Date: August 22, 2018
America’s Booming Economy Comes With a Cost for Global Growth
Making America great again isn’t proving so great for other parts of the world. With the rise in the dollar and interest rates already squeezing emerging economies just as President Donald Trump’s trade war threatens China, the U.S. is set to be the only Group of Seven nation to see economic growth accelerate this year as Trump’s tax cuts kick in. The end of the short-lived euphoria of a synchronized global upswing is already evident in financial markets. NatWest Markets notes its basket of so-called growth assets such as the Australian dollar and copper is down about 4.5 percent this year compared with the almost 7 percent gain of the Standard & Poor’s 500 Index. The gap in performance “certainly captures the imbalanced nature of growth this year,” said Jim McCormick, head of cross-asset strategy at NatWest. The global backdrop will frame discussions when the Federal Reserve holds its annual policy symposium this week in Jackson Hole, Wyoming, at which Chairman Jerome Powell will speak. The Fed’s two interest-rate hikes of 2018 have helped lift the dollar almost 6 percent on a trade-weighted basis this year, making it costlier for international borrowers to repay loans. Minutes of the Fed’s most recent policy meeting, due later on Wednesday, may provide clues on the outlook for rates in 2019. For now, Mark Nash, head of fixed income at Old Mutual Global Investors, bets the domestic economy will keep the central bank raising rates although it could end up creating headwinds for itself. “Once that pain in emerging markets gets particularly acute, that naturally will spread back to the U.S. and change things in terms of how the Fed needs to manage domestic monetary policy,” he said on Bloomberg Television. “For now, you can’t fault what Powell is doing, but the implications of it might come back to haunt him.”
Euro-Area Wages Bring Good News to ECB on Road to Policy Exit
Euro-area wages are on the rise, giving another boost to the European Central Bank’s view that it’s the right time to change policy tack. Collective wages rose 2.2 percent in the second quarter, the most since 2012, according to updated data. That’s up from 1.7 percent in the previous three months. For economists, that’s evidence that the better labor market — unemployment is at the lowest in almost a decade — is starting to feed through more to pay, which should in turn lift inflation. That’s good news for ECB policy makers in a summer that’s seen Italian bond yields pushed higher by investors’ budget concerns and Turkey descend into a currency crisis that could, if it spreads, undermine sentiment. The ECB announced in June it was winding down its bond-purchase stimulus program, in part because it anticipates an improvement in inflation later this year. President Mario Draghi has cited wage growth for this view, noting in particular better negotiated settlements. “The period of a core inflation rate fluctuating around 1 percent is probably coming to an end,” said Ralph Solveen, an economist at Commerzbank in Frankfurt. “The only question is how fast it will rise.” Bloomberg Economics also sees a gradual pickup in core inflation, “buttressed by accelerating wage growth.” According to Commerzbank, the better second-quarter wage growth was driven by Germany, where deals in the metal and construction industries lifted collective wages more than 3 percent. There may be more comfort for policy makers on Thursday, when flash PMI numbers for August are due to be released. The composite reading is forecast to have risen slightly, extending the recent stabilization after a torrid start to the year. The ECB will publish the accounts of its July policy meeting on the same day.
China GDP to Suffer If Trump Fires New Tariffs, Economists Say
The tariffs that the U.S. and China are threatening each other with will cause China’s economy to slow more sharply next year if they’re enacted, underscoring the high stakes nature of negotiations set to resume this week. The ongoing trade conflict will reduce China’s economic growth by 0.2 percentage point this year and 0.3 percentage point in 2019, according to the median estimate of 16 analysts in a Bloomberg survey this month. That’s if the U.S. follows through on its threat to impose additional tariffs on $200 billion of Chinese goods and China retaliates with levies on $60 billion of imports from America. China’s more-than-$12-trillion economy will expand by 6.3 percent next year, a bit slower than the 6.6 percent expected this year, according to a separate poll of economists, not all of which have taken the proposed tariffs into account. While that’s still much faster than other major economies, slower growth will imperil the nation’s aim of doubling the size of the economy in the ten years to 2020. “Trade war damage is not only through exports, it would also disrupt global supply chains,” said Iris Pang, greater China economist at ING Bank NV in Hong Kong, adding that Chinese factories would be reluctant to invest and expand further amid the uncertainties. “If the tariffs on $200 billion of goods kick in, the government will step up the fiscal stimulus and the monetary easing, providing some cushion.” The government has already announced a range of measures to support growth, including more infrastructure projects and tax cuts. While officials are heading to the U.S. this week for the first major talks in more than two months, the next round of tariffs could begin as soon as Sept. 6. and President Donald Trump has threatened to impose tariffs on almost all goods imported from China. At home, the central bank has cut reserve ratios for banks three times this year in an effort to inject liquidity into targeted sectors, and economists expect it to do so again in the second half. The government has also increased spending and urged local authorities to sell bonds faster to boost infrastructure construction. Economists expect those measures to have an effect. Infrastructure investment growth will rebound to 7.4 percent for the full year, up from a record-low 5.7 percent in the first seven months, according to the survey.