Washington/Melbourne| Donald Trump’s escalating trade war will squeeze export volumes, crunch confidence, stall investment plans and threaten employment and living standards around the world, according to a cautionary assessment from the Organisation for Economic Cooperation and Development.
Just days after Washington and Beijing dramatically intensified their punitive tariff measures against each other, the OECD has warned that the current robust global upswing “may now have peaked” – that today’s economy may be as good as it gets.
Despite the caution, it says Australia’s outlook has remained steady, with gross domestic product to rise by 2.9 per cent this year and 3 per cent in 2019.
That’s enough, it says without elaboration, to mean official Reserve Bank of Australia interest rates are “likely” to be raised “gradually”.
While the tariff conflict may still be in its infancy, the global trade growth rate has almost halved, with volume growth slowing sharply to 3 per cent in the first half of 2018 from 5 per cent last year, the OECD said in its latest interim economic outlook.
A flood of tariffs and threats of more to come by the US administration have “already resulted in marked changes in trade flows”, the organisation said.
“Policy announcements have also adversely affected business sentiment and investment plans, reflecting uncertainty about the possible disruption to supply chains and the risk that restrictions may intensify.
“A further rise in trade tensions would have significant adverse effects on global investment, jobs and living standards,” the OECD says.
Tariff conflict is also coinciding with growing signs of fragility across emerging markets, leaving the US essentially isolated as a high-growth region. In the long run, this is unlikely to be sustained.
OECD economists cut their predictions for growth among Group of 20 nations – which account for 80 per cent of the world economy – by 0.1 percentage point to 3.9 per cent this year, and by 0.3 of a percentage point to 3.87 per cent in 2018.
By contrast, they sharply downgraded shakier emerging markets such as South Africa, Brazil, Argentina, and Turkey have being sharply downgraded.
US GDP growth will be 2.9 per cent year-on-year, slowing to 2.7 per cent next year, down 0.1 of a percentage point.
Despite the trade tension, China’s growth outlook is unchanged at 6.7 per cent and 6.4 per cent respectively.
Even though the tariff war hasn’t so far affected GDP growth, “stronger effects and distortions” are already visible in trade flow data, it said.
The OECD notes that imports into the US of washing machines, solar panels, steel and aluminium have all fallen in value terms in the first half of the year, after tariffs were introduced.
US pork and car exports have also declined because of higher Chinese tariffs, even if soya bean shipments surged ahead of tariffs, “providing a one-off boost to US export growth”.
Among its concerns, the OECD notes the debt woes of countries such as Argentina and Turkey, which have been exposed by large external deficits or by heavy foreign-currency borrowing as the US Fed normalises monetary policy.
While there hasn’t been “contagion” to the rest of the world, as was the case in the late 1990s during the Asian and Russian financial crises, the trade war could “exacerbate vulnerabilities – particularly if China was adversely affected”, the OECD warned.
On monetary policy, the OECD expects the US Fed funds rate to reach 3.25 per cent by the end of 2019.
“Monetary policy stimulus is also likely to be withdrawn gradually in Canada, Australia, and possibly the United Kingdom if a smooth exit from the European Union is achieved in 2018.”
In Melbourne, meanwhile, one visiting global fund manager said an all-out trade war was expected to knock about 1 percentage point off global GDP and about 2 percentage points off the output of US and China.
Lori Heinel, deputy global chief investment officer for State Street Global Advisors, told the JANA investment conference: “These are really high-stakes games.”
She said the trade wars represented a “breakdown in major structures that have governed the way countries are run”.
“That’s why the tariff discussions are so damaging,” she said.
“If you get these oscillations in a trade war it structurally changes the economic outlook for both the globe as well as the countries involved.
“So watching how China responds to the recent volleys from the US is going to be critically important.”
Australian fund managers, however, weren’t as downbeat
“It is not as if everything is about to fall in a heap,” said Andrew Fleming, deputy head of Australian Equities at Schroders.
“The acceleration of the unwinding of QE around the world we think is a good thing,” he added.
Mark Landau, joint managing director and chief investment officer of L1 Capital, is confident recent intensification of the tit-for-tat tariff battle pointed to an imminent deal.
“If you read Trump’s playbook historically, it has been ‘maximise leverage, put huge pressure on the opponent and then do a deal’,” he said.
“If we did do a deal with China or the US that would be a huge positive catalyst, particularly for miners,” he said.