Trade tensions remain greatest risk to global economy

07.16.19

As the first half of 2019 progressed, all signs pointed to a resolution to the trade dispute between the U.S. and China, leading to potentially stronger growth in the back half of the year. This view was based on the belief that the leaders of the world’s two largest economies would be motivated to come to a deal. President Donald Trump would be looking for a strengthening U.S. economy heading into the 2020 election season, while Chinese President Xi Jinping would want to claim a political victory ahead of the celebrations to mark the 70th anniversary of the founding of the People’s Republic of China later this year. As we assumed, China has begun to stimulate domestic demand in response to rising uncertainty and a weakening economy.

However, Trump dropped a bombshell in early May by announcing the U.S. would increase the tariff rate on $200 billion in Chinese imports from 10% to 25%. He also threatened additional tariffs on all remaining Chinese imports, an estimated $250–$325 billion in goods. China retaliated by announcing it would raise tariffs on $60 billion in U.S. goods.

Furthermore, Trump threatened to impose tariffs on imports from Mexico to force the country to curb the influx of migrants from Latin American countries.

These actions have caused us to revisit our global gross domestic product (GDP) forecast. We now forecast global growth at 3.2% in 2019 with risks to the downside, a slight downtick from our estimate 1Q of 3.3%.

As anticipated, the G20 Summit in late June provided an opportunity for both sides to call a temporary truce in an effort to return to the negotiating table. Trump and Xi emerged from their meeting with an agreement to delay any new tariffs on U.S. and Chinese products and resume trade talks. We still believe a trade agreement will happen before year-end. However, we also anticipate the intensifying rivalry between the U.S. and China will be with us for some time.

In addition, Trump’s position on Mexico occurred while legislatures in the U.S., Mexico and Canada worked toward ratification of the U.S.-Mexico-Canada Agreement (USMCA), the replacement for the North American Free Trade Agreement.

Mexico became the first country to ratify the trade deal and USMCA is not expected to face insurmountable hurdles in Canada. The path to ratification in the U.S. could be rockier as the Democrat-led U.S. House of Representatives wants the deal to be altered to address key provisions on labor and environmental standards.

We believe USMCA will likely be ratified in the U.S. by the end of the year, but at what cost? Trump’s reliance on tariffs as a negotiating tactic may have shaken the confidence of U.S. trading partners, as it shows that tariffs can be implemented even if a framework on a trade deal has been reached. We also believe it could make China hesitant to strike a deal with the U.S., knowing there’s a possibility Trump could announce tariffs even if an agreement was in place.


Ivy Live: Ivy’s Midyear Outlook: Rates, risks and rallies

Learn more


Past performance is not a guarantee of future results. Risk factors: Investment return and principal value will fluctuate, and it is possible to lose money by investing. International investing involves additional risks, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Fixed income securities are subject to interest rate risk and, as such, the net asset value of a fixed income security may fall as interest rates rise. Investing in below investment grade securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. Investing in the energy sector can be riskier than other types of investment activities because of a range of factors, including price fluctuation caused by real and perceived inflationary trends and political developments, and the cost assumed by energy companies in complying with environmental safety regulations. These and other risks are more fully described in a Fund’s prospectus.

The S&P 500 Index is a float-adjusted market capitalization weighted index that measures the large-cap U.S. equity market. The index includes 500 of the top companies in leading industries of the U.S. economy. It is not possible to invest

The opinions expressed are those of Ivy Investment Management Company and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through July 2019, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon.