Global supply chains prepare for uncertain economy

While a global recession is probably still a year or two away, “there are storm clouds on the horizon,” which are starting to look more than a little threatening, say IHS Markit economists.

“The good news on the trade front is that the United States, Mexico, and Canada have agreed to a revised North American trade treaty,” says IHS Markit’s Chief Economist Nariman Behravesh. “The bad news is that the trade tensions between the United States and China seem to be escalating inexorably.”

One symptom of the contentious trade environment is a fall in the IHS Markit purchasing managers’ index (PMI) for global export orders for the first time in more than two years. Another source of concern is the recent rise in oil prices above $80 per barrel for dated Brent. Putting all this together, IHS Markit predicts that world GDP growth will edge down from 3.2% in 2018 to 3.1% in 2019 and 2.9% in 2020.

Meanwhile, recent strength in employment and income, solid gains in household net worth, and elevated consumer sentiment have generated considerable momentum just as tariffs on some $200 billion of imports from China have gone into effect.

“In our view, the higher tariff rates will reduce demand for imports from China, but two factors will mitigate this effect,” says Behravesh. “First, Chinese exporters will temporarily reduce the pre-tariff price to preserve market share, and some imports will be re-sourced outside of China to avoid paying the tariff. Secondly, we also expect higher post-tariff import prices to pass through to domestic prices and weigh on real income and wealth, reducing domestic demand.”

In their forecast, real GDP growth rises from 2.2% in 2017 to 2.9% in 2018 before slowing to 2.8% in 2019, 2.0% in 2020, and 1.6% in 2021. “Intensifying woes,” in the EU have other economists concerned.

“Rising oil prices could significantly hamper growth, especially compared with the U.S. economy,” says Sara Johnson, Executive Director, Global Economics for IHS Markit.  “Deceleration in much of the rest of the world is also taking the wind out of exports,” she says. “This drag is even bigger owing to the ongoing impact of trade tensions and the rise in the euro and sterling against emerging-market currencies, including the Chinese renminbi.”

Furthermore, economists are concerned about the standoff between the European Union and bond markets. The populist Italian government’s aggressive budget is also sending tremors through eurozone financial markets.