earlier forecasts. For the G20 countries, the GDP growth forecast for 2019 was lowered from 4.1 to 3.8 percent.
OECD outlook on economic growth is measurably gloomy. “Global GDP growth remained solid in the first half of 2018, at around 3¾ per cent, but there are signs that the expansion may have now peaked. Growing differences across countries and sectors have begun to emerge, in contrast to the broad-based expansion seen in the latter part of 2017. Confidence has also eased and investment and trade growth have proved softer than anticipated. Business survey data point to slower growth in both advanced and emerging-market economies, and incoming new orders have eased, especially manufacturing export orders.”
Whatever the outcome of the trade war, the US elections, and the Brexit negotiations, the lasting impact of these events in the coming years is a slowdown in GDP growth, a reassessment of the role of globalism, and increased volatility in financial markets. Some analysts are comparing the impact of the tariffs to an oil price shock. Deloitte, the world's largest consulting firm, is predicting that the chances of a global recession has increased. Even in the best-case scenario, with the Democrats winning the House race, and easing of trade tensions, there are forces that have been unleashed with long-term ramifications.
China is fighting back not only with tariffs on US goods, it is now on the offensive portraying US military presence in South East Asia as a destabilising influence, and offering countries in this region an alternative to the US naval forces. It plans to hold joint naval exercises with the ten nations of ASEAN. “China aims to exclude the United States,” said Carlyle Thayer, a professor at the Australian Defence Force Academy in Canberra. “The military exercises in process are designed to bind ASEAN members to China.” US countered by warning developing nations of the consequences of taking loans from China and leveraging its influence with IMF to deny any bailout requests from Beijing's debtor nations, such as Pakistan. President Trump recently accused China of cyber-attacks to influence the upcoming elections. It needs to be seen if these US actions will add fuel to the fire or are just a prelude to trade talks between US and China!
Dr Abdullah Shibli is an economist, and Senior Research Fellow, International Sustainable Development Institute (ISDI), a think-tank in Boston, USA. His new book Economic Crosscurrents will be published later this year.