OLIVER MANGAN: Global trade war unlikely

US President Donald Trump and Chinese President Xi Jinping

The year may have got off to a flyer, but the first half of 2018 has been characterised by the return of risk aversion and volatility in financial markets, writes Oliver Mangan.

This has seen the dollar recover strongly after a weak start to the year, and stock markets give up early gains to leave most of the main indices slightly down at end June. 

The one constant has been the steady policy tightening by the US Federal Reserve.

Both the IMF and OECD are forecasting a continuation of strong growth for the global economy in 2018 and 2019. 

However, economic data have generally come in below expectations in the first half of this year, apart from in the US. 

Markets see increasing downside risks to global growth from escalating global trade tensions, rising political uncertainty, tightening monetary conditions and the difficulties in a number of large emerging economies. 

The trade tariffs announced to date are small and will have little impact on global economic activity.

Even a full-blown US-China trade war would have little impact and, indeed, would create opportunities for other countries to increase exports. 

China would be the main loser in such a scenario, given its large export base. 

A global trade war, where numerous countries start to impose tariffs on a broad range of imports, would be a far more serious development. Countries that are heavily reliant on exports such as the Asian economies and, indeed, Ireland, would be hardest hit.

Estimates vary on how much a major trade war would knock off global growth and it would also be dependent on the level and extent of new tariffs.

There would also be secondary impacts from the damage to confidence, falls in stock markets and possibly tighter monetary policy to counter a rise in inflation. 

A global trade war seems unlikely, as there would be no winners, only losers. However, it cannot be ruled out in the current fractious political environment. 

Markets are also keeping a close eye on emerging economies. A number of large emerging economies, including Argentina, Brazil, Turkey, South Africa, and Indonesia have all run into financial difficulties. 

Meanwhile, there are some signs that the Chinese economy is beginning to slow. 

Overall then, while the forecasts may be for continuing strong global growth, markets are not so confident, with risk-off sentiment dominating at the present time.

Oliver Mangan is chief economist at AIB

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