US-China trade tensions may escalate further, derail global growth: Moody's

Moody's said the trade restrictions will lead to a slowdown for China, cutting real GDP growth by around 0.3 to 0.5 percentage points in 2019

Moody's Investors Service on Tuesday said trade tensions between the United States and China are likely to escalate further during the year and will impact global growth. 

The trade dispute would stop short of full implementation of the most severe potential measures announced so far, including tariffs on all US automotive imports or a breakdown of The North American Free Trade Agreement (NAFTA), Moody's said in a report titled 'Trade - Cross-Sector: Global Trade Monitor-July'.

"We expect the trade dispute between the US and China and other countries to be prolonged, with further trade measures being put in place over the rest of 2018," Moody's Macroeconomic Board Chair Elena Duggar said.

Moody's said the trade dispute will have a manageable aggregate impact on global growth and inflation. 

"However, if there is a large reaction in the financial markets or if confidence is undermined, the dispute has the potential to derail the global economy," it added.
 

The trade restrictions may cut about 0.25 percentage points off US real gross domestic product (GDP) growth in 2019, offsetting some of the economy's underlying strong momentum and fiscal stimulus gains. US inflation is likely to rise this year and next, driven more by the healthy economy than tariffs, it said.

For China, Moody's said the trade restrictions will lead to a slowdown, cutting real GDP growth by around 0.3 to 0.5 percentage points in 2019. Moody's assumes that these effects will be largely offset by moderate fiscal and policy easing. 

Imposition of a high import duty by the US has triggered a trade war-like situation with other countries such as China, Europe, India, too, resorting to higher tariffs.
 

Moody's in its 'Global Macro Outlook: 2018-19' released in May, had said that the G-20 countries will grow 3.3 per cent in 2018 and 3.2 per cent in 2019.

The advanced economies will grow at a moderate 2.3 per cent in 2018 and 2.0 per cent in 2019, while G-20 emerging markets will remain the growth drivers, at 5.2 per cent in both 2018 and 2019, down from 5.3 per cent in 2017, it had estimated.