The uncertainty stemming from the US-China trade war, Brexit, and crisis in the Persian Gulf are among the foremost drivers of the weak global economic outlook in Q4.
Already, The International Monetary Fund, on July 23rd, cut its 2019 global growth forecast from 3.3% to 3.2%. The IMF pointed to the escalating US-China Trade War as the main risk to the worldwide economy.
Frustrated by China’s foot-dragging, the United States imposed 15% tariffs on more than $125 billion worth of Chinese imports. In response, China allowed the Yuan to weaken past 7 Yuan to 1 U.S. Dollar for the first time since the 2008 global financial crisis. Also, China imposed 15% tariffs on $75 billion worth of U.S. goods. Part of the taxes includes a duty of 5% on U.S. crude. In retaliation to the Yuan devaluation, the U.S. Treasury declared China a currency manipulator.
With attacks on oil tankers and Riyadh oil complex, in July & September, Iran demonstrated its capability to disrupt global oil supplies.
Under these tense economic conditions, a dovish upsurge swept across the global economy, during Q3. Consequently, Central Banks in both advanced and emerging economies slashed rates to stimulate growth.
The US-China Trade war will still be front and center for the global economy
So far, the United States has hit tariffs on $550 billion worth of Chinese products. China, in turn, has set tariffs on $185 billion worth of U.S. goods.
The world’s two largest economies have been embroiled in a trade war since 2018 that have shaken the global markets and threatens global growth.
China, in September, concluded deals to buy U.S. soybeans and pork. The agreement follows Beijing’s decision to lift retaliatory tariffs on soybeans, China’s most significant import from the United States. In return, China may request for Washington lift some restrictions on Huawei and withhold imposing new tariffs. With President Trump under pressure from U.S. Farmers in Iowa, he may ease Huawei export restrictions. In exchange, Trump may push for additional purchase of U.S. agricultural products, Crude Oil, and LNG.
However, deep uncertainty will prevail in Q4, given Beijing’s constant hardline position regarding intellectual property, Cyber theft, Yuan manipulation, and subsidies for state-owned enterprises.
The United States hasn’t changed its demands. Regarding intellectual property rights, the U.S. seeks to halt China’s coercive request for technology transfer from U.S. firms. As for the Yuan, the U.S. wants to end the persistent devaluation of the Yuan against the U.S. Dollar that makes Chinese exports to the United States cheaper, and U.S. exports to China more expensive. Concerning cyber theft, Washington demands a halt to cyber-espionage against U.S. companies by Beijing.
The United States laments that these unfair trade practices have increased its trade deficit with China from $347 billion in 2016 to $376 billion in 2018, to a record $420 billion in 2018.
As the U.S. economy remains reasonably stable and the Chinese economy slumps, President Trump will be enticed to escalate the trade war. Beijing, indeed, will retaliate and might resolve to hold out on additional concessions until the 2020 election.
With President Xi facing intense economic pressure and President Trump under pressure to deliver results from the trade war, both must break the standoff. Already, the global economy is deteriorating, and recession now looms large in Europe, Japan and throughout East Asia.
With the global economy still deteriorating, expect major central banks, in Q4, to cut rates further to stimulate economic growth
Already, the Reserve Bank of Australia, on October 1st, slashed rate by 0.25% to a record low of 0.75%. The RBA’s cut marked the third reduction in five months in a bid to spur growth.
Amid falling export orders due to the US-China trade row, Emerging Markets like the Philippines, Indonesia, Malaysia, and South Korea will lower interest rates even further in Q4. Previously, the Central Banks of these economies lowered rates during the third quarter.
In the Philippines, the Central Bank of the Philippines cut rates by 0.25% to 4.0% on September 26th. In Indonesia, Bank Indonesia, on September 19th, cut its rate by 0.25% point to 5.25%. Also, the Bank Negara of Malaysia cut its policy rate by 0.25% to 3%, on May 7th, due to deteriorating foreign demand amid the U.S.-China trade row. Furthermore, the Bank of Korea, in South Korea, slashed rates to 1.50%. South Korea’s economy is in a hard spot due to the US-China trade war and its own trade war with Japan. Exports, which account for about 40% of its GDP fell for 10 straight months.
Advanced economies like Japan, Eurozone, Hong Kong, Britain, China, and the United States may slash rates as well.
Japan is considering lowering rate, presently at -0.1%, even further into negative territory as global economic outlook weakens and the likely impact from the VAT tax hike.
