The global economy is expected to suffer a slowdown in growth this year. However, India’s dependence on its domestic economy could limit the impact. 

• IMF has cited the possibility of a an economic storm that’s brewing in the global economy
• The major potential causes of the storm are US-China trade tensions, uncertainty over Brexit and a major slowdown in the Chinese economy.
• The much feared no-deal Brexit could impact Indian exports negatively, as the UK is a major market.
• However, US-China trade tensions and slowdown in the Chinese economy could actually benefit India in the short term.

The International Monetary Fund (IMF) has sounded a warning on the global economy on Sunday, asking governments to be better prepared. At the World Government Summit in Dubai, Christine Lagarde, MD, IMF said that an economic storm is possibly brewing, as the economy is “growing more slowly than we had anticipated”.

IMF had cut its growth forecast for the global economy from 3.7% to 3.5% in January 2019. According to Lagarde, there are ‘four clouds’ affecting the global economy at present – trade tensions and tariff escalations, financial tightening, uncertainty related to (the) Brexit outcome and spillover impact and an accelerated slowdown of the Chinese economy. Let’s take analyse these aspects one by one.

US & CHINA – CAN THEY COME TO TERMS?

Perhaps the greatest stress point at present is the uncertainty around the tariff war between US and China. The US President Donald Trump has given a deadline of March 1 to finalise an agreement with China. Negotiators from both sides are in discussions as we speak.

The two sides have already imposed tariffs on US$ 360 billion worth off bilateral trade, which has impacted their manufacturing sectors. US had postponed its plan to raise tariffs for US$ 200 billion worth of Chinese imports in December 2018 to 25% from the current 10%. Trump expects China to take the first step by addressing the issues raised by the US, which include protectionist measures by China and theft of American IP by Chinese companies.

Speculations that talks would fall apart have stressed global financial markets, with experts predicting that neither side will give in so easily.

BREXIT – PLEASE LET US HAVE A DEAL

The March 29 deadline for Brexit is not too far away. The shocking part is that there is no deal on the modalities of Brexit yet. British PM Theresa May has been running from pillar to post, trying to bridge the differences between her country’s MPs and the European Parliament.

After it rejected May’s Brexit proposal, the House of Commons voted to demand for an alternative to the Northern Ireland backstop proposal. May visited Brussels last Thursday to try and convince EU lawmakers to finalise the deal. But the stalemate continues.

In a statement to the House of Commons today, Theresa May has requested MPs for around two weeks more to finalise the deal. However MPs feel that May is only buying time to get MPs to later compel them to accept whatever concessions she can receive from the EU.

UK has been facing a general slowdown since the Brexit referendum in 2016. GDP grew by 0.2% during the last quarter of 2018, which is around one-third of the growth rate before the referendum. According to the Bank of England, the referendum has hit GDP by 1.5%.

The worst possibility would be a no-deal Brexit. Gita Gopinath, Chief Economist IMF warned the UK to avoid crashing out of the EU or risk a 5% to 8% reduction in GDP “over times”.

CHINESE CHECKMATE

Headline numbers from China, which accounts for around 1/3^rd of the growth in the global economy, are further adding to the alarm. The economy grew by 6.6% in 2018, its slowest growth since 1990. Exports in December dropped by 4.4% yoy, while imports declined by 7.6%.

There is a continued slowdown in outstanding credit and weak capacity utilization at around 40-50%. Moreover, combined debts of households, governments and corporations are at thrice the size of GDP. Apple had cut its annual growth projection for the first time in a decade in January, citing slowdown in the Chinese economy.

But it could be worse. Analysts normally take official Chinese numbers with a pinch of salt. “The Chinese published GDP numbers are absolute garbage,” said Leland Miller, CEO of advisory firm China Beige Book. His company has taken data from thousands of companies across China, which indicates that the situation is much weaker than the government’s projections. In fact, China could be softer in its negotiations with the US, since its position is weak at this juncture.

THE INDIA ANGLE

Brexit would impact Tata group companies Tata Steel, Tata Motors and TCS, since they have presence in the UK and it will shut down direct market access to the EU. Other companies that could be impacted include Bharat Forge, Motherson Sumi and Mahindra CIE. If the UK slows down significantly (especially due to the much feared no-deal Brexit), the impact on India’s exports could be negative, since it is India’s 12th largest trading partner, and also one of the seven large nations with which India has a trade surplus.

Even the US-China trade tensions, if unresolved, could drive billions of dollars of trade to nations like India. A UN report estimates that Chinese firms are only expected to take up 5% of the USS$ 85 billion off US exports coming under Chinese tariffs. US firms will take around 6% of the US$ 250 billion of Chinese exports subject to US tariffs.

Lastly, China is the largest trading partner for most of the Asian region, so a slowdown will affect growth in these countries as well. However, India is relatively better placed in comparison, since it’s exports to China are not so significant.

India’s economy is still heavily reliant on its domestic demand. And that story continues to be strong. The World Bank projects India to grow by 7.3% in 2019 and 7.5% over the next two years. A major downside could be that weakening of the yuan would make Chinese companies dump excess capacities into India. But on the other hand, low cost Chinese manufacturing could relocate to India in a big way, in order to benefit from the latter’s growing market.