Storm Clouds Gather Over Global Economy

Stock markets are flying high and the global economy has been humming along. But for how much longer? There's a lot to worry about: Economists warn that trade fights, geopolitical tensions, rising oil prices and emerging market crises could take a major bite out of growth.

"The global economy started the year in relatively good shape. Unfortunately, the outlook has clouded," said Chris Scicluna, head of economic research at Daiwa Capital Markets, CNNMoney reported.

President Donald Trump has slapped tariffs on imports including steel, aluminum, washing machines and solar panels. Canada, Mexico, China and the European Union are retaliating.

Experts say the economic impact from the new tariffs has so far been limited, but the pain could increase dramatically if a cycle of retaliation takes hold.

"A worldwide escalation of tariffs ... could lead to cumulative trade losses equivalent to those experienced during the global financial crisis," the World Bank warned in a report recently.

The steadily expanding global economy should remain resilient, at least for a couple of years, it said.

The anti-poverty agency predicted last Tuesday that global growth will decelerate from a solid 3.1% this year to 3% next year and 2.9% in 2020.

The World Bank predicts that US growth will register 2.7% in 2018, aided by tax cuts, before slowing to 2.5% next year and 2% in 2020. Likewise, the 19-country eurozone will go from 2.1% this year to 1.7% next and 1.5% in 2020, the World Bank said.

China's growth is projected at 6.5% this year, 6.3% in 2019 and 6.2% in 2020. The world's second-biggest economy, after the United States, is trying to manage a difficult transition from breakneck growth based on often-wasteful investment to slower, steadier growth built on spending by Chinese consumers.

The World Bank envisions a slump in global commodities prices. It foresees oil prices surging 32.6% this year, then dropping 1.4% in 2019. Excluding energy, commodity prices will grow 5.1% this year but just 0.2% in 2019, it predicts.

Geopolitical Tensions

If political leaders follow through on their most dramatic trade threats, including US tariffs of 25% on $100 billion in Chinese goods, Barclays estimates that a full percentage point could be knocked off global economic growth next year.

Kallum Pickering, a senior economist at Berenberg bank, said that geopolitical risk is now at its highest level since the early 2000s.

"The current global upswing depends on continued global trade growth—the two are closely linked," he said in a research note. "A threat to trade, and hence economic growth, is a threat to markets."

Senior policymakers are calling on political leaders to reduce tensions, and quickly.

"Protectionism is rising everywhere ... and it's important at the international level that this is addressed," Swiss National Bank Governor Thomas Jordan told CNNMoney Switzerland on Thursday.

Emerging Market Slump

Investors have been attracted to the United States because of rising stocks and bond yields, and a stronger dollar.

That's causing money to rush out of emerging markets, where currencies including the Argentine peso and Turkish lira have been under major pressure. Brazil's currency is down 19% from its recent peak in January.

Economists expect the trend to continue as the US Federal Reserve hikes interest rates.

Central banks in emerging markets have been forced to hike rates to prevent their currencies from sliding too far. Turkey's central bank hiked interest rates again this week to nearly 18%. Rates in Argentina, which agreed a $50 billion bailout with the IMF on Thursday, stand at 40%.

Economists say Brazil could be the next major problem spot. "In Brazil's case, which is only starting to emerge from a recession, having to tighten monetary policy is not very helpful," said Scicluna.

Oil Prices

Oil prices surged to their highest level in over three years last month, leading to concerns that businesses and consumers would have to cut back on spending in other areas to pay for higher energy costs.

One sign of pain: India, the world's third largest energy consumer, sought assurances from Saudi Arabia, the world's largest oil exporter, that prices would remain "stable and moderate".

Oil prices retreated after major producers said they would consider pumping more to ease supply and price concerns. US crude oil is now trading around $66 per barrel.

For some, the damage had already been done: India's central bank hiked interest rates this week, citing a recent spike in oil prices as one of the main factors in its decision.