Economic Commentary – June 2019

June 18th, 2019, by Chris Davis

(Trade) War, what is it good for?

After fearing a global recession in the final quarter of 2018, following a raft of weakening economic data, optimism returned to markets in the first 4 months of 2019, as Central Banks eased monetary conditions with the US Federal Reserve (Fed) signalling it was expecting rates to remain unchanged for 2019. Rhetoric from both US and China had suggested a trade deal was close to being finalised and coupled with better than feared economic and corporate data, risk assets performed well.

Consequently, the breakdown in talks between US and China at the start of May caught investors by surprise. President Trump used Twitter, to state that there was no rush to conclude the trade talks. The tweets came a few hours after the US increased tariffs on $200bn of Chinese products from 10% to 25% and mentioned that the process had begun to place additional tariffs of 25% on the remaining $300bn the US imports from China. China retaliated by increasing tariffs on $60bn of US imports. Since then relations between the two largest contributors to global GDP have deteriorated. President Trump ratcheted the conflict to a “tech war” increasing the technology restrictions on Chinese companies, with the blacklisting of Huawei. China retaliated by purchasing agricultural products from other areas of the globe and is reportedly looking to place controls on its exports of rare earths, elements that are critical to electronics and electric cars.

It’s impossible to predict the outcome of this escalation but it is possible to analyse how each side wishes the end game to play out. President Trump has an election to win in 16 months’ time and knows that if the US falls into recession during this period, the likelihood of his re-election is small. Chinese leaders have a much longer time frame to view economic declines, but a global recession would hit the regime hard at a time in their economic transition and when growth has fallen markedly. As we pass the 30th anniversary of the Tiananmen Square protests, it is a timely reminder of the differences between the political regimes.

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