Global Economy Cools Faster Than Expected as Trade Tensions Rise, World Bank Says

The global economy has stumbled sharply in the first half of the year with trade and investment flows between countries falling faster than expected, according to semiannual forecasts released by the World Bank on Tuesday.

With nearly half a year of data under its belt, the World Bank lowered its global growth forecast to 2.6% from 2.9% in January — and cut its forecast for growth in trade to 2.6% from 3.6%.

“There’s been a tumble in business confidence, a deepening slowdown in global trade, and sluggish investment in emerging and developing economies,” World Bank President David Malpass told reporters. “This is worrisome because subdued investment weakens the foundations for sustained growth.”

The global economy’s growth will be the weakest since 2016, while trade growth is on track to be the weakest since the global financial crisis more than a decade ago.

The bank’s forecasts since January were downbeat across a broad range of countries. More than half of the countries tracked had growth downgrades of 0.1 percentage point or more, with declines for both advanced and emerging economies.

Forecasts for the U.S. and China, which already incorporated a sharp slowdown, were unchanged in the latest update. The U.S. is forecast to slow to 2.5% in 2019 from 2.9% in 2018, while China is expected to slow to 6.2% from 6.6%.

Thus the surprise in the World Bank’s forecast wasn’t the damage the world’s two largest economies are doing to each other in their trade conflict — but the extent of international fallout from the collapse in trade and withering of global business confidence.

All six global regions of emerging and developing economies tracked in the forecast — East Asia and the Pacific; Europe and Central Asia; Latin America and the Caribbean; Middle East and North Africa; South Asia; and sub-Saharan Africa — saw their growth prospects wither in the first half of the year.

The forecast, however, doesn’t incorporate the effects of the U.S. threat to apply 25% tariffs to an additional $300 billion of Chinese goods, which could begin later this month — nor its threat to apply tariffs that could rise to 25% against Mexico’s $350 billion of imports, which could begin next week.

The bank noted other factors behind the decline, including financial market stresses, suboptimal business environments in many countries, and economies that were already slowing because of cyclical factors. But the bank attributed the biggest shifts in its forecasts to continuing trade tensions.

“It’s fair to say the global economy is coming to a crossroads,” said Ayhan Kose, the World Bank economist who oversees the forecast. He noted that policy makers might still strike deals that could boost the global economy or veer further in the direction of escalating tariffs.

The World Bank’s forecasts add to evidence about the toll that falling trade is taking on the global economy. Measures of factory activity around the world, released earlier this week, show that U.S. factory activity slowed in May, and shrank outright in other major economies.

The U.S. factory activity gauge produced by the Institute for Supply Management fell in May to its lowest since October 2016, while JPMorgan’s Global Manufacturing PMI index fell below a reading of 50, which is the dividing line between growth and expansion. Global factory output is now shrinking by the most since 2012, during the depths of the Eurozone’s fiscal crisis.
Source: Dow Jones