Bank of America just slashed its forecast for global economic growth — and it's blaming Trump's trade war

  • Bank of America Merrill Lynch cut its expectation for global gross domestic product growth on Friday to 3.3%, down from 3.6%.
  • The firm cited trade-war uncertainty between the US and China and a lack of normalization in interest rates as reasons.
  • Emerging markets in Europe, Africa, and the Middle East are holding up amidst global trade woes and should see meager improvements in 2020, BAML says.

Bank of America Merrill Lynch lowered its expectations for global gross domestic product growth on Friday, blaming trade-war uncertainties and lagging policy responses for its weakened outlook.

The firm slashed its predicted global GDP forecast to 3.3% from 3.6%. BAML already lowered its 2019 forecast from the 3.9% level it proposed in November.

The report cited several reasons for the negative adjustment. The first is the continued trade war between China, which BAML global economist Ethan Harris said is "already lowering growth in much of the world."

"The obvious story is that policy uncertainty shocks — primarily the ever-evolving trade war — have start to have a notable negative impact on growth," Harris wrote in a note to clients. "Trade has stopped growing; indeed, this is the weakest stretch since the Great Recession."

The chart below backs up this assertion:

Screen Shot 2019 07 12 at 11.51.08 AMBank of America Merrill Lynch

In the event that a final trade-war truce is reached, BAML still has concerns over the other geopolitical turmoil Trump has created during his time in office.

"Even if there is a deal, we worry about the US' long trade war to-do list, including potential currency intervention and tariffs on other countries and products," Harris said.

BAML also said a lack of aggressive monetary and fiscal response has caused irreparable damage, adding that a "hoped-for" normalization of inflation has started to reverse itself as major economic powers hint at interest rate cuts.

Looking outside the US, BAML's report reveals the extent to which the trade war has fostered economic concern in other markets. Japan's growth rate is estimated to run below its typical trend due to "slowing global trade and trade war uncertainties." Europe also faces a lagging growth outlook attributed to the trade war, Brexit and foreign demand weakness.

But the firm says it's not all bad news. Emerging markets in Europe, the Middle East and Africa maintain strong growth, according to the report. The bank forecasted a modest improvement in 2020 after small cuts in their 2019 forecast. It also praised the US economy for achieving its longest economic expansion in history, calling the achievement "no small feat."

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