The US-China trade war is the biggest threat to the “fragile” global economy, the OECD says

By Eshe Nelson

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“Rather bleak.”

That’s the global economy’s outlook, according to Laurence Boone, the chief economist of the Organization for European Cooperation and Development. In a report published today, the Paris-based institution said that after a sharp slowdown in economic growth in the second half of last year, growth has stabilized. It’s not much to cheer about: The global economy can expect only “moderate but fragile growth” for the next two years, the OECD added.

The organization expects world GDP growth to slow from 3.5% last year to 3.2% this year, before picking up slightly to 3.4% next year. Trade tensions are the principal factor threatening the global economy, Boone said. “Growth is stabilizing but the economy is weak and there are very serious risks on the horizon,” she said today at a conference in Paris.

Global trade is projected to grow by 2.1% this year, which would be the lowest rate in a decade, according to the OECD. Last year it grew by 3.9% and by 5.5% in 2017.

The trade tariffs imposed by the US and China last year are already starting to slow growth and increase inflation, the OECD said. By 2021, economic output by both countries is estimated to be 0.2%-0.3% lower than it would otherwise have been.

Add on the extra tariffs announced earlier this month, and US and Chinese GDP are hit by another 0.2%-0.3%. The new tariffs, if maintained, double the impact of those introduced in 2018, the OECD said. In a worst-case, hypothetical scenario in which the US and China impose 25% tariffs on all remaining bilateral trade (and there is an increase in the cost of investing from the additional risk), then global GDP would be about 0.7% lower by 2021 than it otherwise would have. The impact on the US and China would be larger, by about 0.9% and 1.1% lower, respectively. Other countries would also be adversely affected given the importance and size of both economies. An unexpected decline of 2 percentage points in Chinese domestic demand growth for two years could lower global GDP growth by close to 0.4 percentage point per year, the OECD predicts.

Most countries can ill afford any additional drags on growth. The OECD already forecasts zero economic growth in Italy this year, the growth rate in Germany to halve from last year to 0.7%, and Japanese growth to slow to 0.7%. Only a few G20 countries are expected to grow faster in 2019 than last year: Brazil, Saudi Arabia, South Africa, Argentina (but it will stay in a recession), and India, which will grow at 7.2%, the fastest in G20.

The OECD forecasts growth in the the US economy to slow by 0.1 percentage point to 2.8% this year and slip to 2.3% next year. Chinese GDP will growth will also slow to 6.2% and 6% in the next two years, even as fiscal stimulus is supporting the country’s rebalancing towards more domestic-led economic growth.