Storms Outside Our Teacup

Threats to global growth moderate Narendra Modi’s election prospects

In January, this column highlighted Prime Minister Narendra Modi’s streak of lucky breaks (‘Modi is a Very Lucky Man,’ goo.gl/D6wxo4). These included awidely forecast surge in global GDP growth in 2018, spurring rapid Indian growth in his final 18 months in office, and boosting his prospects in the 2019 general election.

Recent events cast doubt on the strength of the global growth surge. This, in turn, casts doubts on whether India will surge forward on a global wave, aiding BJP electorally.

The biggest threat to global growth is the aggressive trade bullying by US President Donald Trump, aimed especially at China. First, Trump raised US import duties on washing machines and solar panels, imported mainly from China. Next came import duties on steel and aluminium. Trump was willing to exempt countries that followed his idea of fair trade practices, and this might cover Europe and Japan. It will not cover China.

Trading Tariffs

Then, on April 2, China retaliated mildly with import duties on just $3 billion worth of US exports, including pork, nuts and wine. This mild approach was clearly aimed at saving face while avoiding an all-out trade war that would be a loss-loss for both sides. But Trump angrily hit back the very next day by proposing higher tariffs on a new list of 1,300 Chinese exports worth $50 billion.

Feathers ruffled, China, within 24 hours, threatened a tit-for-tat levy of 25% on $50 billion worth of US goods such as soybeans, aircraft, large cars and chemicals. Soybeans are an extremely important export item for the US mid-West, which usually votes heavily Republican. Hitting the income of US soybean farmers could hit Trump politically in the mid-West in the crucial Congressional elections in November.

Far from cooling down, Trump on April 5, threatened tariffs on another $100 billion of Chinese exports. He said he had authorised the US trade representative to examine which Chinese exports should be targeted. Undeterred, China declared that it, too, was looking into appropriate counter-measures.

Now, many economic and financial experts dismiss the latest threats as no more than huffing, puffing and bluffing. Optimists think that both the US and China are using extravagant threats mainly to impress their own domestic audiences and will stop short of calamitous action. The stock markets are down, but not by much.

Money usually floods out of emerging markets into safe havens in a global crisis. Right now, emerging markets have stood up pretty well to all the bad news, because of the belief that things will not really be so bad. Instead of global money flooding into the US as a safe haven, there is only trickle. The US dollar has remained relatively weak.

Trump’s track record suggests that trade optimists are partially, or wholly, wrong. He has repeatedly sacked moderates in his administration and replaced them with hardline yes-men. He believes he can use threats of trade war to burnish his own patriotic credentials among US voters, and convince them that harsh medicine is required to force China to behave. However, attempts to make China kowtow could backfire. Maybe behind-the-scenes negotiations will cool tempers. But a ruinous trade war that hits global growth cannot be ruled out.

Trump’s aggression is not limited to China. He has petitioned the World Trade Organisation (WTO) to force India to stop all export subsidies. He has even targeted tiny Rwanda in Africa for stopping US sales of secondhand clothing to that country.

President’s Rule

His latest action is the imposition of trade and financial sanctions against Russia for interfering in the 2016 US presidential election, plus other sins. The sanctions target seven industrialists and their companies, including Rusal, a global aluminium giant. Rusal’s share price fell by onethird. Russia’s economy is spiralling downwards.

Trump is by instinct a trade warrior, not a negotiator. That is bad news for global growth. Fears of trade war will dampen growth even if all-out war is ultimately avoided. But such fears are not the only reason why global growth may be much slower in 2018 than earlier forecast.

In the US, retail sales have fallen for three straight months, and auto sales have plateaued. The latest US jobs data suggested a slowdown in hiring. In Germany, the most powerful European country, industrial output unexpectedly fell by 1.6% in February. Retail sales in Britain have been low for several months, partly because of a substantial rise in prices that have deterred buyers, and partly because of the worst winter weather for decades. French retail sales have been improving. But President Emmanuel Macron is now battling a major railway strike that is hitting all economic activity.

In sum, breezy optimistic forecasts of sharply higher global growth in 2018 have so far not been vindicated. Unexpected adverse developments look like dampening the predicted global surge in 2018, even if all-out trade war is avoided.

This, in turn, lowers India’s growth prospects. Modi badly needs an economic upsurge to create jobs, assuage farm distress and enthuse voters. Prospects for a surge looked bright three months ago. Alas, not any more.

What do you think?