Overseas Headlines – August 24, 2018

Date: August 24, 2018 

United States:

U.S.-China Talks Draw a Blank, Bringing Fresh Tariffs Into View

The trade war between the U.S. and China is primed to escalate after their governments failed to make progress in two days of talks. The two sides had met with low expectations for this week’s meetings and no further talks had been scheduled, a person familiar with the discussions said. The person, who requested anonymity to discuss the private deliberations, also said Chinese officials had raised the possibility that no further negotiations could happen until after November’s mid-term elections in the U.S. The lack of progress and the looming prospect of further tariffs from both sides adds to the uncertainty for businesses, who have to decide whether it makes sense to invest in China or the U.S., given the rising political tensions and risk of punishing new taxes on trade. A new round of tariffs could come as soon as early September, but there is no guarantee that will be the last, or that there won’t be other measures. “Now, it seems quite likely that the US will impose tariffs on the $200 billion in imports from China, which will trigger a bigger round of shooting,” said Zhou Xiaoming, a former commerce ministry official and diplomat. “It is impossible for China to drop the ‘Made in China 2025’ and its industrial policies as a compromise. But there is haggling room in IP protection and market access issues,” he said, referring to intellectual property protection. In a statement, the White House said the countries “exchanged views on how to achieve fairness, balance, and reciprocity in the economic relationship, including by addressing structural issues in China” identified by the U.S. in an investigation into Chinese IP practices. The two nations had “constructive, candid” communication, and will keep in touch about the next steps, the China commerce ministry said in a statement released Friday.



U.K. Squeeze Hits Workers as Savings Rate Falls to Record Low

U.K. consumers’ savings rate fell to the lowest on record as they eat into more of their pay to cover shopping, rent and mortgages. The measure — the difference between income and expenditure — slipped to 1.2 percent in July, UK Finance said on Friday. That’s the lowest since the banking group’s data started more than a decade ago and is also a huge shift from just two years ago, when the rate was at 5 percent. The drop partly reflects the squeeze on households from a jump in inflation in 2016. With wage growth weak, workers were left with falling real incomes, meaning less to put aside each month. While the reduced savings rate helped to support consumer spending through the inflation surge, it can’t go on forever. Also, if consumers’ worries about Brexit increase, they may start to ramp up savings again in preparation for any crisis. That would undermine demand in the economy, as Dan Hanson at Bloomberg Economics has highlighted. Government documents published this week about the planning for a no-deal Brexit may play into any concerns among households. The government has asked pharmaceutical companies to stockpile drugs, Chancellor of the Exchequer Philip Hammond has warned of “large fiscal consequences” and Brexit Secretary Dominic Raab has had to downplay reports of food shortages.



Turkey Needs to Get Cracking to Avoid a Meltdown: Economy Week Ahead

The devil makes work for idle traders – a paucity of central bank meetings and major data releases means there will be plenty of time for investors to think about emerging markets next week. And so they should. Turkey’s economy is threatening a meltdown, Russia could be slammed with fresh sanctions and South Africa has found itself in President Donald Trump’s crosshairs. Not forgetting that the trade skirmish between the U.S. and China will rumble on, too. Turkey is back to work this week after an extended national holiday. Officials will need to get cracking on an urgent task – restoring confidence. The economy has been running hot for several years, inflation has got out of control and there has been too much borrowing in foreign currency. The Fed’s tightening cycle hasn’t helped. But what really lit the fuse was President Recep Tayyip Erdogan’s heavy-handed management of the economy. Confidence has vaporized, and policymakers have narrowed the menu of options from which to choose. The main action so far has come from the central bank, which has engaged in stealth tightening, possibly to avoid drawing criticism from  Erdogan. Experience of past crises suggests that this will not be enough to stem the crisis.  Whether it’s Fed policy or Turkey reminding investors that currency crises still happen, many emerging economies have been tarred with the same brush. Russia, for example, saw the ruble dive in tandem with the lira, but other countries look rather more vulnerable on simple macro fundamentals.  Russia has problems the metrics don’t capture. The U.S. is weighing its options for tighter sanctions – an announcement may come as early as Monday – and sentiment remains fragile. Details have been slow to arrive, with saber-rattling in Congress filling the silence. Another slide in the exchange rate prompted the central bank to suspend foreign-currency purchases, to avoid making things worse.  South Africa is another country whose fundamentals may not justify the market response. It scores poorly on some gauges, but the central bank has a good deal more credibility than its counterpart in Turkey and the election of Cyril Ramaphosa to the presidency has boosted investor sentiment.