Overseas Headlines- October 17, 2018

Date: October 17, 2018

United States:

Trump’s First Annual Budget Deficit Rises to a Six-Year High

The U.S. budget deficit grew to $779 billion in Donald Trump’s first full fiscal year as president, the highest since 2012 amid tax cuts and spending increases. The budget gap for the 12 months through September was 17 percent wider than the same 12-month period a year earlier, as spending rose 3.2 percent and revenue gained just 0.4 percent, according to a Treasury Department report released Monday. The deficit as a share of total economic output was 3.9 percent in fiscal 2018, up 0.4 percentage point from the prior year. The government’s fiscal year runs from Oct. 1 to Sept. 30. The budget deficit has continued to climb in recent years, raising concerns the country’s debt load of more than $21.5 trillion will grow out of control. The Treasury reported this month that the government paid $523 billion in total interest in fiscal 2018, the highest on record. The Treasury report also comes just weeks before midterm elections in Congress and threatens to undermine a longstanding Republican argument that the GOP is a better steward of the nation’s finances. Trump frequently criticized his Democratic predecessor Barack Obama for running up the deficit, and in 2012 recommended banning lawmakers from reelection if Congress couldn’t balance the budget. But the Congressional Budget Office, a nonpartisan arm of Congress, forecasts government spending will outweigh revenue by $973 billion in fiscal 2019 and more than $1 trillion the next year. That would be the first time the deficit exceeds $1 trillion since 2012, when the American economy was still recovering from the Great Recession. Republican tax cuts, increased federal spending and an aging population have contributed to the fiscal strains, though the GOP says tax reform enacted this year will spur economic growth and lift government revenue. Corporate income-tax receipts fell 31 percent in fiscal 2018 while individual income taxes gained 6.1 percent, according to Treasury data.



Investor Optimism in German Economy Plunges as Risks Add Up

German investor confidence soured on the back of this month’s stock-market selloff and rising concern that global trade tensions will harm economic growth. ZEW’s measure of investor expectations for the region’s powerhouse plunged to levels recorded at the height of the debt crisis in 2012, highlighting the magnitude of current uncertainty. A gauge for the euro area also declined. Germany’s benchmark DAX Index has plunged 6 percent since the start of the month as political concerns from Italy’s budget woes to stalled Brexit talks and U.S. protectionism weighed on sentiment. The International Monetary Fund cut its forecast for the world economy for the first time in two years, and the German government cited a weaker external environment as it lowered its 2018 growth projection. BMW AG, one of Germany’s flagship carmakers, issued its first profit warning in a decade at the end of September, blaming trade conflicts and price competition. “Expectations for the German economy are dampening above all due to the intensifying trade dispute between the U.S. and China,” Achim Wambach, president of the ZEW Center for European Economic Research, said in a statement. “A further negative influence on economic and export expectations is the danger of a ‘hard Brexit’, which is becoming ever more likely. Last but not least, the situation of the governing coalition in Berlin is perceived to have become more unstable.” Parties from Germany’s ruling coalition suffered significant losses in Bavaria’s state election over the weekend, raising questions whether Chancellor Angela Merkel’s government will last. The European Central Bank has signaled that solid domestic demand in the euro area means there’s no reason to panic over the economic outlook, even though it acknowledged that dark clouds are gathering. President Mario Draghi said on Saturday after the IMF meetings in Bali, Indonesia, that the key threat facing the global economy was a jump in interest rates sparked by financial instability, inflation surprises or geopolitics. The Governing Council meets next week for one of its regular policy sessions, six weeks since officials trimmed their growth forecasts through 2019 and stopped short of describing risks to the outlook as tilted to the downside.



China Cuts U.S. Treasury Holdings for Third Straight Month

China’s holdings of U.S. Treasuries fell for a third consecutive month in August as the Asian nation struggles to prevent the yuan from weakening amid trade tensions with America. China’s ownership of U.S. bonds, bills and notes was $1.165 trillion, down from $1.171 trillion in July, according to data released by the Treasury Department on Tuesday. Japan, which is the largest foreign owner of Treasuries after China, decreased its holdings to $1.03 trillion from $1.036 trillion a month earlier. Saudi Arabia boosted its ownership by $2.7 billion to a record $169.5 billion. Beijing’s sale of Treasuries is sometimes viewed as a response to the trade war, especially after China’s ambassador to the U.S. signaled in March his country could scale back purchases of the debt to retaliate against American tariffs. President Donald Trump since July has imposed tariffs on about half of Chinese imports, with Beijing responding with duties of its own on American goods. “Holdings have declined over the past three months and may continue to do so as the ongoing trade war sours the relationship between China and the U.S. and thus reduces their appetite for Treasuries,” Thomas Simons, an economist at Jefferies LLC, wrote in a note after the department’s release. “This will be important to keep an eye on going forward.” But China may have allowed its foreign-exchange reserves to decline as part of a policy to stabilize the yuan and prevent it from weakening further. The currency already has depreciated more than 4 percent against the dollar in the past year amid signs of an economic slowdown and capital outflows. Trump has accused Beijing of deliberately weakening its currency to stimulate exports.