In Hong Kong, months of anti-government riots and the fallout from the U.S.-China trade war have begun to take a toll on its economy. As such, Hong Kong’s central bank, the Hong Kong Monetary Authority, might cut rate again. Earlier, the central bank lowered interest rates twice in August (by 0.25% to 2.50 %) and in September (by 0.25% to 2.25 %).
In addition, the Bank of England may cut interest rates even if a no-deal Brexit is avoided on October 31st. Interest rates have been on hold at 0.75% since August 2018.
The US Federal Reserve has cut rates twice this year in response to weak economic outlook. Nevertheless, if President Trump decides to escalate the trade war with China, the Federal Reserve may cut rate by another 0.25% to protect the US economy.
As growth in Eurozone stagnates, the European Central Bank has relaunched a stimulus program to inject over €20 billion monthly into the Eurozone’s financial markets. Given that the Eurozone economy, especially Germany, is heading towards a possible recession in Q4, the ECB might cut rate further during the quarter. Germany’s economy has weakened due to the US-China trade row and the uncertainty regarding to Britain’s exit from the European Union.
Finally, China’s Central Bank, the People’s Bank of China, has also cut rates to 4.20% to cope with economic pressure due to its trade war with the United States. Nevertheless, if the trade war intensifies considerably in Q4, Beijing may further devalue the Yuan or slash rate by another 0.25%.
As the trade war morphed into a currency war in Q3, expect a raise to the bottom, in Q4, by Central Banks to cut their policy rates to boost economic growth in the various economies. The US-China trade conflict has hit manufacturing, with export orders shrinking in many economies.
With attacks on oil tankers along the Strait of Hormuz and on Riyadh’s oil facilities, in Q3, Iran has demonstrated its capability to disrupt global oil exports
On September 14th, a volley of cruise missiles and drone strikes damaged the Abqaiq and Khurais crude processing facilities belonging to Saudi Aramco. The Abqaiq plant and Khurais plant handle over 7 million and 1.45 million barrels per day of crude oil respectively. The attack shut off 7% of the global daily oil supply.
Luckily, the incident occurred when oil stockpiles were higher due to reduced demand. Saudi Arabia had about 180 million barrels of crude oil in inventories in Egypt, the Netherlands, and Japan.
Also, the U.S. commercial crude oil inventories were at 417.1 million barrels. Besides, the Strategic Petroleum Reserve was almost 645 million barrels.
Furthermore, the Organization for Economic Cooperation and Development members had over 2.9 billion barrels in stockpiles.
Although Brent Price jumped from $61.25 per barrel to $68.42 per barrel on September 16th, the price ultimately settled at $58 per barrel by October 1st.
Low demand due to weak economic conditions has diminished the impact of supply disruptions from the Persian Gulf. Unfortunately, additional attacks on Saudi oil facilities or tankers along the Strait of Hormuz may occur.
Moreover, if an oil tanker is unable to transit through the Strait of Hormuz, it can lead to higher shipping costs and significant supply delays. Consequently, oil prices will soar.
Finally, the European Union, in Q4, faces three serious risks; Brexit, potential U.S. auto tariffs, and possible Eurozone recession
Brexit will reach its Zenith as the October 31st deadline for Britain’s exit from the European Union draws near. A hard Brexit will likely be avoided. The British Prime Minister, Boris Johnson’s, threat of a hard Brexit could result in concessions between the E.U. and the United Kingdom on the Irish backstop. If no agreement is reached, the United Kingdom may ask the European Union to extend Brexit for a couple of months.
Growth in the Eurozone will be mild as usual, in Q4, amid the Brexit uncertainty, and the escalating US-China Trade war. Germany, Eurozone’s largest economy, is on the verge of recession. It is deeply reliant on manufacturing cars and other industrial goods to drive its economy.
Unfortunately, it will get worse. The United States, following a WTO victory, is set to impose punitive tariffs on E.U. products in retaliation for illegal subsidies granted to Airbus. In response, Brussels will impose tariffs on U.S. goods. This may push President Trump to impose auto tariffs at a time Germany’s economy is plunging towards a possible recession. President Trump may as well target French products over France’s new digital tax policy. The European Union, indeed, will retaliate against U.S. tariffs. With the Eurozone’s economy stagnating, and the United States’ economy relatively stable, any tit for tat tariff is sure to plunge the EU further into economic crisis.
The intense economic pressure piling up in the European Union has pushed the European Central Bank to reintroduce stimulus measures. the Bank, beginning in November, will inject €20 billion monthly into its financial markets.