/Trade war is plunging world growth to its lowest level since the financial crisis, OECD warns

Trade war is plunging world growth to its lowest level since the financial crisis, OECD warns

PARIS — The trade war between the United States and China has plunged global growth to its lowest levels in a decade, the OECD said on Thursday as it slashed its forecasts.

The Organisation for Economic Cooperation and Development said that the global economy risked entering a new, lasting low-growth phase if governments continued to dither over how to respond.

The global economy will see its weakest growth since the 2008-2009 financial crisis this year, slowing from 3.6 per cent last year to 2.9 per cent this year before a predicted 3.0 per cent in 2020, the OECD said.

The global order that regulated trade is gone and we are in a new era of less certain, more bilateral and sometimes assertive trade relations

OECD chief economist Laurence Boone

The Paris-based policy forum said the outlook had taken a turn for the worse since it last updated its forecasts in May, when it estimated the global economy would grow 3.2 per cent this year and 3.4 per cent in 2020.

“What looked like temporary trade tensions are turning into a long-lasting new state of trade relationships,” OECD chief economist Laurence Boone told Reuters.

“The global order that regulated trade is gone and we are in a new era of less certain, more bilateral and sometimes assertive trade relations,” she added.

Trade growth, which had been the motor of the global recovery after the financial crisis had fallen from 5 per cent in 2017 into negative territory now, Boone said.

Meanwhile, trade tensions have weighed on business confidence, knocking investment growth down from 4 per cent two years ago to only 1 per cent.

Boone said that there was evidence that the trade standoff was taking its toll on the U.S. economy, hitting some manufactured products and triggering farm bankruptcies.

The world’s biggest economy would grow 2.4 per cent this year and 2.0 per cent next year instead of the 2.8 per cent and 2.3 per cent respectively that the OECD had forecast in May.

Brexit Britain

China would also feel the pain with the second-biggest economy growing 6.1 per cent in 2019 and 5.7 per cent in 2020, outlooks the OECD cut from 6.2 per cent and 6.0 per cent previously.

The OECD estimated that a sustained decline in Chinese domestic demand of about 2 percentage points annually could trigger a significant knock-on effect on the global economy.

If accompanied with a deterioration in financial conditions and more uncertainty, such a scenario would mean global growth would be cut by 0.7 percentage points per year in the first two years of the shock.

Meanwhile, uncertainty over government policies was also hitting the outlook for Britain as it lurches towards leaving the European Union.

The OECD forecast British growth of 1 per cent in 2019 and 0.9 per cent in 2020, but only if it left the EU smoothly with a transition period, a far from certain conclusion at this stage. The OECD had forecast in May growth of 1.2 per cent and 1.0 per cent.

If Britain leaves without a deal, its economy will be 2 per cent lower than otherwise in 2020-2021 even if its exit is relatively smooth with fully operational infrastructure in place, the OECD said.

The euro area would not be spared from negative spillovers under such a scenario and would see its gross domestic product cut by half a percentage point over 2020-2021.

The OECD trimmed its forecast for the shared currency block, largely due to the slowdown in its biggest economy, Germany, which was estimated to be in a technical recession.

Eurozone growth was seen at 1.0 per cent – down from 1.2 per cent in May – this year and 1.0 per cent in 2020 – down from 1.4 per cent in May.

Boone said Germany’s economy had probably shrunk in the second and third quarters with a slump in car manufacturing, which accounts for 4.7 per cent of German GDP, knocking three-fourths of a percentage point off German growth.

© Thomson Reuters 2019