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'Shallow recession' likely in the US as economy slows, trade war weighs on global growth, CLSA says

Chad Bray chadwick.bray@scmp.com

The United States is likely headed towards a "shallow recession" and world trade could turn negative next year as a slowing economy and an escalating dispute with China weighs on global growth, according to Eric Fishwick, chief economist at Hong Kong-based investment bank CLSA.

If world trade growth contracts in 2020, it would be the first protracted period of negative growth since 2008 and 2009, the height of global financial crisis, he said.

"We are already at the weakest point in terms of global trade and global manufacturing since 2010, which has happened as a result of the US slowing from about 3.5 per cent to 2 per cent growth," Fishwick said. "My fear is the US will continue to slow."

Trade globally has been hit by a weakness in manufacturing, centred around Europe and China, combined with a decline beginning in the third quarter of 2018 in US import demand and manufacturing indicators, he said.

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"Given the weakness of the rest of the world, the US needs to grow at more than 3 per cent to keep global trade and global manufacturing conditions relatively healthy," Fishwick said.

The US and China have been in a trade war for more than a year as US President Donald Trump tries to force Beijing to change decades of industrial and trade policies. The tensions have seen the US and China both impose tariffs on each other's products and have weighed on business sentiment globally.

On Monday, Bank of America Merrill Lynch said exports in China were hit hard in August by rising trade tensions, falling 1 per cent and coming in below market expectations.

"With wider coverage and higher levels of US tariffs to be imposed soon, we expect a more negative impact on exports, especially after front-loaded orders fade in [first quarter 2020]," Bank of America economists Helen Qiao and Xiaojia Zhi, said in a research note. "Additionally, exports to non-US destinations will likely weaken on the back of a dimmer global growth outlook."

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CLSA, which is part of Citic Securities, expects the US economy to grow at 2.5 per cent this year and gross domestic product growth to slow to 1 per cent next year as business sentiment and corporate profits weaken. That will hurt trade and export-driven economies, particularly in Asia, Fishwick said.

In China, CLSA is forecasting an economic growth rate of 6.3 per cent this year and slowing to 5.8 per cent by 2021. Fishwick said that China can support full employment at a rate below 6 per cent, but that will not help to support the overall global economy as the US slows.

"We do have to realise that the trade war is causing traditional trade patterns to realign. US-China trade has slowed more aggressively than China-Europe trade, even though the US is healthier," Fishwick said. "That is affecting the supply chain across the region. We've often seen because of the size of China's supply chain across the Pacific Rim that shocks to manufacturing have a greater impact on smaller countries than they do in China because China is able to compensate for that shock more effectively."

At the same time, Hong Kong's economy, which was already slowing, has found itself caught in the middle of the US-China trade war and months of civil unrest has weighed on tourism and retail in the city.

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CLSA is forecasting Hong Kong's economy to contract in 2019 and 2020, with GDP shrinking 0.7 per cent this year and 0.5 per cent next year, Fishwick said. In August, Hong Kong's government revised its forecast, saying the economy could grow at zero to 1 per cent this year.

"Modelling Hong Kong at the moment is extremely difficult. There are two primary big effects that we have had to include in our forecasts. There is, firstly, the dislocation to current and future household spending, which by sector is very, very skewed to food and beverage," Fishwick said. "That is going to be very negative for this year, but should mean revert relatively cleanly looking into 2020."

Protesters wave US flags as they march to the US consulate in Central on Sunday. Photo: Sam Tsang alt=Protesters wave US flags as they march to the US consulate in Central on Sunday. Photo: Sam Tsang

The bigger question will be how soon service exports, which include inbound tourism, normalise next year, he said.

"What is very different through this crisis compared with previous crises is the profile of Hong Kong protest in mainland Chinese media," Fishwick said. "That means that practically we have to model for a longer lived service dislocation to exports."

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2019 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2019. South China Morning Post Publishers Ltd. All rights reserved.