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Global economy in 2019: Growth beginning to fray

France is in the throes of mass demonstrations, forcing President Emmanuel Macron to beat a hasty retreat
France is in the throes of mass demonstrations, forcing President Emmanuel Macron to beat a hasty retreat AFP
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Washington (AFP)

American farmers have been forced to warehouse a bumper crop of soybeans, or sell at a loss, while a Midwest medical supply company is considering shipping production overseas amid growing uncertainty.

Surveys of US business and consumer sentiment continued to show economic optimism going into next year but cracks are beginning to form -- in the United States and around the world -- with President Donald Trump's trade conflict the major source of concern.

The International Monetary Fund is forecasting respectable global growth of 3.7 percent next year but the world's two largest economies -- the United States and China -- are starting to cool.

"The mood is that of uncertainty and the impact in China, in particular, is beginning to be noticed," Minnesota-based MedSource Labs CEO Todd Fagley told AFP.

"We have been told by some local Chinese manufacturers that it 'feels' like they're entering a slowdown and that they are being hurt already due to higher export costs and overcapacity."

Signs the US expansion may have peaked shook global stock markets in recent weeks and Wall Street's main indices have erased all the gains posted this year.

The US recovery will soon become the longest in recorded history but the boost provided from last year's tax cuts is dwindling. Rising interest rates and a shortage of workers are crimping the housing market.

At the same time, the trade conflict threatens to undercut growth, hamper investment and spur US inflation.

"Growth momentum likely peaked in the second quarter," S&P Global Ratings economists said. But the United States is "more likely to see a slowdown than a contraction in the near term."

And amid the uncertainty, worries that had been bubbling in the background, drowned out by the overwhelming good news, are now rising to the surface: the surge of borrowing by heavily indebted companies, the huge weight of US student loan debt and the impact of rising interest rates on home buying.

Meanwhile, Europe faces political and economic upheaval and Japan remains in a long-term funk.

- Irresistible force, immovable object -

The central danger to the global outlook is the US trade conflict with China, due to the potential to spillover to the rest of the world.

The dispute threatens to derail, halt or shift hundreds of billions of dollars in global trade but Trump also is threatening tariffs on auto imports.

Steep US tariffs on steel and aluminum already have hit the bottom line of American manufacturers.

The IMF warns a continued escalation of the tariff threats could cut 0.8 percentage points off global growth.

"It's vitally important, because trade is a major engine for growth," IMF Managing Director Christine Lagarde said in a recent television appearance.

While many officials and executives agree with the Trump administration's complaints about China's trade policies -- notably forced technology transfer -- they worry about his aggressive strategy.

And businesses, farmers and ranchers already are feeling the pain.

"Our concern is the cure is worse than the disease," Jake Colvin, a vice president of the National Foreign Trade Council, told AFP. "Tariffs are already having a negative effect on the real economy."

And the shape of any deal Washington and Beijing could agree on is unclear.

William Reinsch, a trade expert with the Center for Strategic and International Studies in Washington, described the negotiations as the "irresistible force and the immovable object."

"We're either going to have to scale back our goals or maybe the Chinese will have some kind of epiphany and suddenly decide to do what their economists have been telling them a long time," he said in a recent podcast.

- Brexit and other bad news -

Lagarde has said she sees no sign of a US recession in the near term. But neither does the IMF expect breakout expansion in other regions to offset a next year's expected US slowdown from 2.9 percent growth to 2.5 percent.

Growth in China's economy is expected slow by a half point next year while India should hold steady.

But Britain, which still has not recovered from the financial crisis, will see growth of just 1.5 percent, while the specter of a disorderly Brexit "would have a large negative impact on growth."

Crashing out of the EU could cut output by five to eight percent in the long run and even a more benign exit would lower the economy's potential by 2.5 to four percent, the IMF estimates.

Meanwhile, France is in the throes of mass demonstrations, forcing President Emmanuel Macron to beat a hasty retreat, blowing a hole in the budget in the process. And Italy has clashed with the EU over its big-spending budget.

The global economy may be hit by a hangover in 2019 that will last well beyond New Year's day.

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