The International Monetary Fund (IMF) is forecasting global Gross Domestic Product (GDP) to grow 3.9% in 2018, up from 3.7% in 2017. US growth is leading the global expansion and is expected to grow 2.9%, this year.
The latest US economic data has been positive. The ISM (Institute for Supply Management) Manufacturing Index is a monthly indicator, where a level above 50 is consistent with economic expansion. Despite the respondents expressing concerns over recent trade developments, the survey posted a reading of 60.2, indicating that the US economy is in a very healthy position.
In June, US non-farm payrolls increased by 213,000, which was above market expectations of 195,000 and follows an upward revision of 244,000 in May. Job gains were seen in professional and business services, manufacturing, and health care, whilst employment in the retail trade declined.
The labour participation rate rose from 62.7% to 62.9%, whilst the unemployment rate rose slightly to 4%, which has helped to hold wage growth at 2.7%. Job openings are higher than the number of people registered unemployed, therefore, there is little evidence that employment trends will reverse any time soon.
In June, a strong US economy has given the Federal Reserve the confidence to increase interest rates and signal two further interest rate increases this year. The prospect of higher interest rates should result in the US Dollar remaining strong.
Despite the political uncertainty of the Brexit negotiations, the UK economy has had positive news and has benefited from the royal wedding and the hot summer. The Office for National Statistics has said that GDP grew 0.3% in May. After a flat start to the year, in the quarter from March to May, the economy grew 0.2%. A buoyant services sector offset falling construction and industrial output.
The PMI (Purchasing Managers’ Index) surveys for Manufacturing, Construction and Services also beat expectations.
Despite a fall in unemployment, UK wages rose 2.7%, in the three months to May, which is slightly lower than the previous month’s figure. Wage growth is one of the key figures that the Bank of England monitors to assess the health of the UK economy. The slowdown in wage growth could dampen the expectations of an interest rate rise next month.
Eurozone monetary policy
The European Central Bank has announced that interest rates will not be going up until at least the summer of next year, although they did confirm that their quantitative easing programme would stop by the end of this year.
China’s economy is continuing to expand and grew at an annual rate of 6.7%, in the 3 months to June. However, this marks a slight slowdown from 6.8% in the previous quarter, as the government is attempting to curb the problem of growing debt.
In the second half of the year, slow credit growth, softer real estate activity and an intensifying trade conflict with the US should weigh on China’s economic growth. A research note by the Economic Intelligence Unit (EIU) stated that the EIU were more concerned about slowing domestic demand within China’s economy, through weak investment and slowing consumption, rather than exports.
The US-China trade war
Donald Trump has suggested recently that more than $500 billion of Chinese goods could be hit by tariffs, which is almost equal to the value of China’s entire goods exported to the US last year.
In response to the US’ intention to impose 10% tariffs on $200 billion additional products, China has filed an official complaint against the US to the World Trade Organisation. The impact of the trade war between the US and China has been limited so far. This can be illustrated from China’s monthly trade surplus with the US, which in June, hit a record of nearly $29 billion.
The EU-China summit
The EU and China have held a summit that has produced a communiqué that committed both sides to the multilateral global trading system. The EU has said that China should make its economy more open to foreign firms. The EU also warned that worsening trade tensions could lead to conflict. The Chinese Premier, Li Keqiang, stressed the need to uphold free trade.
Free trade – Japan and the EU
Donald Trump’s “America First” policy has introduced tariffs on a range of items, including steel, which the EU and Japan exports to the US. Both Japan and the EU, particularly Germany, are large exporters and, therefore, a full-scale trade war is not in their interests.
The US and China are the top export destinations for Japanese companies, which exported ¥30 trillion to the two countries in 2017. China and the US represents 40% of world GDP, therefore, if a trade dispute causes growth in both counties to fall, the Japanese exporters will feel the consequences.
In response to the threat of protectionism, Japan and the EU have announced they have signed a free trade agreement, although at this stage, the details are vague. Japan’s Prime Minister, Shinzo Abe, said, “Right now, concerns are rising over protectionism all around the world. We are sending out a message emphasising the importance of a trade system based on free and fair rules”.
The global economy, led by the US, is continuing to expand, but one of the key risks to the current economic environment is the US-China trade war. However, it is quite clear that although the US-China trade war is intensifying, the impact so far has been limited.
Although protectionism is a risk to the global economy, free trade has not gone away, particularly with the signing of a free trade agreement between Japan and the EU, which should give a boost to the global economy. Who would have thought the US would be on the side of protectionism, whilst the EU would be on the side of free trade?