MACRO AND MARKET PERSPECTIVES

The danger of elevated trade frictions

Oct 12, 2018
By BlackRock Investment Institute

Elevated trade protectionism marks the greatest downside risk to the global expansion and is a prime driver of heightened macro uncertainty. The U.S. trade conflict with China is at the heart of higher trade tensions. We find that trade tensions have likely served as a drag on risk assets, even though it is unclear if the measures taken so far have hurt global trade activity much. This leaves the global economy in an uneasy equilibrium. Yet amid the uncertainty, the BlackRock G7 Growth GPS points to upside risks relative to the consensus. A major escalation of trade tensions or signs that prolonged tensions are hurting confidence would make us negative on the growth outlook.

Highlights

  • Many model-based estimates of trade actions so far suggest the direct impact of tariffs on trade activity should be modest. Yet many of these simulations do not account for deeply integrated global value chains – and these value chains can greatly magnify the negative effects of trade actions. A sharp fall in private sector confidence, along with modestly tightening financial conditions outside the U.S., could also further damage activity and risk assets.
  • Growth in the volume of global trade has slowed this year, but it is not clear that tariffs are the main driver. Our new daily trade “nowcast” points to global trade expanding at a steady but subdued 2% annual pace in the near term – softer since last year but on par with global GDP growth.
  • We find some signs that the heightened macro uncertainty sparked by U.S. trade policy is likely holding back equities and may be a key factor in this year’s emerging market (EM) volatility. We find this lingering “uncertainty effect” weighing on risk assets as trade conflict headlines still dominate the news.
  • We would become wary on the global growth outlook if there were a significant increase in tariffs and other trade barriers or if confidence were being hit. On the flip side, any easing of trade tensions – particularly between the U.S. and China – could boost risk assets and some EM currencies. Still, we see these tensions as a part of a broader strategic standoff between the U.S. and China that will likely persist.

Snapshot

Trade tensions are here to stay. To get a live read on how trade dynamics are evolving in the face of protectionism, we have developed a real-time nowcast of trade growth. Trade growth has slumped from last year’s remarkable pace of around 5%, but in our view it is not clear that trade tensions are the main culprit. Our nowcast suggests that trade should grow at an annualised pace of 2% over the next few months, a subdued level given the strength of global growth. For the past few months, the reported data were trailing our nowcast but have now rebounded. Trade growth at a 2% pace for the remainder of 2018 would result in a full-year growth rate of around 3.5%. That’s just below the IMF’s October 2018 forecast for this year and next – but in line with global GDP growth and better than recent PMI data on export orders have suggested.

Chart: Trade and tariffs
Jean Boivin
Global Head of Research, BlackRock Investment Institute
Jean Boivin, PhD, Managing Director, is Global Head of Research for the Blackrock Investment Institute and is a member of the EMEA Executive Committee.
Head of Economic and Markets Research, BlackRock Investment Institute
Deputy Head of Economic and Markets Research, BlackRock Investment Institute