Global Growth Remains Strong; Risk of Trade War Presents a ‘Clear and Present Danger’ to Ongoing Expansion

Scotiabank Economics Global Economic Outlook Report: July 2018

Scotiabank Economics released its quarterly Global Economic Outlook today. This quarter, the Global Economic Outlook remains optimistic about underlying global growth possibilities, but the economic horizon is clouded by developing and wholly unnecessary trade conflicts touched off by the US with its major trading partners.

“The uncertainty surrounding trade policy in the US and potential responses by US trade partners will continue to weigh on financial markets, and likely act as a drag on growth into 2019,” said Jean-François Perrault, SVP & Chief Economist at Scotiabank. “While the global economy remains sufficiently robust to deal with reasonably minor trade skirmishes such as the tariffs on steel and aluminum, we fear we have reached an inflection point, where all future trade actions could dampen global growth in a meaningful way while raising inflation.”

The Report includes several additional economic indicators and forecasts:

On the US economy:

• US economic growth is accelerating and the Fed is on track to raise rates to 3% by end-2019, with two more rate hikes in 2018 and two further hikes in 2019.
• The pace of the Federal Reserve’s balance sheet unwinding will peak this autumn, which will impose unconventional policy tightening concurrently with the forecast rate hikes.
On the Canadian economy:
• Our central view on the Canadian economy remains little changed from the previous quarter.
• Canadian growth is moderating, but capacity pressures are increasing. Combined with strong demand from the US, we expect recent business investment gains to continue as Canada’s marginal additional sources of growth shift from residential real estate and consumption to trade and business activity.
• The expansion anticipated across all provinces this year, led by British Columbia and Alberta, will benefit from strengthening business investment to address capacity constraints in key industries.
• The Bank of Canada is expected raise rates another 125 basis points, to 2.50%, by end-2019. We continue to expect two more 25 bps increases during 2018 in the Bank of Canada’s target overnight rate, with the first of these coming this month, and three additional 25 bps increases during 2019.
• Commodity prices continue to benefit from strong economic growth and increasingly tight conditions across both upstream production capacity and supporting supply chains.
• WTI crude is forecast to average US$68/bbl in 2018 and US$71/bbl in 2019. The discount on WCS is expected to remain wide owing to bottlenecks in take-away capacity.
On the Pacific Alliance countries, Mexico, Chile, Colombia and Peru:
• A key challenge facing emerging markets this year is the transition to a more hawkish stance on the part of the Federal Reserve. Capital flows to emerging markets have fallen, though this has been concentrated in high-risk countries, such as those with high current account and fiscal deficits. The countries of the Pacific Alliance have been generally insulated from these movements.
On the economy in Asia:
• Prospects in Asia remain reasonably strong, though new trade frictions between the US and China have the potential to significantly affect the region.
• An escalation of the trade dispute with the US would have negative impacts on the Chinese economy, but Chinese authorities have a range of tools at their disposal to blunt the impact of more aggressive US trade policy. Principal among these is the exchange rate, which the Chinese authorities are allowing to depreciate.
• Our forecast assumes cooler heads prevail on the trade side and that an all-out bilateral trade war is averted given the damage it would cause in both China and the US.
• We continue to believe a revamped NAFTA will be ratified in 2019, though NAFTA-related uncertainty, along with tariffs on steel and aluminum, will exert a modest drag on growth.
• The foundations of the global expansion remain solid, and we remain optimistic that political and economic pressure will ensure that trade tensions will not lead to a full-blown trade war.

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