Chief economist update: The risks just got real

An influx of economic data and surveys are set for release this week. The central banks of Australia, Canada, the Eurozone and Japan are also scheduled to meet.

Don't bother with any of them. Whatever the indicators indicate and the central banks decide on would be null and void should US President Donald Trump make good on his 25/10 tariff threat (25% tariff on steel and 10% on aluminium) this week and there's certain retaliation from trading partners.

You can forget the World Bank (WB) and the International Monetary Fund's (IMF) rosy, glowing global growth forecasts too for the risks to their projections just became real.

The World Bank's "Global Economic Prospects" report (released in January) upgraded world GDP growth to 3% in 2018 (from its June forecast of 2.8%) and 2.9% in 2019 (from 2.8%).

"A broad-based cyclical global recovery is underway, aided by a rebound in investment and trade...Global growth is expected to be sustained over the next couple of years-and even accelerate somewhat in emerging market and developing economies (EMDEs) thanks to a rebound in commodity exporters," the report said.

The IMF's "World Economic Outlook Update" (released in January) was even better, projecting world output growth of 3.9% in 2018 and 2019 - revised from its October forecasts of 3.7% for both years.

"This forecast reflects the expectation that favorable global financial conditions and strong sentiment will help maintain the recent acceleration in demand, especially in investment, with a noticeable impact on growth in economies with large exports. In addition, the US tax reform and associated fiscal stimulus are expected to temporarily raise US growth, with favourable demand spillovers for US trading partners - especially Canada and Mexico-during this period."

The report also showed the IMF significantly lifting its "world trade volume (good and services)" growth projection significantly to 4.6% in 2018 (from 4% in October) and 4.4% in 2019 (from 3.9%). The World Bank did the same, albeit more conservative, upgrading the forecast growth in world trade volume to 3.9% (from 3.7%) in 2018 and 3.8% (from 3.7%) in 2019.

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The risks just got real. The WB talked about how "abrupt tightening of global financing or a sudden rise in financial market volatility" could "potentially derail the expansion."

"In addition, escalating trade protectionism or rising geopolitical risk could also negatively affect confidence, trade, and overall economic activity."

The IMF listed almost the same risks to its outlook but for our purpose, here's the statement on trade:

"Inward-looking policies. Important long-standing commercial agreements, such as NAFTA and the economic arrangements between the UK and rest of the European Union, are under renegotiation. An increase in trade barriers and regulatory realignments, in the context of these negotiations or elsewhere, would weigh on global investment and reduce production efficiency, exerting a drag on potential growth in advanced, emerging market, and developing economies. A failure to make growth more inclusive and the widening of external imbalances in some countries, including the US, could increase pressures for inward-looking policies."

Should Trump go ahead and sign the 25/20 tariff into law, Trump-flation wins and central banks would be getting what they've been wishing for all along, higher inflation.

Speculations that the Fed would go four times instead of three is the least markets should worry about - the Fed could raise interest rates by more as higher tariffs are passed onto the domestic economy.

Retaliation from other countries would prompt Trump to counter by expanding tariffs on other goods and services war here we come.

This would raise inflation and slow growth at the same time. In other words stagflation.

Ben Ong is the Director of Economics and Investments at Rainmaker Group. He previously worked as a fund manager, economist, asset allocation strategist, portfolio analyst and stock market analyst. Check out his economics analysis here.

His latest book, The Good Economics Guide: Making sense of key economic data, is available free to download on the Financial Standard app.

Read more: IMFWorld BankCanadaFedAustraliaEuropean UnionEurozoneGlobal Economic ProspectsInternational Monetary FundJapanNAFTAUnited KingdomUnited StatesUS President Donald TrumpWorld Economic Outlook Update
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