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Global economy is set to feel delayed trade war pain in 2019

Volumes are tipped to slow further even as the United States and China seek to resolve their trade spat, with companies warning of ongoing disruption.

Hong Kong

WHILE 2018 was the year trade wars broke out, 2019 will be the year the global economy feels the pain.

Bloomberg's Global Trade Tracker is softening amid a fading rush to front-load export orders ahead of threatened tariffs.

Volumes are tipped to slow further even as the United States and China seek to resolve their trade spat, with companies warning of ongoing disruption.

Market voices on:

Already there are casualties. GoPro will move most of its US-bound camera production out of China by next summer, becoming one of the first brand-name electronics makers to take such action, while FedEx Corp recently slashed its profit forecast and pared international air-freight capacity.

"Any kind of interference with commerce is going to be a tax on the economy," said Hamid Moghadam, chief executive officer of San Francisco-based Prologis, which owns almost 4,000 logistics facilities globally. "The world economy is probably going to slow down as a result of it."

Financial markets have already taken a hit. Bank of America Merrill Lynch estimates that the trade war news has accounted for a net drop of 6 per cent in the S&P 500 this year. China's stock market has lost US$2 trillion in value in 2018 and is languishing in a bear market.

Recent data underscore concerns that trade will be a drag on American growth next year.

US consumers are feeling the least optimistic about the future economy in a year, while small business optimism about economic improvement fell to a two-year low and companies expect smaller profit gains in 2019.

The International Monetary Fund forecasts trade volumes will slow to 4 per cent in 2019 from 4.2 per cent this year and 5.2 per cent in 2017. They warn that trade barriers have become more pronounced.

Europe isn't insulated either. While Germany's key machinery sector will produce a record 228 billion euros (S$355 billion) this year, the trade disputes are among reasons why growth will slow, according to the VDMA industry association. Output will increase about 5 per cent in real terms in 2018, the most since 2011, before growth slows to 2 per cent next year.

Then there's the risk of the US placing tariffs on auto imports from Europe and Japan, a move that would damage relations between some of the world's biggest economies.

The arrest of Huawei Technologies' chief financial officer Meng Wanzhou illustrates the risk of unexpected developments that can quickly inflame already tense relations.

"'Trade divergence' since 2018 and the 'Tariffs-Limbo' into 2019 are likely to keep a high degree of uncertainty and continue to have an impact on trade and investment plans," New York-based Citigroup global markets economist Cesar Rojas wrote in a recent note.

The critical question is whether Washington and Beijing can strike a deal by the March 1, 2019 deadline.

If they succeed, a cloud will be lifted off the world economy.

But for now, the threat that tensions will linger is a brake on business expansion plans, and thereby the global economy. BLOOMBERG