Stockholm (Ekonamik) – The U.S. and China both experienced a slowing in consumer and industrial activity in April before even the latest escalation of their trade war last week Friday, undermining hopes of recovery for the Chinese economy despite a stronger than expected Q1 and heightening the stakes further for trade negotiations.
Trade talks essentially collapsed last Friday, despite signs as recently as two weeks ago that a deal would be reached soon. Both countries blamed each other, with Mr Trump using the situation to slap new tariffs on Chinese goods and accusing China of “breaking” the negotiations. He nevertheless played down the disagreement, calling it a “squabble” and suggesting a deal could still happen.
China’s retail sales rose 7.2% in April, less than the 8.7% in March and confounding optimistic forecasts of 8.6%. Industrial production rose 5.4%, again far less than the projected 6.5% or the 8.5% gain in March. In addition, U.S. President Donald Trump last week increased tariffs on $200 billion worth of Chinese goods from 10% to 25% and threatened 25% tariffs on an additional $325 billion in Chinese goods. China President Xi Jinping retaliated by boosting tariffs on $60 billion of U.S. goods.
Economists are calculating a roughly 0.5% hit to China’s GDP as a result of the tariffs, with an approximately 0.1% hit on U.S. growth for every two months the increased tariffs subsist, amounting to 0.6% annually. Mr Trump’s tariffs are expected to increase prices for U.S. consumers, which could have an even greater effect on U.S. GDP, with consumers products and manufacturing likely to be the hardest hit.
Markets reacted negatively Monday, plunging 617 points, or 2.4%, following China’s retaliation, and caused investors to call for central bank easing, with expectations for more than one quarter-point rate cut this year from the U.S. Federal Reserve and Chinese expectations of more fiscal and monetary stimulus from its central bank. Mr Trump himself appeared to suggest that the Federal Reserve could move to support the U.S. if China moved to stimulate its economy, as stocks rebounded slightly Tuesday.
“China will be pumping money into their system and probably reducing interest rates, as always, in order to make up for the business they are, and will be, losing,” he wrote on his favourite medium, Twitter. “If the Federal Reserve ever did a ‘match,’ it would be game over, we win! In any event China wants a deal!”
U.S. presidents traditionally avoid commenting on Fed policy so as not to politicise the institution and undermine confidence in its decisions.
Nevertheless, a survey of global fund managers by Bank of America Merrill Lynch suggested that America would have to enter a bear market before the Fed could be expected to take action. The S&P 500 would have to plunge as low as 2,305 before the Fed would cut rates, according to the survey. In other words, “the Fed shouldn’t be counted on for help until investors have priced in a recession,” according to CNN Money’s Matt Egan.
Meanwhile, President Xi urged countries “not to close their doors and hide behind them” while opening the Conference on Asian Civilizations Dialogue in Beijing Wednesday (May 15), his first major address since the tariff escalation Friday. There is, he said, “no need for civilizations to clash with each other.”
A U.S. trade delegation is expected to travel to Beijing in the weeks ahead, and Mr Trump and Mr Xi are expected to meet at the G20 in Japan in June.
Image: President Donald J. Trump and President Xi Jinping | July 8, 2017 (Official White House Photo by Shealah Craighead) (Wikimedia Commons)