Apart from the US-China trade tussle, other significant risks to global growth include the lack of a recovery in the euro area, a no-deal Brexit, and escalation of geopolitical tensions.
According to IMF, the negative consequences of policy uncertainty are visible in the weak trends in the manufacturing sectors and the significant weakness in global trade.
It’s hardly any wonder that purchasing manager indices (PMI) for global manufacturing paint a gloomy picture.
Business sentiment has been faltering as firms hold back on investment in the face of high uncertainty. JPMorgan’s Global Manufacturing PMI was at its lowest since October 2012 and pointed to contraction in business activity.
No wonder then, that the global policy uncertainty remained elevated in June (see chart). The Economic Policy Uncertainty index, computed by economists Scott R. Baker, Nicholas Bloom and Steven J. Davis, is based on the frequency of articles in domestic newspapers mentioning economic policy uncertainty. The index rose to its highest level for 2019 in end-June.
In an attempt to boost global growth, key central banks across the world are in an easing mode. The US Federal Reserve is seen cutting interest rates for the first time since the global financial crisis in 2008. But some economists do not anticipate a quick turnaround on the back of rate reduction, which means business confidence may not improve in a hurry.
Further, IMF said that concerns with respect to geopolitics have become even more salient in recent months. “Civil strife in many countries raises the risks of horrific humanitarian costs, migration strains in neighbouring countries and, together with geopolitical tensions, higher volatility in commodity markets," it said.
The Geopolitical Risk Index, computed by economists Dario Caldara and Matteo Iacoviello, has eased in July. This index is based on the frequency of words related to geopolitical tensions in international newspapers. But it should be noted that data collected is only until 10 July. And, considering the recent tension between the US and Iran, this index could rise in the coming weeks.
As foreign research house Nomura’s global forex strategist Jordan Rochester said in his latest quarterly Risk Radar report, there are risks galore. “Tensions in the Gulf are on the rise, oil output is falling, meaning Opec (Organization of the Petroleum Exporting Countries) meetings will take on renewed market relevance. The choices of Donald Trump with respect to further tariffs or talk about FX (foreign exchange) intervention will likely keep the market volatile."