The impact of the US-China trade war is now reflected in global growth forecasts, visible in corporate earnings and investment plans. It is starting to spread to other regions and there is no end in sight – yet.
The US-China trade war is hitting global economic growth forecasts, say economists at UK forecasting and quantitative analysis group Oxford Economics in their latest research. Oxford Economics has lowered its world GDP growth forecasts to 2.6% in 2019, the weakest since the global financial crisis, and 2.7% in 2020, both below the average of 3.0% in the preceding five years.
“The US-China trade war flare-up and ongoing industrial weakness fuel concern over the outlook,” says Oxford Economics economist Ben May. The longer trade tensions linger, and any ratcheting-up should the US carry out its threat to impose 10% tariffs on a further US$300bn of imports, will put more pressure on growth, both denting private sector confidence and triggering tighter financial conditions, he says.
The Office of the US Trade Representative recently delayed introducing tariffs on some of the US$300bn of Chinese imports threatened with a 10% duty until mid-December, benefiting a range of Christmas staples such as game consoles and consumer electrics.
That decision reflects an awareness of the trade war’s impact on US consumers and is significant, say Oxford Economics economists James Watson and Gregory Daco. “Phone sets alone constitute US$45bn of Chinese imports. As much as half of the originally threatened Chinese imports will now have no tariffs applied for almost another quarter.”
However, the softening stance is not enough to allay fears that the US won’t carry out its threat to impose these much wider tariffs. “It is unlikely that the move marks the start of a broad-based tariff retreat, therefore ongoing trade tensions will continue to be a headwind on economic activity,” say Watson and Daco.“Washington’s intention may be to railroad Beijing into agreeing a deal, but the persistent moving of the goal posts may make China disinclined to negotiate,” adds May.
Moreover, trade tensions are also bleeding into new areas – and regions. China’s renminbi fell to its lowest level this year in August following Trump’s (since rescinded) threat to impose those additional tariffs on Chinese imports. By allowing the yuan to weaken below a key threshold level against the US dollar, effectively reducing the sting of tariffs, Chinese policymakers have increased the risk of the dispute escalating. “The move provides President Trump with more political justification to fuel his threat of further tariffs on China,” says Watson. “The yuan’s fall may also trigger other struggling exporters to attempt to weaken their currencies, leading to a wider ‘currency war’,” warns May.
Elsewhere, a quarrel between Japan and South Korea regarding compensation for victims of forced labour during the war, has now bled into a trade spat, highlighting the risk of trade tensions creeping beyond the US-China frontline. Both countries have removed each other from their respective lists of preferential trading partners. Europe could become a future battlefield too. “The long-standing risk that the US will impose tariffs on the EU car sector remains firmly in place,” says May.
The trade war is also weighing on corporate spending. “This backdrop of weak global trade and heightened uncertainty clearly does not auger well for investment,” says May, arguing that a stronger dollar could weaken balance sheets in emerging markets where dollar financing is prevalent, further reducing firms’ capital spending there. “Investment growth has already fallen below its prior post-2009 lows and we do not expect global investment to match even the anaemic rates of recent years in 2020 or 2021.”
It is an analysis confirmed by the recent second quarter earnings calls of US corporates, particularly those with exposure to China. Tariffs were mentioned in a quarter of all earnings calls among companies in the S&P500 Index in the second quarter of 2019, according to FactSet, the data analytics group. Elsewhere, The Economist recently reported how Jim Fitterling, Chief Executive of chemicals giant Dow, is navigating the trade tension. During the company’s earnings call he said he’d keep capital spending “tight” until he gets “better visibility,” adding that he thought a trade deal was needed to “get some confidence back in the market.” Something that doesn’t look likely anytime soon.