Three major events shaped the economic story for the first month of the new year. The US-China interim trade deal was finally signed, injecting optimism into the global economy. However, a flareup of tensions between the US and Iran at the start of the year and the spreading of a new infectious coronavirus out of China dented sentiment.
Will the Wuhan Coronavirus impact the global economy?
The latest shock on the global economy is a novel Coronavirus out of Wuhan, China. An outbreak of this virus, which is similar to SARS and MERS, has led to the lockdown and quarantine of multiple Chinese cities. The outbreak expanded during the Chinese New Year, and the Chinese economy could see GDP growth slowing down by a full percentage point in 2020 as a result of weakened consumer performance.
While the virus has spread to numerous other countries, including Europe and the US, cases outside of China are still a small number. However, the virus is said to be at least comparable to SARS in terms of infectiousness, and experts warn that unless the disease is contained, global trade and tourism could face negative outlooks for the year.
What happened with the US-China trade deal?
The US and China officially signed a Phase I trade deal, putting a pause on further escalation in a trade war that had affected both economies over the past two years. The trade deal committed to a reduction in US tariffs on some Chinese exports down to 7.5% and a Chinese promise to increase its purchase of US exports by US$ 200bn over 2 years.
While the trade deal brought a sense of positivity to global markets, and opened the road for further cooperation between the US and China on trade matters, analysts were largely underwhelmed by the benefits the trade deal provided. The extent of promised purchases of US exports were largely considered to be unrealistic, while the US still continued to impose high tariffs on most exports from China. Any Phase II deal is also considered unlikely until after the 2020 US Presidential election in November.
How did tensions in the Middle East work out?
The beginning of the year was rocked by an escalation in tensions between the US and Iran, after the US assassinated a key Iranian military leader, resulting in retaliatory rocket strikes by Iran onto US bases in Iraq. While these initial confrontations brought immense pressure onto global sentiment, especially due to the possible impacts on global oil prices, both countries subsequently backed down from their rhetoric. Further military conflict between the two nations was avoided, but Iran is intent on re-starting its nuclear program and the US has increased its sanctions on Iran.
How have commodities been performing?
Oil prices see-sawed in January, fueled by a rise in the first half of the month and a fall in prices later on. Escalations in Middle East tensions combined with expectations of stronger energy demand after the US-China trade deal to raise prices to a high of US$ 68.91 per barrel on the 6th of January. However, fears of a global pandemic in the wake of the Wuhan Coronavirus subsequently brought prices down to a low of US$ 58.57 per barrel by the 27th of January.
In contrast gold prices rose across January, as investors flocked to safe haven assets in response to the geopolitical tensions and risks of a pandemic. Prices rose from a low of US$ 1518.10 per ounce on the 27th of December to a high of US$ 1581.95 per ounce by the 26th of January.
How China’s Virus Outbreak Could Threaten the Global Economy
The Wuhan Coronavirus could have major implications for the global economy. The mysterious respiratory illness is likely to restrict consumption and confidence in China’s domestic economy, and on the back of an overall slowdown, this could prove harmful to other emerging markets as well.
Read more - nytimes.com
IMF says the outlook for the global economy ‘remains sluggish’ as it cuts growth forecasts
The International Monetary Fund (IMF) has become less optimistic about global growth, warning that the outlook remains sluggish and there are no clear signs of a turning point. The IMF has now revised down the global growth forecasts to 2.9% and 3.3% for 2019 and 2020 respectively.
China’s trade war deal ‘may be doomed from start’ as scepticism mounts over capacity to buy US products
The interim trade deal that was signed between the US and China might be more unrealistic than previously expected, with conditions undertaken by China being seen as largely out of scope. Most Chinese exports are still taxed even with the deal, and unless progress is made, worries are rising that trade tensions could relapse.
China-US Phase 1 Agreement: A Positive Spillover for the World
Despite being an incomplete solution to the US-China trade dispute, the Phase I deal would still have positive impacts on the global economy. The continued dialogue between the two nations is key here, as it allows for other issues, such as those surrounding IP protection, security, and domestic purchase to be continuously discussed.
China economic growth slows to 30-year low as Trump's trade war bites
In 2019, the Chinese economy grew at its slowest since 1990, mainly due to the negative impacts of the trade conflict with the US. While an interim trade deal might cushion this slowdown, tariffs still exist on hundreds of billions of dollars of Chinese exports, and combined with a weakening domestic economy, could mean even slower growth in 2020.
Compiled by: Chayu Damsinghe
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