Global Supply Chains at Risk of Recession?

August saw another intensification of the trade conflict between the United States and China. Then, in mid-September, the attack on Saudi Arabian oil production facilities resulted in an oil price spike. Both are bad news for the global supply chain managers coming at a time when the world's economic growth is already slowing, says IHS Markit.

“Partly because of the trade war, again downgraded the growth forecasts for all the major economies during the past month,” says Chief Economist Nariman Behravesh.

“Our September forecast was completed before the Abqaiq and Khurais attacks. The economic impacts will depend on the magnitude and duration of supply disruptions,” he added.

A sustained oil price increase of $10‒20 per barrel could cut global growth 0.1–0.2 percentage point, note economists. While the damage of an oil shock to the U.S. economy will be much less than in the past, the harm to large net oil-importing economies such as China, Japan, and Europe could be significant.

Meanwhile, in U.S., new tariffs will hurt growth, but not kill it, says Sara Johnson, Executive Director, Global Economics, at IHS Markit.

“Second-quarter real GDP growth was reported at a 2.0% annual rate, a pace that will likely be sustained for several quarters,” she says. “High-frequency data signal near-term strength in consumer spending but weakness in business fixed investment.”

The outlook for the next few years has been lowered in response to the Trump administration's new 15% tariffs on most goods imports from China that had previously escaped tariffs, and an increase in the tariff rate to 30% on imports from China that had been subject to a 25% rate.

These tariff changes, being implemented in steps from 1 September to 15 December, are expected to boost consumer prices and the cost of capital, softening the outlook for personal consumption expenditures, business fixed investment, and GDP. We now project annual real GDP growth of 2.3% in 2019, 2.1% in 2020, and an average of 1.7% growth in 2021‒23.

So here's the “bottom line” for global supply chain managers from the September Global Economic Forecast Flash:
The risks of a recession have risen because of the escalating trade war and oil shock. Nevertheless, given the momentum of growth and expected additional stimulus, a recession can probably be avoided.

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