Overseas Headlines- March 7, 2019

United States:

U.S. Trade Gap Surged to $621 Billion in 2018, 10-Year High

The U.S. trade deficit widened in 2018 to a 10-year high of $621 billion, bucking President Donald Trump’s pledges to reduce it, as tax cuts boosted domestic demand for imports while the strong dollar and retaliatory tariffs weighed on exports. The annual deficit in goods and services increased by $68.8 billion, or 12.5 percent, Commerce Department data showed Wednesday. The December gap jumped from the prior month to $59.8 billion, also a 10-year high and wider than the median estimate of economists. The merchandise-trade deficit with China — the principal target of Trump’s trade war — hit a record $419.2 billion in 2018. As a share of the economy, the gap widened to 3 percent of GDP from 2.8 percent in 2017. It’s still significantly smaller than in the decade before the Great Recession, when it approached 6 percent. While Trump frequently cites the deficit as evidence of the failure of his predecessors’ trade policies — even though most economists don’t dwell on the indicator — the gap has increased by $119 billion during his two years as president. Even if he completes an accord to end the tariff war with China, substantially shrinking the deficit may prove tough as cooling global growth weighs on exports while domestic demand keeps driving shipments from abroad. For goods only, the U.S. deficit with the world surged to a record $891.3 billion in 2018 from $807.5 billion the prior year. The merchandise deficits with Mexico and the European Union also hit records. Meanwhile, the surplus in services kept rising, hitting a record $270.2 billion last year. For the full year, exports rose 6.3 percent to $2.5 trillion as shipments of goods including crude oil, petroleum products and aircraft engines increased. Imports jumped 7.5 percent to $3.12 trillion on purchases of items from pharmaceuticals to computers, along with services such as travel. For December, exports fell 1.9 percent from the prior month, the biggest decline since early 2016, to $205.1 billion, on lower shipments of civilian aircraft, petroleum products and corn. Imports rose 2.1 percent to $264.9 billion, boosted by foods, consumer goods, computers and aircraft. The goods deficit was a record. The figures follow last week’s initial report on fourth-quarter gross domestic product, which showed net exports were a drag on growth for the fourth time in five quarters. Trump’s supporters point to his talks with China and other U.S. trading partners along with the renegotiation of Nafta as efforts that will help reduce the U.S. trade deficit.



ECB Unleashes Support Package for Economy Hurt by Slowdown

The European Central Bank said it will offer more cheap loans to banks and keep interest rates at record-lows for longer as a weakening economy derails its plan to withdraw stimulus. Becoming the latest central bank to capitulate to slowing demand, President Mario Draghi and fellow policy makers will offer banks the first round of long-term loans since 2016, starting in September. Officials left their key interest rates unchanged, and said they’ll stay at current levels through the end of the year, several months later than previously anticipated. The decision came just three months after the ECB halted its crisis-era bond-buying program and signalled it may raise borrowing costs later this year. The change of gears reflects slowdowns in large economies such as Germany and Italy amid the global rise of protectionism and populism. Draghi is set to reinforce the sense of concern when he unveils new forecasts at a press conference at 2:30 p.m. in Frankfurt. Bloomberg News reported on Wednesday that the latest projections show extensive downgrades for inflation and economic expansion in 2019 with a pickup anticipated toward the end of the year. The euro dropped to a three-week low and bank stocks erased their decline after the announcement. The single currency was down 0.3 percent to $1.1275 as of 2:10 p.m. Frankfurt time. A recession in Italy, a near-recession in Germany and pressure from global trade tensions have Brexit have left the euro-area economy in a weakened condition. While some surveys have shown signs of stabilization recently, sharp declines in key indicators since last year have raised the alarm about the health of the region. The ECB is therefore reviving its Targeted Longer-Term Refinancing Operations with the intention of encouraging banks to provide credit to businesses and customers across the euro-region. The loans will have a maturity of two years, and the interest rate will be indexed to the main-refinancing rate over the life of each operation. Similar to previous offers, the program will have built-in incentives to assist credit conditions. Financial institutions took up more than 700 billion euros ($788 billion) in the second TLTRO, launched in 2016. The tool is now in its third incarnation, on terms which seem less favourable than before. Since the ECB said in January that risks to the outlook moved to the downside, a number of policy makers have voiced concern over the economy and said they were discussing a possible response. However, there was speculation that the ECB would hold out and not make an announcement today. Some economic numbers have shown signs of stabilizing recently after sharp drops in previous months.



China’s Double Edged Sword: How to Lure Cash But Keep Control

China’s increasing success at luring global investors to its stock and bond markets may be laying the seeds of future volatility as its financial system becomes subject to overseas sentiment like never before. The country’s years-long campaign to attract steady streams of foreign capital is now paying off, providing support for the yuan in the face of diminishing current-account surpluses. Foreign ownership of Chinese bonds has climbed to a record of more than $260 billion, while holdings of stocks stood at $172 billion in the most recent data. Wider inclusion of Chinese assets in global bond and equity indexes will offer China a fresh source of funding, the need for which was underlined Tuesday when the government widened its budget-deficit target and boosted plans for local-government debt issuance. Capital inflows will also cushion a shrinking current account surplus that the International Monetary Fund tips to fall further over coming years. “China’s increasing openness to foreign investors will help in the development of its financial markets — but at the risk of increasing exposure to capital flow volatility, which will also complicate exchange rate management.” said Eswar Prasad, the former head of the IMF’s China section who is now at Cornell University. Foreign investors hold less than 3 percent of China’s domestic bonds and equities, making them marginal players for now, although they’ve had increasing impact on the government debt which forms the bulk of their bond holdings. Their sway is set to rise as the country’s weightings in global portfolios expand. Similarly, China’s impact on those portfolios will rise. “This will be a double edged sword: more access but also more transmission of volatility to the global market,” said Hui Feng, a senior research fellow at the Griffith Asia Institute and co-author of “The Rise of the People’s Bank of China.” Last week, MSCI Inc. announced it will boost onshore Chinese stocks in its emerging-market index to 3.3 percent by November, from 0.72 percent now. Next month, Chinese government and policy-bank bonds are set for a phased inclusion in the Bloomberg Barclays Global Aggregate Index that will bring China’s share to an estimated 6 percent. Bloomberg LP owns the Bloomberg Barclays indexes, and is the parent of Bloomberg News.


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