From the IMF to the global stock and bond markets, we’re taking the trade war far too lightly

Anthony Rowley says neither the prices of stocks and bonds, nor the steady growth forecasts by global organisations like the IMF, are sensible when the escalating trade confrontation between the US and so much of the world threatens supply chains everywhere

PUBLISHED : Tuesday, 17 July, 2018, 2:22pm
UPDATED : Tuesday, 17 July, 2018, 10:34pm

Hot and sultry summer days somehow conduce a belief in the idea of a “phoney war”. Rumblings of trade battles can be dismissed as the sound of distant thunder rather than as an imminent threat to the health of the global economy – until the real storm breaks, that is. 

Stock and bond prices, although down this year, are facing the threat of Donald Trump’s trade wars with equanimity bordering on foolhardiness. Markets either believe that the global economy can survive a trade war, or their lack of reaction means that they have “no place else to go”.

The second scenario stems from the simple fact that, at US$170 trillion in all (nearly US$70 trillion and about US$100 trillion, respectively) stock and bond markets are by far the biggest repositories of investment. The only others are highly illiquid “real” assets or low-yielding money markets.

Whichever scenario applies, there is little cause for comfort. Both are alarming. They imply that nearly everyone will cling to the sinking ship (or the belief that the global economy can easily weather the storm), until it slips below the water line and it is time to launch the lifeboats.

As the International Monetary Fund notes in its latest World Economic Outlook Update, "financial markets seem broadly complacent in the face of these contingencies, with elevated valuations and compressed spreads in many countries”. But that warning aside, the IMF itself appears complacent.

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It blithely projects that advanced economies will grow by 2.4 per cent this year (shaving just 0.1 percentage points off its forecast several month ago), and by 2.2 per cent in 2019. Only by 2020 will the impact of trade disruptions be felt and even then it will shave only 0.5 percentage points off global growth.

For emerging market and developing economies as a group, the IMF still projects “growth rates of 4.9 per cent for 2018 and 5.1 per cent for 2019”, which all adds up to a forecast for global economic growth of “about 3.9 per cent for both this year and next”.

This is odd, given the risk presented by the US president’s tariff hikes against China and others (assuming he is not lobbied by domestic constituencies to lower or abandon them). The tariffs are highly likely to ricochet through global supply chains, damaging emerging economies. and boomeranging back on advanced economies.

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Why is the IMF so “tentative” in its cautioning about the likely impact Trump’s wars (even though the latest World Economic Outlook does acknowledge "the risk that current trade tensions [will] escalate further – with adverse effects on confidence, asset prices and investment”?

Multilateral institutions like the IMF and the World Bank are always sensitive about being accused of precipitating a global crisis by being too pessimistic (read: realistic). And, when they are headquartered in the same city as Trump, they are wary of being accused of creating “fake news”.

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Even sharp intellects such as Adair Turner (the former head of the UK Financial Services Authority and now chair of the Institute for New Economic Thinking) seem too sanguine in their view that leading economies are becoming less vulnerable to trade shocks as reliance on domestic demand grows.

This might prove to be the case over time, although a global economy where major economies “onshore” offshore production in response to rising costs overseas – robbing emerging economies of their role as global supply chain links – does not sound like a recipe for global development and prosperity.

In any case, all this is looking years down the road, whereas the current risks arising from the prospective trade wars are clear and present. To deny this is akin to believing that the body's blood circulatory system can be arbitrarily interfered with without endangering the patient's health.

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It is rather alarming that, with all the detailed analysis done in recent years by the IMF, Organisation for Economic Cooperation and Development, and others, of the complex structure of global trade and supply chains, more serious attempts have not been made to assess the impact of tariff wars on advanced and emerging economies.

No doubt such analyses will materialise in the coming months as the threat of retaliation increases, especially if tariff hikes provoke currency volatility and a severe erosion of corporate profitability. But, by then, perceptions of a phoney war may have given way to the real thing.

 Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs