Economist forecasts global economic growth to slow to 2.2%
With US President Donald Trump having recently sent various countries letters setting out their new tariff rates, expected to go into effect on August 1, Fitch Solutions unit BMI chief economist Cedric Chehab notes that a spike in tariffs could impact growth in the global economy in the form of weaker trade volumes and higher prices, uncertainty, financial market volatility and tightened financial conditions.
During a webinar held on July 9, he said global economic growth was likely to slow from about 2.6% last year to 2.2% this year.
He said emerging markets were expected to outperform while developed markets would lag with growth below 2%, adding that a slowdown in most regions was expected globally, with two exceptions.
The first is sub-Saharan Africa, where the company expects domestic factors, including an improvement in Nigerian energy production, to boost growth. The second is the significant increase in oil production as Organisation of the Petroleum Exporting Countries (Opec) Plus return barrels to the market.
He noted that, despite the headwinds to growth in the short term, there were several emerging and frontier markets with large populations that were going to deliver high growth rates over the coming five years or so and could offer interesting investment opportunities.
This includes countries such as the Philippines and Indonesia.
Chehab projected a sharp slowdown in US growth from about 2.8% last year to below trend growth of 1.5% this year, driven by significant levels of uncertainty.
He said a sluggish recovery to about 1.7% is expected next year.
“The trade uncertainty at the start of the year, as well as the front loading of imports, resulted in a contraction in growth in the first quarter, which will weigh heavily on the full year growth story,” he said.
He noted, however, that the probability of a recession in the US had decreased, whereby consensus expectations had fallen below 40%.
If the tariff rates were to rise sharply, however, Chehab warned that the risks of recession in the US could rise again.
“But we're just not there yet,” he said.
“The overall view is that the US economy will face slower growth, higher inflation and a slight pick-up in unemployment, which is essentially a stagflation-lite outlook. Some good news, however, is that we expect the Fed to cut interest rates by about 50 basis points, which should help a little bit at the margins,” he continued.
Chehab also pointed out that the Chinese economy was forecast to grow by 4.5% this year, driven by significant monetary and fiscal support from the government, while the Eurozone was forecast to grow by about 0.8% this year, largely driven by tariff-related uncertainty.
He highlighted some risks to watch out for, including the softening of developed economy growth.
Chehab highlighted the continued weakening of labour markets as a risk to many economies, including the US; as well as the potential of a trade war escalation, the tightening of monetary policies, and elevated interest rates as potential risks to the global economy.
“The other risk that we're looking at as well includes a pickup in inflation, of course, because of tariffs, that could lead to slower adjustment in monetary policy. But we also know that markets are pretty frothy, and so a sharp correction could also lead to financial market volatility and uncertainty and less investment,” he said.
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