The big attention-grabbing number this week is the $200bn-worth of Chinese exports to the United States that will be subject to tariffs from Monday. In an escalating move, President Donald Trump’s administration announced the goods will be subject to a 10 per cent import duty, potentially rising to 25 per cent if no deal is agreed before 2019. China retaliated, announcing plans for a 10 per cent tariff on $60bn-worth of US imports.
While the scope of the charges may be eye-catching, their depth is less alarming. Economists at UBS estimate the effect of tariffs (at 25 per cent on the $50bn tranche of Chinese goods initially targeted in July, plus 10 per cent on the additional $200bn announced) to have a modest 0.5 per cent drag on Chinese GDP over the following 12 months. If the levy on the additional $200bn rises to 25 per cent, the negative impact on GDP could be 0.8 per cent. The UBS team believes, however, that the impact on Chinese GDP growth will be offset by supportive fiscal and monetary policy measures and it has only downgraded its forecasts for 2019 Chinese GDP growth to 6 per cent from 6.2 per cent.
Another interesting aspect of the saga will be the longer-term effects of measures China takes to shore up its economy as the trade tensions escalate. Monetary policy to stimulate lending in the domestic Chinese economy might include reducing the reserve requirement rate (RRR) for China’s banks, a move that has been resorted to several times already this year. Fiscal stimulus could come in the form of increased infrastructure investment. The effects of reduced prudential stringency in its banking sector, coupled with investment policies that (if undertaken when the current account surplus is shrinking – a likely result of tariffs hitting export volumes) imply an increased debt burden, could combine to store up problems for China in the future.
For the US, the imposition of relatively shallow tariffs to start with gives room for manoeuvre and there is confidence thanks to a raft of positive economic data this year. On Friday 21 September, the latest trend in US Manufacturing PMI data, which weakened slightly in August to 54.7, is predicted to remain flat by economists surveyed for Bloomberg. Next week, the quarterly published GDP growth rate is expected to remain above 4 per cent. With continued good news for the American economy, and China potentially taking riskier domestic policy decisions, President Trump will feel his hand is strengthened in future trade negotiations.
In the UK, the announcement this week of a rise in inflation, measured by the consumer prices index (CPI), to 2.7 per cent is expected to motivate the Bank of England to maintain its policy of gradually tightening interest rates. The inflation figures will not be welcome for companies in the retail sector. On Wednesday 19 September, Graham Spooner, investment research analyst at The Share Centre, noted: “On a day when Kingfisher's shares are down by 5 per cent on the back of its ongoing struggles and changes in the way we all shop, for retailers who are already eyeing the important festive season this will not come as good news.”
Although the Bank of England will be concerned that inflation remains above the government’s 2 per cent target, stretching the finances of British households, Mr Spooner adds that inflation is likely to slow as the year goes on and we move into 2019.
Next week’s economics
The announcement of the US GDP growth figures, on 27 September, will make interesting reading given President Trump’s tough negotiating stance with China. The day before, all eyes will be on the Federal Open Market Committee, to see whether the world’s most influential central bank will announce further increases to the target Federal Reserve Funds rate. Back in July, President Trump told CNBC News that he “wasn’t thrilled” by rate increases but it will be interesting to see from the September meeting how the Fed feels it will be necessary to manage economic growth and the other potential inflationary effect of increased tariffs on imports.
For British prime minister Theresa May, the end game of tough Brexit negotiations is on hand and every piece of news and indication of sentiment and economic health, on both sides of the English Channel, is crucial. Next week sees some important announcements for the UK, including third-quarter GDP figures on Friday 28 September. The quarterly growth rate for the second quarter of 2018 was 0.4 per cent and the annual figure was 1.3 per cent. Also, in a nation where positive economic sentiment is so often linked with house prices, the latest figures for the Nationwide House Prices index (also released on Friday) will be worthy of close attention, on the back of a 0.5 per cent decline for August.
On the European Union side of the negotiating table there will also be some figures to keep a watch on. Some EU diplomats have, off-the-record, poured scorn on Mrs May looking to bypass their chief negotiator, Michel Barnier, and trying to broker compromise with national leaders directly. The strategy is, however, as worthwhile as it is reasonable, unavoidable and inevitable. The EU remains a confederation of sovereign nation states with their own disparate concerns, which are often brought sharply into focus by economic data. Next week, inflation data in France and Germany and the German IFO Business Climate Index will contribute to the thinking of key economic and policy decision makers in Europe’s central axis. On the fringes of the EU, next Thursday’s Hungarian unemployment figures could give a lead indicator of sentiment towards the European project from its periphery.
