investor daily logo

World GDP growth to hit 8-year low

 — 1 minute read

The outlook for the global economy has eroded significantly due to escalation in the US-China trade war according to Fitch Ratings, with the credit agency now forecasting world growth to fall next year to the lowest rate since 2012.

In its latest Global Economic Outlook, Fitch has predicted world GDP growth will be reduced to 2.6 per cent for 2019, going down further to 2.5 per cent in 2020. 

The forecasts are a fair drop from last year’s GDP growth figure of 3.2 per cent, the 0.6 per cent fall in growth would be the largest decline since 2011.


The annual average growth was 3 per cent during 2014 to 2018. 

Fitch has updated its outlook from June in light of the recent escalation of the US-China trade war, which has “severely damaged the outlook for world trade and business sentiment,” the report noted.

The new US tariff measures introduced in the last three months amount to an additional US$55 billion to US$60 billion of US taxes on Chinese imports – equivalent to 75 per cent of the shock Fitch had previously estimated for a worse-case scenario in its June analysis.

The worst-case scenario envisaged the US would imposing a 25 per cent tariff rate on the remaining US$300 billion of goods, a tax of $75 billion.

In its previous report, Fitch assumed the trade war would neither escalate nor de-escalate.

China slowdown to hit Australia

In response to the tariff hikes, China has braced for economic slowdown: with authorities cutting banks’ reserve requirement ratios, bringing forward local government bond issuance quotas and effecting a slight reduction in the loan prime rate – a new benchmark interest rate for bank lending to corporates.

Fitch anticipates China’s growth to be to 6.1 per cent this year, a decline of 0.1 per cent from its prior forecast, and it predicts the country’s GDP to slow further in 2020, to 5.7 per cent, down 0.3 per cent from its last estimate.

The downgrade to China’s growth has also affected Fitch’s outlook for Australia: with it cutting its forecast for Aussie GDP growth to 1.7 per cent for 2019, before picking back up to 2.3 per cent in 2020. But the prediction is still a downgrade by 0.1 per cent. 

Almost a third (30.6 per cent) of Australia’s total exports went to China in 2017-28. In the past month, Treasurer Josh Frydenberg added the country to a coalition of nations urging for an end to the trade war.

Fitch said loosening policy and a “fading drag from the housing market” in Australia should lead GDP growth to recovery next year.

Trade policy a new deciding factor for growth

“Trade policy has doubtless played some part but until recently, has not been a dominant factor,” the report read.

“By contrast, the further declines in global growth we are now anticipating over the next 12-18 months are almost entirely trade policy driven and are unlikely to be neutralised by the rapid and broad-based shift to monetary policy easing witnessed this year.”

Fitch chief economist Brian Coulton commented: “There can be few precedents since the 1930s of global economic prospects being affected so significantly by trade policy disruptions.”

The US announced a 10 per cent tariff rate on US$300 billion of Chinese imports on 1 August. 

Around three weeks after, China introduced retaliatory measures on US$75 billion of imports from the US. 

In a matter of hours, President Donald Trump indicated the rate on US$75 billion would rise from 10 per cent to 15 per cent and that the existing 25 per cent tariff on US$250 billion of imports from China would rise to 30 per cent. 

The new 15 per cent tariff is scheduled to be fully phased in by mid-December, when about US$160 billion of goods, Fitch reported, will attract the new 15 per cent rate. 

The increase to 30 per cent from 25 per cent in US$250 billion of goods is scheduled to take place in mid-October.

US not immune but tipped to steer clear of recession

The US has not been immune to weakening growth, Fitch noted, with its GDP growth slowing to around 2.3 per cent on an annualised half-yearly basis (in year-on-year terms), down from 3 per cent in 2018. 

However the US will remain out of recession territory, it added, the American economy is relatively closed and therefore less exposed to external demand shocks and domestic demand has held up well. 

Only American exporters will feel the escalation in the trade war – US exports to China are only 0.6 per cent of GDP. 

Germany, UK, India cop largest downgrades

The impact of trade policy disruptions was said to be felt strongly in highly open economies including in Europe, where concerns are exacerbated by rising fears of a no-deal Brexit. 

The spread for global slowdown has been even across developed markets, with Fitch’s review downgrading its outlook for the eurozone’s growth by 0.1 per cent for 2019 and 0.2 per cent next year, and US growth decreasing by 0.1 per cent for both years.

The largest downward forecast updates have been for Germany (0.3 per cent for 2019 and 0.6 per cent for 2020) and the UK (0.3 per cent for both years). 

Among emerging markets, India saw the largest downgrade of at 1.1 per cent and 0.9 per cent for financial year 2019 and FY20.

World GDP growth to hit 8-year low

The outlook for the global economy has eroded significantly due to escalation in the US-China trade war according to Fitch Ratings, with the credit agency now forecasting world growth to fall next year to the lowest rate since 2012.

investordaily image
investordaily image
ID logo
Sarah Simpkins

Sarah Simpkins

Sarah Simpkins is a journalist at Momentum Media, reporting primarily on banking, financial services and wealth. 

Prior to joining the team in 2018, Sarah worked in trade media and produced stories for a current affairs program on community radio. 

You can contact her on [email protected].

related articles

Website Notifications

Get notifications in real-time for staying up to date with content that matters to you.