IIF Warns Trade Tensions May Derail Global Expansion

The global economy is set to grow at a faster clip than anticipated in 2018, due mostly to lower tax rates in the United States, but tensions over trade threaten to derail months of synchronized global expansion, the Institute of International Finance said late Monday.

The Institute, a global financial industry association, lifted its forecast for global growth in 2018 by 0.2 percentage points to 3.5% as it boosted its growth view on the US economy for the current year to 2.9%, Reuters reported.

The US economy grew 2.3% in 2017 according to IIF. Its previous 2018 forecast, before tax cuts were enacted late last year, was for the US economy to grow 2.4% in 2018.

“You have the US, where there is important fiscal stimulus because of tax reform, and this is going to boost consumption and investment,” said Sergi Lanau, deputy chief economist at IIF. According to the report, faster US growth is “the key driver of the upward revision”.

However, the synchronized growth that the global economy saw through 2017 for the first time in a decade is showing fissures, as exporters see pressure due to uncertainty over global trade.

Lanau pointed to recent weak economic data out of Germany as evidence of the effect of trade uncertainty. German exports plunged unexpectedly in February, posting their biggest monthly drop in more than two years.

Also, softening data on new export orders in Japan and Korea are “consistent with the idea that there is some uncertainty around what trade policies will look like down the road,” Lanau said.

The trade measures announced so far are relatively small so the economic impact is not big, he added, but they cause concern in markets and could delay investment and consumption. Besides trade tensions, the IIF sees the central risk to global growth in a potential spike in inflation, specifically in the United States.

However, Lanau said, oil prices are the key driver for US inflation and “our view is that in the second half of the year oil prices will moderate, especially because when prices go up shale producers in the US ramp up production.”

The low likelihood of even faster monetary policy tightening in developed economies in the near term brings down the risk to emerging markets, the report said.

Among the largest emerging market economies, the report highlights the continued growth in Brazil after the steep recession in 2015-2016, with the sizable fiscal deficit as the main risk to their outlook of 2.7% growth in 2018.

China is seen growing at a marginally lower pace of 6.7% compared to 6.9% growth last year, while India is seen accelerating to 7.9% from 6.4% in 2017.

IIF also debuted its forecast for 2019 global growth at a stable 3.4% from the 3.5% forecast for 2018.