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Baltic Exchange: Growth prospects are less-than-rosy, with trade tensions a seemingly key feature

The latest report from The World Bank crushingly delivers its weakest global growth forecast in three years and the worst predicted global trade growth since the 2008 financial crisis. Global Economic Prospects: Heightened Tensions, Subdued Investment sees world growth for 2019 lowered to 2.6%, 0.3 percentage points lower than previous outlooks. This, according to The World Bank, reflects weaker-than-anticipated international trade and investment at the start of this year. Additionally, world trade growth in 2019 has been reduced a complete percentage point, also to 2.6%.

Risks at large

The report envisages that global growth will gradually increase to 2.8% by 2021, “predicated on continued benign global financing conditions, as well as a modest recovery in emerging market and developing economies (EMDEs) previously affected by financial market pressure”. Yet, the report also states that EMDE growth continues to be restricted by subdued investment, which is dulling prospects and hindering progress towards realising development goals. Furthermore, risks are strongly on the downside, partly reflecting the potential of destabilising policy developments. These include unexpectedly-sharper slowdowns in major economies, further escalation of trade tensions between key economies and renewed financial turmoil in EMDEs.

With regard to different economy types, The World Bank forecasts that 2019 growth for advanced economies will be 1.7%. This represents a drop of 0.3 percentage points in comparison to the first month of this year. Emerging market and developing economies fare better, with an outlook for growth in 2019 of 4%. However, this also constitutes a 0.3 percentage point decrease against January 2019. In the report, Japan, the Eurozone and the US are viewed as weakening, partly because of weaker exports and investment. The World Bank also notes that since the 2008 financial crisis, government debt has gone up.

“Global growth has continued to soften this year,” it says. “Momentum remains weak and policy space is limited. A subdued recovery in investment growth in emerging market and developing economies dampens potential growth prospects and hampers progress toward achieving the Sustainable Development Goals. Risks remain firmly on the downside, including the possibility of escalating trade tensions, sharper-than-expected slowdowns in major economies and renewed financial stress in EMDEs.

“Meanwhile, rising debt constrains the ability of EMDE governments to support economic activity in the event of adverse developments as well as finance growth-enhancing investments. This highlights the need for policy actions to undertake reforms to boost private investment and productivity growth.”

Growth commentary

Dicussing the report, Franziska Ohnsorge, World Bank Development Prospects Group manager and project manager for the report, told France 24 that although a growth outlook slowdown had been anticipated, it was not expected to be as big as it has turned out to be.

“The 2.6% growth forecast for 2019 … is the weakest in three years — the last time we saw such weak growth was in 2016,” she explained. “We have always expected a slowdown: that’s a natural, cyclical downturn from a stimulus-induced high in 2017 and 2018. That it would be that steep was unexpected, and that accounts for our downward revision, and it’s really something at as broad a base that cuts across the globe, across all groups of countries.”

She continued: “And the weakness of global trade is perhaps the most striking feature of the global economic environment. The trade growth in 2019 that we currently expect is the lowest since the global financial crisis. It is even lower than in 2016, which was a troubled year for the global economy. And part of it, again, is just a simple cyclical slowdown, but on top of that, trade tensions, or policy uncertainty more broadly, has really weighed on money-factoring, industrial production, trade and investment — especially in emerging markets and developing economies.”

Victoria Kwakwa, The World Bank’s regional vice president for East Asia and the Pacific, believes that “the trade issue” is a large risk for the world economy. Responding to a question from Bloomberg Markets: Asia on whether there will be further downgrades to come, Ms Kwakwa said:

“I think the important thing is that we’re not done with the downgrades. So, we could really fix the trade issues. I think it’s going to continue to weigh on the global economy and so it makes it even more important that countries work together to reach the agreements needed so that trade does not become interrupted globally, because it does have a negative impact.”

Is fixing trade tensions therefore the key to unlocking better world growth? If so, it might make those who support trade wars and tariffs think twice.
Source: The Baltic Briefing (By Kate Jones)

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